The man behind FTX, Subject of a Market Manipulation Investigation

by Michael London | 12/08/2022 3:14 PM
The man behind FTX, Subject of a Market Manipulation Investigation

Federal prosecutors are examining whether Sam Bankman-Fried and his hedge fund organized transactions in a manner that contributed to the collapse of two cryptocurrencies in May.


The new chief executive officer of FTX and the company's lawyers met with authorities from the Justice Department this week as the investigation into the collapse of the cryptocurrency corporation continues, according to a person familiar with the discussion

According to the source, new CEO John J. Ray III of FTX Trading and attorneys for the cryptocurrency business met in person with prosecutors from the Manhattan office of the U.S. attorney's office, which has been spearheading an investigation into the unexpected collapse of the firm. Bloomberg News first reported the meeting.

Following the withdrawal of rival exchange Binance from a potential purchase, FTX filed a petition for bankruptcy protection in the United States last month, and its creator Sam Bankman-Fried resigned from his position as chief executive officer. Ray, who was responsible for supervising the company's reorganization, said that the business cooperates with the relevant authorities and regulators.

As reported by The New York Times, Federal prosecutors are looking into whether Sam Bankman-Fried, the founder of FTX, manipulated the market for two cryptocurrencies this past spring, causing their collapse and setting off a domino effect that ultimately led to the implosion of his own cryptocurrency exchange last month.

According to the people, U.S. prosecutors in Manhattan are looking into whether or not Mr. Bankman-Fried manipulated the prices of TerraUSD and Luna, two currencies that are linked together, to benefit the entities he controlled, such as FTX and Alameda Research, a hedge fund he co-founded and owned.

It is unclear at this time if prosecutors have discovered any criminality by Mr. Bankman-Fried or when they started looking into the TerraUSD and Luna deals; the probe is still in its infancy. This is part of a larger investigation into the possible misuse of billions of dollars in client monies after the collapse of Mr. Bankman-cryptocurrency Fried's enterprise in the Bahamas.

When FTX moved its customers' money to Alameda, it sparked an investigation by federal prosecutors and the Securities and Exchange Commission into whether or not the company had broken the law. An $8 billion shortfall in the exchange's finances was discovered last month, triggering a run on deposits that ultimately led to the company's demise. In light of FTX's Chapter 11 filing on November 11, Mr. Bankman-Fried resigned as CEO.

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According to three people familiar with the investigation, FTX is also being investigated for allegedly violating laws regarding money laundering in the United States. These laws stipulate that money transfer business must be aware of the identities of their customers and must report any potentially illegal activity to law enforcement authorities. This probe, which Bloomberg News originally revealed, had already been underway for a number of months before FTX filed for bankruptcy. Additionally, the actions of other offshore bitcoin trading sites are being investigated by the investigators.

Mr. Bankman Fried is quoted as saying in a statement that he is "not aware of any market manipulation and definitely never planned to participate in market manipulation."

“To the best of my knowledge, all transactions were for investment or for hedging,” he added.

Representatives of the United States Attorney's Office for the Southern District of New York refused to comment on the matter. There was no quick response from representatives of FTX to the demands for comment that were made.

The attention exacerbates the legal storm that is gathering around Mr. Bankman-Fried on the possibility of market manipulation. It is against the law for a private person to deliberately arrange a market activity to move the price of a particular asset up or down.

The value of a so-called stablecoin dubbed TerraUSD wasn't explicitly supported by the value of the United States dollar, unlike the value of other stablecoins. Instead, it derived its value from a second currency known as Luna via an intricate series of algorithmic processes. These coins might be minted by merchants operating inside the digital economy, and their pricing would vary according to the total number of coins that were in circulation. Every time the price of TerraUSD went down, the quantity of Luna went higher because merchants manufactured more Luna to make up for the discrepancy and profit from it.

Market makers are individuals or exchanges who arrange for buyers and sellers to be matched. According to one individual with knowledge of the market activity, the major cryptocurrency exchanges and individuals who arrange for buyers and sellers to be matched noticed a flood of "sell" orders coming in for TerraUSD in the month of May. The speaking individual noted that while the orders were for relatively modest amounts, they were submitted quickly.

The system was quickly overwhelmed by the unexpected increase of sell orders for TerraUSD, making it difficult to discover "purchase" orders that matched up with them. Any sell orders that remained unfilled for an excessive amount of time would, under normal circumstances, be matched with corresponding purchase orders at a lower price. Because TerraUSD and Luna's values were linked, a decrease in one coin's price would induce a similar decline in the other coin's price. This effect was compounded the longer the orders remained unmatched over an extended period of time.

It is still unknown what exactly caused the decline in the value of each of these coins. A person with knowledge of the market activity stated that Sam Bankman-cryptocurrency Fried's trading firm, which also placed a large bet on the price of Luna falling, appeared to be the source of the majority of the sell orders for TerraUSD. This person stated that the firm had placed a large bet on the price of Luna falling.

The price drops in Luna might have resulted in a sizeable profit for the transaction if they had gone according to plan. In its place, the whole TerraUSD-Luna ecology experienced a catastrophic collapse. Because of the collapse, the cryptocurrency business had even more difficulties. As a result, the value of the cryptocurrency market dropped by around one trillion dollars. This forced some famous enterprises to declare bankruptcy.

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The crash of the Luna eventually led to the demise of Mr. Bankman-commercial Fried's empire, which was caused by the ripple effects of the catastrophe. According to a source acquainted with the case, Caroline Ellison, the chief executive officer of Alameda, informed the employees in November that loans to Alameda were returned due to the market instability that was released as a result of the crisis. Ms. Ellison explained to the workforce that the cash that Alameda had borrowed was no longer freely accessible to fulfill the payments; the firm utilized the funds that FTX customers had contributed.

The collapse of FTX has sent shockwaves across the sector, stifling liquidity at companies that had exposure to what was once one of the largest cryptocurrency exchanges in the world and sparking investigations by regulatory authorities in a number of different nations.


                       FTX Founder Sam Bankman-Fried on the Crypto Exchange's Collapse | WSJ

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