Two former top executives of Sam Bankman-Fried’s crypto trading empire have pleaded guilty to federal criminal fraud charges and are cooperating in the case against the disgraced crypto entrepreneur, the U.S. attorney for the Southern District of New York said on Wednesday night.
The two are Caroline Ellison, who was the chief executive of the cryptocurrency trading company Alameda Research, and Gary Wang, a founder of the FTX crypto exchange. They were key lieutenants in Mr. Bankman-Fried’s vast business empire, which rested primarily on FTX and Alameda, companies that he founded and ran.
The Securities and Exchange Commission also filed civil fraud charges against Ms. Ellison and Mr. Wang on Wednesday. The S.E.C. said that Ms. Ellison, 28, had misused FTX customer deposits to fund Alameda’s trading activity and that Mr. Wang, 29, had created software that allowed that diversion of funds to take place. The S.E.C. case builds on civil charges filed against Mr. Bankman-Fried, 30, this month.
The guilty pleas and cooperation agreements are a major advance in the criminal fraud case against Mr. Bankman-Fried, who is in U.S. custody after agreeing to be extradited from the Bahamas earlier on Wednesday.
The combination of criminal and civil charges against the former top executives puts Mr. Bankman-Fried in an even more perilous legal position, with the federal government having said he oversaw a sweeping, yearslong fraud that transformed him from one of the most powerful people in the crypto industry into a criminal defendant potentially facing decades in prison.
Federal prosecutors and regulators in the United States have said Mr. Bankman-Fried carried out a fraud that diverted billions in customer money for other uses, including buying real estate in the Bahamas, trading crypto at Alameda, making campaign donations and investing in other crypto companies. Prosecutors contend he defrauded customers, investors and lenders to his crypto trading firm before it collapsed in bankruptcy last month.
The charges have also come as a major blow to the crypto industry, which has been reeling for the past year as prices of cryptocurrencies such as Bitcoin have plunged and firms have filed for bankruptcy. The collapse of FTX and the fraud charges have unsettled customers of other trading platforms, which had been assured their money was safe and protected.
What to Know About the Collapse of FTX
What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.
Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.
How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.
What led to FTX’s collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.
Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.
The guilty pleas by Ms. Ellison and Mr. Wang could push other former executives to cooperate with the authorities in the case against Mr. Bankman-Fried, who has been charged with fraud, money laundering and campaign finance offenses.
The U.S. attorney, Damian Williams, said Mr. Wang and Ms. Ellison were charged “in connection with their roles in the fraud that contributed to FTX’s collapse.”
Mr. Williams also reiterated a point he made last week when the criminal charges against Mr. Bankman-Fried were announced. “If you participated in misconduct at FTX or Alameda, now is the time to get ahead of it,” Mr. Williams said. “We are moving quickly and our patience is not eternal.”
During a two-week media blitz before his arrest on Dec. 12, Mr. Bankman-Fried claimed he had done nothing wrong and had not intended to defraud anyone. He also claimed he wasn’t fully aware of what was happening at Alameda.
Mr. Williams, in his statement, also said Mr. Bankman-Fried was in F.B.I. custody and being flown back to the United States, and would be presented before a judge as soon as possible. He is expected to be taken into Federal District Court in Manhattan as early as Thursday.
Lawyers for Ms. Ellison declined to comment. Ilan Graff, a lawyer for Mr. Wang, said, “Gary has accepted responsibility for his actions and takes seriously his obligations as a cooperating witness.”
A spokesman for Mr. Bankman-Fried declined to comment.
In its complaint, the S.E.C. said Ms. Ellison, under direction from Mr. Bankman-Fried, had manipulated the price of a digital currency that FTX created, called FTT, by buying large quantities of the crypto token to prop up its price.
Alameda was one of the major firms that was trading FTT and had used the crypto token as collateral for loans it got from other big crypto firms to fund its trading.
The Aftermath of FTX’s Downfall
The sudden collapse of the crypto exchange has left the industry stunned.
- A Spectacular Rise and Fall: Who is Sam Bankman-Fried and how did he become the face of crypto? “The Daily” charted the spectacular rise and fall of the man behind FTX.
- How FTX Operated: FTX called itself an exchange. But it was vastly different from stock exchanges, which are highly regulated and barred from engaging in many of the activities that the crypto company pursued.
- Political Donations: Federal prosecutors are seeking information from Democrats and Republicans about donations from Mr. Bankman-Fried and two former FTX executives.
- Ryan Salame: The former FTX executive, who told regulators about wrongdoing at the exchange and was a big Republican donor, has emerged as a central player in the scandal.
Sanjay Wadhwa, deputy director of the S.E.C.’s Division of Enforcement, said Mr. Bankman-Fried, Ms. Ellison and Mr. Wang “were active participants in a scheme to conceal material information from FTX investors, including through the efforts of Mr. Bankman-Fried and Ms. Ellison to artificially prop up the value of FTT.”
Ms. Ellison was a key figure in Mr. Bankman-Fried’s business empire. At times, she and Mr. Bankman-Fried were romantically involved, and they lived together in a five-bedroom penthouse in the Bahamas, where FTX was based.
Ms. Ellison met Mr. Bankman-Fried at the quantitative trading firm Jane Street, where she worked after graduating from Stanford University. Both were involved in effective altruism — a community focused on using data to maximize the long-term impact of charitable donations.
Mr. Bankman-Fried left Jane Street and eventually founded Alameda in 2017. Ms. Ellison joined him in 2018 and soon became a member of his tightknit inner circle. She followed him to Hong Kong, and took over as the chief executive of Alameda after Mr. Bankman-Fried founded FTX with Mr. Wang.
Even as she became a powerful figure in the emerging crypto industry. Ms. Ellison was never a true believer in the technology. “I do think a lot of crypto projects don’t have much real value,” she said on FTX’s official podcast in early 2021. She got into crypto, she explained on another episode, because she was hoping to make lots of money to give away as part of her commitment to effective altruism.
As FTX collapsed, Ms. Ellison gathered a group of Alameda staff members who were working from the company’s office in Hong Kong, and confessed that the firm had used customers’ deposits to fill a shortfall in its accounts, according to a person familiar with the matter.
A former software engineer at Google, Mr. Wang, a graduate of the Massachusetts Institute of Technology, was one of Mr. Bankman-Fried’s closest confidants at FTX. The pair lived together in a luxury apartment complex in the Bahamas.