FTX Crypto Exchange

[CarderPlanet]

A few months before the FTX crash, a group of employees discovered a backdoor in the exchange's code that allowed a subsidiary trading firm, Alameda Research, to have a negative balance of $65 billion. This is reported by the WSJ.

According to sources of the publication, the team reported the discovery to its management, who discussed the problem with one of the assistants of FTX founder Sam Bankman-Fried (SBF). The backdoor was not eliminated, and one of the managers who expressed concern was fired.

It is assumed that during the beginning of the trial over SBF, preferences for Alameda will be discussed. Among the charges, the prosecutor's office claims that the former head of FTX stole customer funds by ordering "special functions" in the software that enabled the trading firm to use the exchange as a credit fund.

According to court documents, the investigation found a deeply hidden string in the FTX code that allowed Alameda to have a negative balance. The average user's positions were eliminated automatically in this situation.

Who found the backdoor and what was behind it

In the spring of 2022, a small group of employees discovered these software features. They worked for LedgerX, a crypto derivatives trading platform that the US division of FTX acquired in August 2021.

The team was looking at ways to use the code of the main international exchange registered in the Bahamas, in the United States, where regulatory rules are much stricter.

"I just wanted to point out that there are currently several places in the [...] code base where Alameda is in one way or another enjoying special attention," the publication quotes a message from platform employee Jim Auten dated May 5.

His boss, LedgerX risk director Julie Schoening, responded that " the offshore exchange has less strict rules."

"But yes, we need to clean up these things," she added.

Previously, a specialist with a degree in physics worked for the US Futures Trading Commission, where she analyzed high-frequency trading and market manipulation.

According to the WSJ's interlocutors, the team found a number of problems in the methods of risk management and conducting liquidations, including easing for Alameda.

Schoning shared the findings with her immediate supervisor, LedgerX CEO Zach Dexter. He discussed the liquidation issue with FTX CTO Nishad Singh, who was part of SBF's inner circle. After the latter removed some of the code, Dexter considered the situation resolved.

In early August, Schoning was fired. The reason was allegedly inappropriate messages that she sent to other employees. The document with their screenshots was distributed by some FTX executives.

According to sources, the posts were forged or taken out of context. They suggest that Schoning annoyed her superiors by identifying problems with risk management.

In June, the FTX bankruptcy management team said that the company sometimes paid " informants who threatened to reveal the true fraudulent nature of the enterprise."

According to the WSJ, Schoning hired a lawyer and threatened to go to court over her dismissal. The parties allegedly agreed to settle the dispute for $5 million. However, the deal could not be completed before the exchange collapsed in November.

Singh has pleaded guilty to fraud charges and is expected to testify against SBF at the trial. Prosecutors allege that the ex-CTO knew about FTX's special relationship with Alameda and helped implement a loophole in the exchange's software.

What can Bankman-Fried admit?

SBF denies all charges. Former FTX head of institutional sales Zane Thackett, in an interview with The Block, suggested a possible line of defense for the exchange's founder on one of the main issues: whether he had illegal access to customer funds or whether mismanagement led to the collapse of the exchange.

He believes that SBF will try to "overwhelm" the jury with confusing technical details.

"I think he will argue that it was just a spot margin loan — FTX clearly allowed this practice. Then he will delve into the intricacies of how this process worked, and how Alameda was able to borrow because they had substantial collateral, throwing out big numbers like $100 billion, " said Tackett.

In his opinion, SBF can also recognize that " margin collateral systems were not as reliable as they should have been."

However, Tackett believes that these statements will face clear contradictions. The exchange operated a discount system to prevent the occurrence of risks on any particular asset.

"FTX was designed in such a way that the larger the position in a particular asset, the higher the discount of the collateral contribution or the higher the collateral requirement," the former manager explained.

According to him, it will be clear that SBF and Alameda borrowed without the margin system that worked for the rest.

"Obviously, he knew what he was doing," Thackett concluded.

During the third day of the FTX founder's trial, Adam Yedidia, a former developer of the exchange and a close friend of SBF, testified, The Block reports. He spoke about the automated system fiat@ftx.com to track FTX customer deposits. In fact, the funds were kept by Alameda in the bank account of its "daughter" North Dimension.

"I thought the firm was just holding the money," he said.

Yedidia said that at some point after playing padel tennis together with SBF, he asked if everything was all right.

"Last year we were super-reliable, this is not the case," he quoted the FTX founder as saying.

The programmer added that SBF wanted to attract additional funding from Saudi Arabia or the United Arab Emirates.

 

[Father]

After the conviction of the former head of the collapsed FTX crypto exchange, the attention of the investigation shifted to his closest associates, who opposed the disgraced boss in court.

The Court of the Southern District of New York will evaluate the measure of responsibility in the case of multi-billion-dollar fraud FTX Group Caroline Ellison( Caroline Ellison), Nishad Singh (Nishad Singh) and Gary Wang (Gary Wang), learned sources Bloomberg. All three former close friends of Sam Bankman-Fried pleaded guilty, made a deal with the investigation, and voluntarily agreed to testify against the former FTX CEO in the hope of getting a lighter sentence.

"All three played a central role in the FTX case and presented the jury with an emotional drama that captured the jury's attention and gave a picture of what happened. It would be difficult for a court to prove such a complex case without insider information," said former federal prosecutor Jordan Estes.

Most legal experts agree that there has been a shift in society towards more lenient sentences. And in the case of FTX, the relatively young age of former FTX top managers, plus active cooperation with the investigation, may work in their favor.

"In the vast majority of cases, white — collar employees do not receive prison sentences," added Jordan Estes.

However, this does not mean that Allison, Singh and Wang will be able to avoid jail time. The court is waiting for a letter from the authorities stating how much the actions of former FTX employees helped in the investigation of the crime. Whether the information provided was useful and valuable. The final decision in the case of Ellison, Singh and Wang is in the hands of a federal judge.

Federal prosecutors say the FTX exchange case has become one of the largest financial fraud cases in U.S. history. And the largest in the last decade, which puts it on a par with such cases as the Enron fraud and the Bernie Madoff scam.

 

[Carding Forum]

Hearings on the cases of co-founder of the collapsed FTX exchange Gary Wang and its ex-CTO Nishad Singh will be held in the fall. This is stated in court documents.

Singh will be sentenced on October 30 in New York, and Wang on November 20. Both former managers of the trading platform pleaded guilty and cooperated with the investigation.

The defendants face decades in prison, but are likely to receive a "significant reduction in their sentences" following the government's 5K1.1 motion, Kennyhertz Perry law firm partner and former federal prosecutor Brayden Perry told The Block.

"Usually [5K1.1] indicates substantial assistance and cooperation with the authorities. In the status of a first-time white-collar employee Singh and Wang will likely receive a minimum prison sentence," he added.

According to Perry, the final verdict depends on "the amount of assistance provided and the final indicative verdict based on the investigation report of the main case."

Singh was a witness in the case against former FTX CEO Sam Bankman-Fried. Then he talked about the CEO's "unilateral" decisions and his expenses at Alameda.

In parallel, Wang revealed details about how the exchange used a random number to generate the volume of an insurance fund.

• Source: https://www.courtlistener.com/docke...d_before=&entry_gte=&entry_lte=&order_by=desc

 

[Friend]

U.S. Attorney's Office Requests Lenient Sentence for Caroline Allison

The U.S. Attorney's Office has asked the court for the Southern District of New York to inform the judge of Caroline Ellison's "exclusive cooperation" in the case against FTX CEO Sam Bankman-Fried.

According to prosecutors, "credible and convincing testimony," as well as an "admission of responsibility" and "a frank account of one's own serious misconduct" in connection with the collapse of FTX, deserves leniency in court.

"Allison's testimony was critical to Bankman-Fried's indictment, and it would have been difficult to prove without her involvement. Despite the fact that Allison played a key role in the Bankman-Fried criminal schemes, she never worked for FTX. Allison was not involved in the development of the criminal schemes that gave her company Alameda special treatment and allowed it to increase FTX's negative balance by withdrawing customer funds," prosecutors explained.

Prosecutors believe the court "rightly placed the blame for all aspects of criminal activity" on former FTX director Bankman-Fried, according to an appeal to Judge Lewis Kaplan. The prosecution advises that Caroline Allison be given a suspended sentence of three years, taking into account the period of pre-trial detention. The verdict is expected to be announced on September 24.

 

[Friend]

The court sentenced the former head of Alameda Research, Caroline Ellison, to two years in prison and forfeiture of $ 11 billion on charges of fraud and money laundering. Bloomberg writes about it.

The verdict softened Allison's "remarkable" assistance to the investigation into ex-FTX CEO Sam Bankman-Fried, its former CEO and partner.

The defendant's lawyers insisted on the need to show leniency and avoid imprisonment.

The judge stressed that the collapse of FTX was one of the "most serious" financial frauds, and the collaboration does not give Ellison a "free card to gain freedom".

"You are a very strong person, Miss Allison, in a sense, but not untouchable. Mr. Bankman-Fried had your kryptonite. You were vulnerable, and you were used", he said.

The judge recalled the spreadsheets provided to the defendant, which played a key role in the prosecution as the main evidence.

According to him, the guidelines provided for 110 years in prison, as in the case of SBF.

During the hearing, Allison admitted her involvement in the FTX fraud and apologized to creditors, investors, and victims who lost money as a result of her actions, as well as family and friends and "anyone she scammed".

The ex-CEO of Alameda Research may serve his sentence in a general regime prison.

After Allison's sentencing, other defendants are now awaiting a court decision - FTX co-founder and CTO Gary Wang, as well as the head of the exchange's engineering department Nishad Singh. Bloomberg predicted that they would also receive a prison sentence.

 

[Man]

FTX has filed a motion to approve a settlement agreement with former Alameda Research executive Caroline Allison, according to which "substantially all of her assets" that she has left will be transferred.

The petition, filed on October 7, requires the court to authorize a settlement agreement with Allison, who agreed to transfer to FTX's creditors any assets that were not seized by the state in her criminal case or used to pay legal costs.

The petition notes that once she meets the conditions, "Allison will have no assets left other than certain physical personal property," but does not specify the value of the assets she will lose.

She also agreed to cooperate with investigations and court cases of the bankrupt cryptocurrency exchange, which could include sharing documents or knowledge she gained as the former head of subsidiary trading firm FTX and Sam Bankman-Fried's ex-girlfriend.

FTX argues that the settlement agreement is just as beneficial as continuing to prosecute Allison in a nearby court case, as it provides "pretty much everything they can get back" anyway, and her additional cooperation represents substantial value.

They also argued that the trial would drain Ellison's remaining resources and cost him time and money.

In July 2023, the FTX bankruptcy estate sued Ellison, Bankman-Fried, and other executives, accusing them of violating fiduciary duties, embezzlement of corporate assets, and fraudulent transfers.

They sought to recover $22.5 million in bonus payments dated February 2022 and $6.3 million in bonus payments from 2021.

In addition, the latest documentation mentions call options and FTX stock that were fraudulently transferred to Allison.

Hearings on the proposed settlement are scheduled for November 20.

On the subject: US government cites "extraordinary cooperation" Caroline Ellison collaborated with federal prosecutors in a criminal case against Bankman-Fried before sentencing

Allison resulted in a reduced sentence to two years on September 24 for her involvement in fraud.

Bankruptcy Judge John Dorsey approved FTX's bankruptcy plan on October 7. Former customers and holders of cryptocurrencies should receive a refund of 118% to 142% of the value of their claims as of November 2022, when the company filed for bankruptcy.

Source

 

[Man]

On November 7, former Alameda CEO Caroline Ellison began serving her prison sentence at the Federal Correctional Institution in Danbury, Connecticut, reports The Block.

In September, the court sentenced Allyson to two years in prison and forfeiture of $11 billion on charges of fraud and money laundering.

She, along with Wang, cooperated with the investigation and testified against the founder of FTX.