Crypto Traders Charged with Fraud by SEC for Allegedly Defrauding Investors on FTX Platform

The Securities and Exchange Commission has charged Zixiao (Gary) Wang, the former CTO of FTX Trading Ltd. (FTX), and Caroline Ellison, the former CEO of Alameda Research, for their roles in a multiyear scheme to defraud equity investors in FTX, the cryptocurrency trading platform that Wang and Samuel Bankman-Fried co-founded. Investigations into additional alleged transgressions of the securities laws, as well as those of other people and companies, are still ongoing.

The SEC complaint alleges that between 2019 and 2022, Ellison furthered the scheme by manipulating the price of FTT, an exchange crypto security token issued by FTX, by making sizable purchases on the open market to support its price. This was done at Bankman-direction.

Fried’s FTT was used as security for hidden loans made by FTX to Alameda, a cryptocurrency hedge fund run by Ellison and owned by Wang and Bankman-Fried. According to the complaint, Bankman-Fried and Ellison artificially raised the value of Alameda’s FTT holdings, which in turn raised the value of collateral on Alameda’s balance sheet and deceived investors about FTX’s risk exposure.

Additionally, according to the complaint, Bankman-Fried raised billions of dollars from investors between at least May 2019 and November 2022 by misrepresenting FTX as a secure platform for trading crypto assets with sophisticated risk mitigation measures to protect customer assets and by telling investors that Alameda was just another client with no special treatment, while Bankman-Fried and Wang improperly diverted FTX client assets to Alameda. According to the complaint, Ellison and Wang should have known or known that the statements were untrue and deceptive.

The lawsuit also claims that Ellison and Wang actively participated in the scheme to defraud FTX’s investors and took actions that were essential to the scheme’s success. According to the complaint, Wang wrote the software code for FTX that enabled Alameda to divert FTX customer funds, and Ellison used those funds for Alameda’s trading activities. The complaint claims that Bankman-Fried, with the knowledge of Ellison and Wang, transferred hundreds of millions more in FTX customer funds to Alameda even after it became clear that Alameda and FTX could not make their customers whole.

The SEC has charged Caroline Ellison and Gary Wang with defrauding investors through their involvement in the crypto asset trading platform FTX. According to the SEC, Ellison and Sam Bankman-Fried schemed to manipulate the price of FTT, a crypto security token related to FTX, in order to inflate the value of the platform. The SEC also alleges that Ellison and Wang misused customer assets and posted collateral for margin trading in order to support the platform, known as Alameda. When the platform ultimately failed, investors were left holding significant losses. The SEC emphasizes the need for crypto platforms to comply with securities laws in order to protect investors from such risks.

Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforce, stated: “As alleged, 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, which served as collateral for undisclosed loans that Alameda took out from “Defendants concealed the very real risks that FTX’s investors and customers faced by covertly syphoning FTX’s customer funds onto the books of Alameda.”

Ellison and Wang are accused of breaking the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 in the SEC’s complaint. The SEC’s complaint asks for disgorgement of Ellison and Wang’s illicit gains, a civil penalty, an officer, and director bar, injunctions against additional securities law violations, a ban on them acting as officers or directors, and an injunction prohibiting them from taking part in the issuance, purchase, offer, or sale of any securities aside from for their own accounts.

Ellison and Wang have agreed to split settlements, which are still pending court approval, under which they will be permanently barred from breaking any of the aforementioned conduct-based injunctions, officer and director bars, and federal securities laws.

The court will decide whether and how much disgorgement of ill-gotten gains, prejudgment interest, and/or a civil penalty are appropriate, as well as how long the officer and director bar will last and how long Wang will be subject to a conduct-based injunction, upon the SEC’s motion.

In a related development, Ellison and Wang have been charged by the Southern District of New York’s US Attorney’s Office.

Ellison and Wang are assisting the SEC’s ongoing investigation, which is being led by Brian Huchro and Pasha Salimi and being carried out by Devlin N. Su, Ivan Snyder, and David S. Brown of the Crypto Assets and Cyber Unit. Amy Flaherty Hartman, Michael Brennan, Jorge Tenreiro, and David Hirsch are in charge of supervision. Amy Burkart and David D’Addio will be in charge of the SEC’s legal action, under the direction of Ladan Stewart and Olivia Choe. Therese Scheuer, Alistaire Bambach, Ainsley Kerr, William Connolly, and Howard Kaplan also contributed to the investigation.

The SEC is grateful for the support provided by the Commodity Futures Trading Commission, the FBI, and the U.S. Attorney’s Office for the Southern District of New York.

Source:- https://www.sec.gov/news/press-release/2022-234