The court filings continue to shed light on the dubious relationship between FTX and Alameda Research, in which the hedge fund gained an “unfair” trading advantage, as well as unprecedented access to user holdings on the cryptocurrency exchange.
The United States Commodity Futures Trading Commission archived a lawsuit in New York Southern District Court on December 1, alleging a series of irregular business dealings between Sam Bankman-Fried's cryptocurrency exchange FTX and his trading company Alameda Research.
The complaint provides a series of allegations detailing how the two companies and some experts, including Bankman-Fried, violated the Commodity Trading Act and various regulations. This comes after the the former CEO was arrested in the Bahamas on December 12 and is scheduled to be extradited to the United States.
The CFTC highlights how Bankman-Fried owned and operated FTX.com and its associated subsidiaries, as well as Alameda and its related entities, from May 2019 until its collapse in November 2022.
Alameda operated as the primary market maker at FTX.com, which provided liquidity to its cryptocurrency markets. The companies operated as a "common company," but the CFTC alleges that this was abused in various ways.
According to the filing, a small circle of insiders were involved in allowing deposits from FTX clients, including the fiat currency, Bitcoin (BTC) and ether (ETH), to be "accepted, held and/or appropriated by Alameda" for its own use.
In addition, the CFTC claims that FTX executives created features in the exchange's code that allowed "Alameda to maintain an essentially unlimited line of credit in FTX."
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Other exceptions were created that allowed Alameda to have “an unfair advantage” when trading on FTX. This included faster trade execution times, as well as an exemption from the exchange's "distinctive self-settlement risk management process."
Bankman-Fried and another Alameda executive also reportedly directed the hedge fund to use FTX and user funds to trade on third-party cryptocurrency exchanges and to finance a "variety of high-risk digital asset industry investments."
In addition, Bankman-Fried and other FTX executives obtained hundreds of millions of dollars in poorly documented "loans" from Alameda. These funds were used to purchase real estate and luxury properties, as well as to finance political donations.
Widespread misappropriation of client funds occurred while FTX Trading claimed in its terms of service that clients owned and maintained control of the assets in their accounts and that these were protected and segregated from FTX funds.
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