FTX Employees Unearthed Alameda’s $65 Billion Backdoor Months Before Collapse

As the trial of Sam Bankman-Fried, the founder of the now-defunct crypto exchange FTX, got underway, the testimony of witnesses shed light on a report by The Wall Street Journal. 

The report revealed that the company’s employees had uncovered a secret link between the exchange and an affiliated trading firm, raising concerns about potential fraudulent activities. 

These revelations raise questions about what the firm’s leadership knew regarding problematic features that form the basis of the prosecution’s case.

FTX Employees’ Discovery Raises Questions

According to The Journal, employees discovered a backdoor connection between FTX and Alameda Research in May 2022, several months before the exchange’s collapse. 

This feature allowed Alameda, a sister trading company controlled by Bankman-Fried, to withdraw consumer funds and maintain a negative balance of up to $65 billion. At the same time, ordinary customers were not permitted to go negative. 

Recognizing the significance of their discovery, employees flagged it to a senior leader. However, despite some executives believing the feature had been removed, it was still in place, as per The Journal’s findings.

During the trial’s opening arguments, prosecutors contended that Bankman-Fried had misappropriated billions of dollars in customer funds for personal gain, which only came to light after FTX’s collapse. 

Assistant U.S. Attorney Thane Rehn characterized FTX’s apparent success as “built on lies.” In response, Bankman-Fried’s defense counsel argued against portraying him as a “cartoon villain” and emphasized that the exchange’s failure was primarily due to operating in a risky industry. Lead defense lawyer Mark Cohen asserted that running a business is not inherently a crime.

Testimony Of Witnesses

The trial’s first witnesses took the stand, offering insights into the impact of FTX’s collapse on customers and shedding light on internal operations. 

Marc-Antoine Julliard, an FTX customer based in London, testified that he initially trusted Bankman-Fried’s assurances and did not attempt to withdraw his funds as the exchange faltered, resulting in a loss of over $100,000. 

Adam Yedidia, a former FTX employee and college classmate of Bankman-Fried, resigned after discovering that customer funds were being used to pay creditors at Alameda.

The trial will feature several high-profile witnesses, including Gary Wang, a senior FTX executive cooperating with prosecutors. 

As the trial progresses, more revelations may come to light regarding the extent of the company’s knowledge and involvement in the alleged fraudulent activities. The significance of the backdoor discovery made by employees will likely be further explored.

In response to the allegations, LedgerX, the company that acquired FTX, conducted an internal investigation and found no evidence that its employees were aware of any reported code enabling Alameda to access the exchange’s customer assets. 

LedgerX firmly denies any contrary allegations and maintains that its employees were unaware of the problematic features. As the trial of Sam Bankman-Fried continues, the discovery of a backdoor connection between FTX and Alameda Research by the company’s employees raises questions about the knowledge and actions of the firm’s leadership. 

The trial is expected to uncover further details regarding the alleged fraudulent activities and their impact on FTX customers.

Featured image from Shutterstock, chart from TradingView.com