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Former FTX, Alameda execs Gary Wang, Caroline Ellison plead guilty to DOJ charges

FTX co-founder and former CTO Gary Wang and former Alameda Research CEO Caroline Ellison have plead guilty to charges related to their roles in fraud that contributed to the collapse of FTX, U.S. Attorney Damian Williams said Wednesday night.

Both Wang and Ellison are cooperating with Justice Department's investigation, Williams said.

Seven charges leveled against Ellison, and those to which she plead guilty include wire fraud and wire fraud conspiracy against FTX customers and FTX's sister hedge fund Alameda Research, conspiracy to commit commodities and securities fraud, and conspiracy to commit money laundering. The charges carry up to 110 years in prison and millions of dollars in in potential penalties.

Wang's charges, to which he also plead guilty, include four counts of wire fraud and wire fraud conspiracy, as well as conspiracy to commit commodities and securities fraud. Penalties for the charges carry up to 50 years in prison, plus fines.

In a separate action, the SEC announced late Wednesday it charged both Wang and Ellison with defrauding FTX investors, saying both were cooperating with its investigation and disclosing both had entered into settlements with the SEC.

Caroline Ellison, 28, ran the crypto hedge fund Alameda Research that was a subsidiary of FTX. Ellison previously worked with former FTX CEO Sam Bankman-Fried at Jane Street.

Gary Wang, 29, was a former college roommate of Bankman-Fried at the Massachusetts Institute of Technology. Wang cofounded FTX with Bankman-Fried in 2019.

NASSAU, BAHAMAS - DECEMBER 21: FTX co-founder Sam Bankman-Fried is escorted out of the Magistrate's Court on December 21, 2022 in Nassau, Bahamas. The former crypto billionaire is preparing to be extradited to the US from the Bahamas to face charges over FTX’s multi-billion-dollar collapse.  (Photo by Joe Raedle/Getty Images)
FTX co-founder Sam Bankman-Fried is escorted out of the Magistrate's Court on December 21, 2022 in Nassau, Bahamas. (Photo by Joe Raedle/Getty Images)

On Wednesday, a judge approved Bankman-Fried's extradition to the United States after the Bahamas Minister of Foreign Affairs signed off on the order. Williams also confirmed Sam Bankman-Fried’s extradition and transfer to U.S. custody.

"Samuel Bankman-Fried is now in FBI custody and is on his way back to the United States. He will be transported directly to the Southern District of New York, and he will appear in court before a judge in this district as soon as possible," Williams said.

On the night of December 12, the Bahamas Royal Police arrested Bankman-Fried. Until Wednesday, Bankman-Fried was being held in custody at the Fox Hill prison in New Providence, Bahamas.

A spokesperson for Bankman-Fried declined to comment.

“As I said last week, this investigation is very much ongoing and is moving very quickly,” Williams said. “I also said that last week’s announcement would not be our last. And let me be clear once again: Neither is today’s.”

Williams warned those that participated in misconduct at FTX or Alameda to come forward. “Our patience is not eternal,” he said.

A spokesperson for the U.S Attorney’s Office, Southern District of New York did not respond to Yahoo Finance's request for comment.

SEC allegations

According to the SEC’s complaint, from 2019 and 2022, Ellison, at the direction of Bankman-Fried, furthered a scheme to manipulate the price of FTX's token, FTT, "by purchasing large quantities on the open market to prop up its price."

This practice allowed FTX to use FTT as collateral for loans taken out by FTX using its customers' assets to Alameda. The outcome permitted the value of Alameda's balance sheet to be overstated, thereby misleading investors about FTX's exposure, the SEC complaint alleges. The SEC did not respond to Yahoo Finance's request for comment by press time.

During the same time, Bankman-Fried touted FTX as a "safe crypto asset trading platform with sophisticated risk mitigation measures to protect customer assets." FTX's current CEO, John J. Ray III, said in testimony before the U.S. House Financial Services Committee on December 13 that he estimates FTX's losses are in excess of $7 billion dollars.

FTX customer funds were used for Alameda's trading activities, loans to FTX executives, and to fund personal real estate purchases, according to the SEC complaint.

"Between March 2020 and September 2022, Bankman-Fried executed promissory notes for loans from Alameda totaling more than $1.338 billion, including two instances in which Bankman-Fried was both the borrower in his individual capacity and the lender in his capacity as CEO of Alameda," the complaint said. "Ellison knew, or was reckless in not knowing, about these 'loans.'"

As CTO of FTX, Wang created the platform's software code that allowed Alameda to divert FTX customer funds, the SEC alleged. At Alameda, Ellison used the misappropriated funds for the hedge fund's trading activity, according to the SEC's complaint.

The complaint also alleges that even after it was made clear FTX could not make customers whole, Bankman-Fried "directed hundreds of millions of dollars more in FTX customer funds to Alameda" with the knowledge of Ellison and Wang.

"By surreptitiously siphoning FTX’s customer funds onto the books of Alameda, defendants hid the very real risks that FTX’s investors and customers faced," said in SEC's statement on its complaint.

The SEC is seeking monetary penalties and to bar Ellison and Wang from acting as corporate officers or directors. The action also asks for an injunction to stop the defendants from participating directly or indirectly in the issuing, purchasing, offering, or selling traditional and crypto securities.

The SEC said both have reached settlements, subject to court approval.

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