The FTX judge kept the Sam Bankman-Fried deputies’ collaboration a secret
A judge hid that two of Sam Bankman-Fried’s closest associates had turned against him to keep the cryptocurrency entrepreneur from being spooked and fighting extradition from the Bahamas, according to court transcripts released Friday.
US prosecutors in New York waited until Bankman-Fried, the founder of collapsed crypto exchange FTX, was in FBI custody before revealing that his business partners Carolyn Ellison and Gary Wang had secretly pleaded guilty to fraud and to cooperating with the investigation, which may earn them leniency in sentencing.
US Attorney Damian Williams delivered the guilty pleas when Bankman-Fried was on the air late Wednesday.
Prosecutors had feared that if Bankman-Fried found out his friends were cooperating, he might try to resist extradition from the Bahamas, where he had been arrested at the request of US authorities.
Ellison, 28, and Wang, 29, entered pleas of guilty Monday in federal court in Manhattan to face charges that carry the potential penalty of decades in prison.
At that hearing, Assistant US Attorney Danielle Sassoon told judges prosecutors expected Bankman-Fried to approve Monday’s extradition before there were “some hiccups in the Bahamian courtroom.”
“We still expect his extradition soon, but since he has not yet given his consent, we believe that if Ms. Ellison’s cooperation were disclosed at this time, it could potentially thwart our law enforcement objectives to extradite him,” Sassoon told the U.S. District Judge Ronny Abrams.
The judge obtained assurances from Ellison’s attorney that there were no objections to the motion before granting it.
“Revealing the collaboration could hamper law enforcement officials’ ability to continue the ongoing investigation and could also affect Mr. Bankman-Fried’s decision not to extradite this case,” Abrams said.
Bankman-Fried, 30, appeared in court in New York on Thursday. He was released on condition that he live under house arrest with his parents in Palo Alto, California while awaiting trial.
The home where he was staying was protected Friday by heightened security forces, including a Stanford University security guard posted about 150 feet from the home to keep passers-by away. The president of the school lives nearby.
Ellison is the former CEO of Alameda Research, Bankman-Fried’s cryptocurrency hedge fund trading firm. Wang co-founded FTX, the crypto exchange. Both agreed to testify at Bankman-Fried’s trial.
She and Bankman-Fried are accused of defrauding clients and investors by illegally diverting vast sums of client funds from FTX to make lavish real estate purchases, donate money to politicians and conduct risky deals at Alameda.
On Monday, Ellison told the court that since the collapse of FTX and Alameda in November, she “has worked hard to help recover assets for the benefit of clients and to cooperate with government investigations.”
“I’m really sorry for what I did. I knew it was wrong. And I want to apologize to affected FTX customers, Alameda lenders and FTX investors for my actions,” she said, according to a transcript.
Ellison said she was aware from 2019 to 2022 that Alameda gained access to a borrowing facility on FTX.com that allowed Alameda to hold negative balances in multiple currencies.
She said the practical effect of the arrangement is that Alameda has access to an unlimited line of credit without posting collateral and without owing interest on negative balances or being subject to margin calls or liquidation protocols.
Ellison said she knows that when Alameda’s FTX accounts have significant negative balances in any currency, it means Alameda is borrowing funds that FTX clients have deposited into the exchange.
“While I was co-CEO and then CEO, I understood that Alameda had made numerous large illiquid venture investments and lent money to Mr. Bankman-Fried and other FTX executives,” she said.
Ellison said she understands that Alameda funded the investments with multibillion-dollar short-term and perpetual loans from outside lenders in the cryptocurrency industry.
When many of those loans were called back by lenders in June, she agreed with others to borrow billions of dollars from FTX to repay them.
“I understand that FTX needs to use client funds to fund its loans to Alameda,” she said. “I also understood that many FTX clients have invested in crypto derivatives and that most FTX clients did not expect that FTX would lend their holdings of digital assets and… deposits to Alameda in this way.”
From July through October, Ellison said she agreed with Bankman-Fried and others to provide Alameda’s lenders with misleading financial statements, including quarterly balance sheets, that disguised the extent of the company’s borrowing and the billions of dollars in loans it had to FTX -Executives had forgiven and others.
“I have agreed with Mr. Bankman-Fried and others not to disclose the true nature of the relationship between Alameda and FTX, including Alameda’s loan agreement,” Ellison said.
During his request Monday, Wang said he made changes to the computer code to enable transactions with Alameda.
“I knew what I was doing was wrong,” he said.
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