New SEC filings show that an eCommerce site riddled with errors was central to Sam Bankman-Fried’s alleged commingling of FTX assets.
According to the Securities and Exchange Commission (SEC) complaint, FTX allegedly instructed customers looking to trade on its exchange to wire their funds to North Dimension Inc., a purported online electronics retailer.
FTX then pooled that money and used it to make its own trades the complaint said.
North Dimension’s website, which is no longer online but remains viewable as an archive, described the company as the “World’ (sic) top E-Commerce site for consumer electronics in order to provide the lowest costs for authentic items from the world’s most reputable brands.”
Ignoring the potential red flags, including many items listed for sale with prices that exceeded their retail amounts and pages full of spelling errors and poor grammar, FTX customers did as they were told.
Their money was wired to North Dimension, where it was deposited directly into FTX-controlled accounts, according to the complaint. FTX then used that money to make its own trades that customers were not informed about or made aware of. This, at a time when FTX’s promotional materials claimed it was “the cleanest brand in crypto.”
In reality, bankruptcy filings show the now-defunct exchange was misappropriating and commingling customer funds to fix ongoing holes in its own balance sheet.
The eventual collapse of the exchange as a direct result of those holes has severely rattled confidence in the crypto industry.
The Alameda Research Connection
At the center of the FTX implosion is the exchange’s complicated and compromised relationship with its sister trading firm, Alameda Research, of which North Dimension was a subsidiary company. North Dimension filed for bankruptcy, along with all other FTX enterprise companies, on Nov. 11.
The relationship enjoyed between FTX and Alameda allowed for Bankman-Fried and other senior FTX employees to evaporate billions of dollars of other people’s money entrusted to them.
Speaking before the House Financial Services Committee, current FTX CEO John J. Ray said that Alameda could transfer assets from FTX “on an unlimited basis to take positions with other people’s money,” adding that the company did not perform daily reconciliations.
“FTX was operated as one company,” he told lawmakers. “As a result there is no distinction between the operations of the company and who controlled those operations. We can confirm that user funds were deposited directly into Alameda instead of FTX.”
Both entities, Alameda and FTX, were founded by the disgraced Bankman-Fried, who is accused of frontrunning token listings using Alameda, as well as giving the trading firm special bypass privileges on the FTX exchange. Alameda, founded in 2017, was Bankman-Fried’s first company.
Bankman-Fried has since been criminally charged with eight counts of fraud and conspiracy.
In August 2022, former Alameda Research CEO Caroline Ellison claimed that FTX and Alameda were separate companies, that Alameda received no special treatment on the FTX platform, and that there was an “ethical wall” between them preventing sharing of customer information between FTX and Alameda.
Earlier this month (Dec. 19), Ellison admitted these previous statements were “knowingly misleading” and pled guilty to charges filed against her, agreeing to cooperate with authorities.
Special Privileges for Me, Not Thee
The special privileges Alameda enjoyed, which executives at FTX were reportedly well aware of, ultimately led to the downfall of the exchange and its more than 130 affiliate companies, as well as the incineration of billions of dollars of customer deposits.
Those privileges included the ability for Alameda to maintain a negative balance on its FTX account, “untethered from any collateral requirements.” It was the only customer allowed to do so, as alleged in the SEC complaint and confirmed by Ellison’s plea agreement.
Separately, Alameda enjoyed an “unofficial, limitless” line of credit that enabled it to draw upon the funds of other FTX customers for its own trading or for the personal use of executives. This line of credit eventually grew to billions of dollars. As alleged in the same SEC complaint, no other FTX customer enjoyed anything remotely similar.
Around May 2020, according to the SEC, Bankman-Fried told FTX engineers to exempt Alameda from the auto-liquidation feature of FTX’s spot margin trading services, a key risk-management control. This exemption allowed Alameda to make trades without putting up the required collateral, leaving no back-stop for risky trades that might fail.
Ellison, for her part, has told authorities she is “truly sorry” for her actions and the role she played.
Bankman-Fried so far maintains his innocence. He has been released under supervised home arrest and will be living with his parents on the Stanford University campus as he awaits trial.
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