Bankman-Fried lawsuits expose FTX's 'Special Treatment' of Alameda Research

Sam Bankman-Fried’s “personal piggy bank” Alameda Research was deeply intertwined with his exchange, FTX.

Court filings against alleged crypto fraudster Sam Bankman-Fried are shedding more light on the cozy relationship that burned down his empire: the one between crypto exchange FTX and its sister hedge fund Alameda Research.

“There was no meaningful distinction between FTX customer funds and Alameda’s own,” the U.S. Securities and Exchange Commission alleged Tuesday. Alameda is said to have improperly siphoned $8 billion from customers of the now-bankrupt FTX.

In its own suit, the Commodity Futures Trading Commission said Alameda enjoyed special access to FTX’s trading backend. It could execute trades faster than other customers and was exempt from auto-liquidation, both “unfair advantages,” the suit said. And it could borrow as much money as it liked.

Alameda Research was the giant crypto hedge fund and market making firm that Sam Bankman-Fried launched in 2017, well before FTX. It started as a bitcoin arbitrage trader but quickly grew into one of the industry's most influential names, both for its perceived trading prowess and its billions of dollars in capital. Alameda's stature rose in tandem with FTX's; Bankman-Fried ran both until October 2021, when he declared he was leaving the fund.

Publicly, the firms claimed to be two different companies that operated "at an arm's length," Alameda's former CEO Caroline Ellison has previously said. But in reality Bankman-Fried ran FTX and Alameda in lockstep, the suits allege. And Alameda was playing with FTX customers' funds.

Bankman-Fried, who owns 90% of Alameda, was arrested in the Bahamas Monday and faces criminal money laundering, conspiracy and fraud charges in the U.S. His stunning fall from CEO at the top of the crypto industry to international defendant took just over one month.

In that time, the 30 year-old former billionaire had embarked on an aggressive apology tour to cast his role in FTX’s implosion as stupid and reckless, but hardly criminal. At times he jumped around questions that probed Alameda’s relationship with FTX and has repeatedly denied knowing of any backdoors.

Hardcoded loopholes

The new suits take direct aim at Bankman-Fried’s assertions. He “directed” FTX to let Alameda do things its other customers could not, like fall below margin requirements on risky bets and execute trades when its accounts were empty, the suits allege. They went on to say these loopholes were baked into FTX’s code at Bankman-Fried’s direction.

When institutional customers like Alameda placed trades on FTX they used an API, which is by design more streamlined – and thus faster – than the website retail traders use. But Alameda’s access was faster still. According to the CFTC, it “was able to bypass certain portions” of the FTX API to move “several milliseconds faster” than other big spenders.

Part of Alameda’s speed boost was due to its other special privileges. Because it didn’t need to have enough money to place trades, it wholly sidestepped the automatic balance check that other accounts had to clear. This gave Alameda “another significant speed advantage.”

Once, when Alameda maxxed out its borrow limit on FTX, Bankman-Fried told staffers to set a ceiling so high it would never be reached, the CFTC alleged. It could theoretically withdraw tens of billions of dollars from FTX.

Alameda’s infinite money glitch led to the hedge fund repaying “billions of dollars of loans” using customer deposits, according to the U.S. Department of Justice. It unsealed criminal charges against Sam Bankman-Fried Tuesday after the former FTX CEO’s arrest in the Bahamas.

Bankman-Fried tried to hide the relationship between his “personal piggy bank” and FTX by routing money to seemingly unaffiliated bank accounts that Alameda controlled, according to the SEC. FTX used the unassuming account name “fiat@ftx.com” to track its sister company’s multi-billion dollar debts without raising eyebrows. And Alameda never told third-parties that its “loan” was from FTX.

Even when FTX tried to untangle its liabilities in 2022 it gave special treatment to Alameda. Bankman-Fried stopped the exchange’s accounting systems from charging interest on the hedge fund’s $8 billion liability (it had done so automatically, per the SEC).

We can’t really shut it down

Bankman-Fried “drafted and shared a document that questioned whether Alameda should be permanently shut down” in September 2022, months before it imploded, according to the CFTC.

His reasoning: Alameda was taking on more risk than it was worth.

“I think it might be time for Alameda Research to shut down. Honestly, it was probably time to do that a year ago,” Bankman-Fried wrote in a document titled “We came, we saw, we researched.”

At the same time, Bankman-Fried acknowledged that Alameda played such a large role in FTX’s operations that it might be impossible to pull the plug. As FTX's primary market maker, ensured trades went smoothly for all FTX customers, not just itself. Disappearing Alameda would create a shortfall in liquidity that might undermine FTX's value as an exchange.

“Given the amount that Alameda is doing, we can’t really shut it down,” he wrote, according to the CFTC.

The fall

The SEC and CFTC chart Nov. 2 as the day Alameda and FTX began to unravel. On that day, the regulators said CoinDesk published an article that probed Alameda’s extensive FTT token holdings. FTT is a token issued by FTX, and Alameda had billions of dollars of FTT and other FTX-linked tokens on its balance sheet.

“On November 6, 2022, in response to this article, the CEO of Binance tweeted that, “[d]ue to recent revelations that have came [sic.] to light,” he would be selling the remainder of his significant FTT holdings, which he acquired during the buyout from FTX seed investment,” the CFTC said.

Binance’s call-to-liquidate tanked the price of FTT and triggered a run on deposits at FTX. One day later it became clear to the exchange that it didn’t have enough cash to cover for customers, the CFTC said.

At the same time, Alameda traders were directed to “sell everything that could be sold” in a mad dash to “generally do anything possible to quickly obtain billions of dollars in capital to send to FTX,” the CFTC said, noting Bankman-Fried played a key role in that effort.

Bankman-Fried also planned to use Alameda’s firesale to fill a hole at FTX US, which was also getting pummeled by withdrawals. Executives there had found “a shortfall they did not understand and were unable to quantify,” per the CFTC. (During his apology tour Bankman-Fried insisted that the U.S. exchange was never insolvent.)

“On November 8, Bankman-Fried directed Alameda traders to prioritize meeting FTX US capital requirements and to send excess capital to FTX US. On information and belief, Alameda sent in excess of $185 million to FTX US to fill its shortfall,” the CFTC said.

It was just one more criss-cross in the sprawling, unspoken, ties between Alameda and all aspects of the FTX empire.