FTX Trading Ltd. and Alameda Research: privileges, customer money and loans

analysisRay's first-day declaration describes Alameda Research LLC, organized in Delaware, as the parent and main operating company of the Alameda Silo, which ran quantitative trading funds specializing in crypto assets and offered over-the-counter trading; Ray summed it up as a "crypto hedge fund" trading for its owners, Bankman-Fried (90%) and Wang (10%). The CFTC's consent order adds that the firm, never registered with the CFTC, did business with its subsidiaries and affiliates as "Alameda", was founded by Bankman-Fried in November 2017 and first operated from Berkeley, California. GLEIF gives Alameda Research LLC a headquarters at 2000 Center Street, 4th Floor, Berkeley, the same street address that FTX Trading's statement of financial affairs lists among FTX Trading's addresses from August 2019; a shared address does not by itself show common control or any transaction. ^{1 2 3 4}

analysisBankman-Fried was Alameda's chief executive until 2021. The CFTC order dates his replacement as chief executive to August 2021, when he appointed Caroline Ellison and another person as co-chief executives while remaining a signatory on Alameda's bank accounts with direct authority over its major trading, investment and financial decisions; an Alameda press release of 12 October 2021 named Ellison and Sam Trabucco co-chief executives. The SEC's complaint puts the change at around October 2021, says Ellison became sole chief executive around August 2022 and describes her as formally chief executive of Alameda Research Ltd., the LLC's subsidiary; a debtors' motion of November 2024 dates Trabucco's term as co-chief executive of Alameda Research Ltd. from August 2021 to August 2022. The debtors' complaint of November 2024 describes Wang as a co-founder of Alameda Research Ltd. and of the two West Realm Shires companies. ^{2 5 6 7 8}

analysisThe companies were not kept apart. The CFTC order finds that FTX Trading Ltd. and Alameda Research LLC commingled customer assets with corporate assets, did not document transfers between them and regularly shared employees, office space, systems, accounts and communication channels, and that Bankman-Fried, the ultimate majority owner of FTX Trading, signed their core agreements and was a signatory on their bank accounts. Ray listed among the failures he found the absence of independent governance between Alameda and the Dotcom Silo, in which outside investors had invested, as well as the secret exemption of Alameda from aspects of FTX.com's auto-liquidation protocol and the use of software to conceal the misuse of customer funds. Sources use "Alameda" loosely: FTX Digital Markets' liquidators, for example, apply it collectively to Alameda Research LLC, Alameda Research Limited and North Dimension Inc., so their figures are not attributed to a single company. ^{2 1 9}

analysisAlameda Research Ltd.'s own subsidiary Maclaurin Investments Ltd. began as Alameda Ventures Ltd., founded in December 2019 in Seychelles by Bankman-Fried, Wing Man Charis Law and Luk Wai Chan, its first directors, and renamed in September 2022. After the filing, Alameda Research Ltd., as Maclaurin's sole shareholder, ratified Ray's appointment as chief executive, Kurt Knipp's appointment as director and the petitions in a resolution of 6 February 2023 signed by Matthew Rosenberg, then its sole director. ^{10 11}

analysisThe CFTC order finds that throughout the relevant period Alameda's FTX account carried a special "Allow Negative" flag that let it withdraw unlimited digital assets while its balance was negative and exempted it from automatic liquidation, and that its borrowing limit was set at $65 billion. The debtors' first interim report puts the comparison plainly: at the petition date Alameda Research LLC alone had a $65 billion limit, where other market makers had limits of up to $150 million; two secretly granted features, can_withdraw_below_borrow and allow_negative, were added to the FTX.com code by Nishad Singh on 23 and 31 July 2019, and Alameda was the only customer with allow_negative set to true at the petition date. ^{1 2}

analysisThe SEC's complaint against Ellison and Wang alleges that FTX engineers, including Wang, repeatedly raised the negative balance Alameda could carry at Bankman-Fried's direction, creating an unofficial "line of credit" that grew to tens of billions of dollars funded by other customers' deposits, and that around May 2020 they exempted Alameda from the auto-liquidation feature of FTX's margin trading; no other customer had such terms. ^{3 4 5 6 7 8}

analysisInstead of opening bank accounts in FTX Trading Ltd.'s name, the debtors' second interim report states, the group used Alameda's existing accounts to take in and pay out FTX.com customers' money: from at least 16 November 2019 to 30 August 2020 customers received wire instructions on Alameda letterhead directing them to more than a dozen Alameda accounts, and one of them, Alameda-4456, received over $250 million directly from customers in 2020 alone, plus over $4 billion from other Alameda accounts funded in part by customer deposits. When banks questioned these accounts, the report says, the group turned to North Dimension Inc., which the report calls a shell company without operations or employees; at the direction of a senior FTX Group attorney the group told a bank that North Dimension was a trading firm with 2,000 counterparties, in an answer Bankman-Fried signed; from April 2021 customers were told to wire money to North Dimension accounts, which had received at least $1 billion of customer deposits by the end of 2021. The report does not name the bank, the attorney involved or the counterparties, and calling North Dimension a shell is the debtors' characterization. ¹

analysisThe CFTC order, entered with FTX Trading's and Alameda's consent, makes similar findings: customers depositing fiat from 2019 were directed to accounts owned and controlled by Alameda, some in the name of its Delaware subsidiary North Dimension; the internal account recording these deposits showed as much as $11 billion at times; some deposits kept reaching Alameda accounts after FTX opened its own customer accounts in 2020; and from FTX's launch Alameda used customer fiat and digital assets for its own trading, investment and lending without authorization, although, the order finds, section 8.2.6 of FTX Trading's terms of service prohibited such use. The SEC's complaint makes the same allegation and adds that the liability sat in an internal FTX account called "fiat@ftx.com" that was not tied to Alameda, while North Dimension's website disclosed no connection to Alameda. ^{2 3 4 5 6 7 8}

analysisThe debtors' report describes a "Payment Agent Agreement" between Alameda Research Ltd. and FTX Trading Ltd. that a senior FTX Group attorney created in April 2021, gave an effective date of 1 June 2019 and Bankman-Fried signed for both sides; it cast Alameda as a mere payment agent, although, the report says, Alameda never passed the deposits on to FTX. FTX Trading told its auditor that Alameda provided "cash management services", and its audited financial statement, shared with potential investors in the Series C round that closed in January 2022, recorded no FTX.com customer fiat. The report calls the agreement a backdated sham, which is the debtors' characterization. By about mid-2022, the CFTC order finds, FTX's ledgers showed Alameda's dollar liability to FTX at about $8 billion, and at Bankman-Fried's direction executives hid it by moving it into a customer account he later called "our Korean friend's account". ^{1 3 2}

analysisAccording to the SEC, Alameda received a large share of the 350 million FTT tokens minted when FTX launched FTT in July 2019, including all the company tokens allocated to FTX, without paying for them, and borrowed billions of dollars from lenders against collateral consisting largely of FTT; the SEC also alleges that Alameda and Ellison, at Bankman-Fried's direction, traded FTT in 2019 and 2021 to support its price. The CFTC order finds that Alameda's loans at times exceeded $10 billion in notional value, secured largely by FTT and other illiquid tokens valued without appropriate discounts, and that FTT made up an extremely high portion of Alameda's $14.6 billion of assets at 30 June 2022. ^{1 2 3 4 5 6 7}

analysisIn 2022, without enough liquid assets to meet margin calls and called loans, the CFTC order finds, Alameda increased its use of FTX customer assets to meet its debts, withdrawing several billion dollars through its FTX account. The SEC alleges that in May 2022 Bankman-Fried directed Ellison to draw on the line of credit so that billions of dollars of customer funds went to repay Alameda's lenders, that she hid the arrangement in the balance sheets shown to lenders, and that the drawings continued through the summer, funding hundreds of millions of dollars of "loans" to Bankman-Fried and other executives. In the debtors' later complaint against SkyBridge, Ellison's trial testimony is cited for the figure that by 1 September 2022 Alameda Research Ltd. was "borrowing" $13.7 billion from FTX that it could not repay, and the plea hearings of Singh and Wang for the statement that Alameda routinely took "several billion dollar[s]" from FTX.com using its special privileges, and Ellison's plea hearing for her agreement with Bankman-Fried, by about July 2022, to give Alameda's lenders materially misleading financial statements. ^{7 1 2 3 4 5 6 8 9}

analysisBy late on 7 November 2022, the CFTC order finds, FTX could no longer meet withdrawals; Bankman-Fried, Ellison and others acknowledged internally that customer funds had been misappropriated, while Bankman-Fried publicly portrayed a liquidity problem and falsely said FTX remained solvent, having earlier assured the public, including a U.S. Senate committee on 9 February 2022, that customer assets were segregated. A balance sheet prepared for prospective investors showed an $8 billion negative balance in a hidden "fiat@" account. At a meeting of Alameda staff on or about 9 November 2022, according to the SEC, Ellison admitted that she, Bankman-Fried, Wang and Singh had known that Alameda used customer funds; a news report of the recording played at trial quotes her saying FTX had "basically always allowed Alameda to borrow users' funds"; the recording itself was not retained, and neither the SEC nor the report names the Alameda legal entity concerned. The debtors' first interim report quotes Bankman-Fried himself writing that "Alameda is unauditable", its balances only roughly known. ^{7 1 6 10}

analysisRay's declaration records related-party loans receivable of $4.1 billion at Alameda Research (consolidated) on 30 September 2022, chiefly a $2.3 billion loan by Euclid Way Ltd. to Paper Bird Inc. and loans by Alameda Research Ltd. of $1 billion to Bankman-Fried, $543 million to Singh and $55 million to Ryan Salame; Ray said he did not rely on the unaudited balance sheets. The SEC alleges that Bankman-Fried signed notes for more than $1.338 billion of Alameda loans between March 2020 and September 2022, twice as both borrower and, as Alameda's chief executive, lender; that on about 22 July 2022 he lent himself $136 million; that Wang signed notes for about $224.7 million whose proceeds Bankman-Fried used; and that two $100 million investments by FTX Ventures Ltd. were funded with customer money diverted to Alameda. ^{1 2 3 4 5 6 7}

analysisThe debtors describe intercompany dealings without corporate formalities: assets and liabilities moved among group companies and insiders without documentation, Alameda Research LLC paid salaries and expenses for itself, other debtors and FTX Digital Markets as well as venture investments and acquisitions, and an Alameda account sent tens of millions of dollars to Bankman-Fried's personal account in 2021 and 2022, documented as loans but booked as "Investment in Subsidiaries". FTX Trading's statement of financial affairs lists an intercompany payable from Alameda Research created on 3 May 2021 for Singh's exercise of FTX Trading share options (the figure 16500, no currency stated). Ray's declaration lists $1,400 million owed by Clifton Bay Investments to Alameda Research Ltd, $68.6 million to Alameda Research LLC and $38.5 million to Alameda Ventures, on unaudited balance sheets he did not rely on. ^{8 9 10 1}

analysisMoney also left through outside counterparties. Between June and November 2022, the debtors' report says, the group sent about $450 million to the hedge fund Modulo Capital from account Alameda-9485, funded in part from an FTX Trading account that received customer deposits, plus $25 million on 19 May 2022; in May 2023 Modulo returned about $407 million and released claims to $56 million held on FTX.com, about 98% of the transfers. Alameda Research had borrowed from BlockFi Lending and BlockFi International, and on 9 November 2022 it and Emergent Fidelity Technologies gave BlockFi security over Grayscale and Bitwise trust shares and Emergent's Robinhood investment; separately, West Realm Shires Inc. had agreed in June 2022 to lend BlockFi up to $400 million, of which BlockFi drew $275 million. The debtors also state that Bankman-Fried, Singh and another insider made more than $100 million of political donations funded through purported "loans" from the FTX Group. ^{11 9 1 12}