Last year, it took reporters digging into Alameda Research’s balance sheet to finally show that ex-FTX CEO Sam Bankman-Fried’s big crypto house of cards was built on a shaky bedrock of customer funds. But according to a new report, a few FTX employees were well aware that Bankman-Fried’s hedge fund Alameda had backdoor access to the crypto exchange’s funds months before the company’s multi-billion dollar collapse. Of course, their complaints were ignored.
It’s news that could rattle Bankman-Fried even more than he already is as the once-crypto kingpin enters the second day of a federal fraud trial. Alongside federal campaign finance violations, Bankman-Fried is accused of using billions of dollars of stolen customer funds to prop up his massive crypto empire. According to unnamed sources speaking to The Wall Street Journal, employees at FTX discovered there was a backdoor Alameda had into FTX customer wallets several months before the news went public. They brought it to the attention of one member of FTX’s senior leadership, but the company reportedly ignored the problem.
The employees were working for Ledger X, a smaller exchange under the FTX umbrella. They brought the issue up with LedgerX Chief Risk Officer Julie Schoening, who is quoted telling the staff “there are less rigid rules” governing crypto but followed up with “but yea we should clean up this sort of stuff.” Schoening then reportedly brought the issue up with her boss, who then brought it up to FTX director of engineering Nishad Singh.
Singh has already pled guilty to federal fraud charges alongside others like Alameda head Caroline Elison and FTX co-founder Gary Wang. All those who pled guilty have agreed to testify against their former boss, but we’re only on the second day of the trial, so it’s unclear if this new timeline will be brought up. The U.S. Attorney’s office has said that all these former execs alongside FTX chief operating officer Constance Wang are on the witness list and may testify against their former boss.
The New York U.S. Attorney’s Office declined to respond to Gizmodo’s request for comment.
The backdoor, or the “special features” as prosecutors have referred to it, allowed the crypto trading firm Alameda to take money out of FTX. The code gave Alameda special permission to have a negative balance on the platform—something that no other account could do—up to $US65 billion worth of crypto tokens.
In the trial’s opening day, U.S. prosecutors hammered SBF in court. In opening arguments, assistant U.S. attorney for the Southern District of New York Thane Rehn said “He had wealth. He had power. He had influence. But all of that, all of that, was built on lies.” Prosecutors brought up Bankman-Fried’s ultra-lux lifestyle including his $US30 million Bahamas apartment and all the property he bought for family and friends, which is now the subject of a separate lawsuit.
Bankman-Fried, who often goes by SBF online, kept mum throughout the first day. His lawyers called the once-billionaire a humble “math nerd” who went to MIT. They tried to portray him as the good boy on campus who “didn’t drink or party.” SBF’s attorney Mark Cohen tried to imply that the FTX startup was hard to control as it grew fast from infancy, saying it was “like building a plane as you’re flying it.” That certainly is an interesting tactic for the defense, as Bankman-Fried is being accused of misleading and defrauding thousands of customers. The company would likely have had much less success if customers knew ahead of time SBF was building his plane in midair.