The Securities and Exchange Commission (SEC) has filed charges against former Alameda Research CEO Caroline Ellison and FTX co-founder and former CTO Gary Wang. The enforcement action was due to the pair’s role in the failure of FTX and their roles in a “multiyear scheme to defraud equity investors in FTX.”
The SEC announced its actions just as the US Attorney, Southern District of New York, announced criminal charges against the duo as well. U.S. Attorney Damian Williams said that both Ellison and Wang had pled guilty and were cooperating with the ongoing investigation.
Ellison and Wang are both cooperating with the SEC’s ongoing investigation.
According to the SEC’s complaint, between 2019 and 2022, Ellison, at the direction of Bankman-Fried, manipulated the price of FTT – FTX’s native token. FTT acted as collateral for loans issued to Alameda – a hedge fund controlled by Sam Bankman-Fried, founder and former CEO of FTX. The complaint alleges that, by manipulating the price of FTT, Bankman-Fried and Ellison caused the valuation of Alameda’s FTT holdings to be inflated, which in turn caused the value of collateral on Alameda’s balance sheet to be overstated, and misled investors about FTX’s risk exposure.
The complaint also alleges that Bankman-Fried raised billions of dollars from investors by falsely touting FTX as a safe crypto asset trading platform with sophisticated risk mitigation measures to protect customer assets. The SEC claims that at the same time Bankman-Fried and Wang improperly diverted FTX customer assets to Alameda. The complaint alleges that Ellison and Wang knew or should have known that such statements were false and misleading.
Crucially, the SEC complaint alleges that Wang created FTX’s software code that allowed Alameda to divert FTX customer funds, and Ellison used misappropriated FTX customer funds for Alameda’s trading activity. The complaint further alleges that, even as it became clear that Alameda and FTX could not make customers whole, Bankman-Fried, with the knowledge of Ellison and Wang, directed hundreds of millions of dollars more in FTX customer funds to Alameda.
“As part of their deception, we allege that Caroline Ellison and Sam Bankman-Fried schemed to manipulate the price of FTT, an exchange crypto security token that was integral to FTX, to prop up the value of their house of cards,” said SEC Chair Gary Gensler. “We further allege that Ms. Ellison and Mr. Wang played an active role in a scheme to misuse FTX customer assets to prop up Alameda and to post collateral for margin trading. When FTT and the rest of the house of cards collapsed, Mr. Bankman-Fried, Ms. Ellison, and Mr. Wang left investors holding the bag. Until crypto platforms comply with time-tested securities laws, risks to investors will persist. It remains a priority of the SEC to use all of our available tools to bring the industry into compliance.”
Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, said allegations indicate that Bankman-Fried, Ellison and Wang were active participants in the scheme:
“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.”
The SEC’s complaint charges Ellison and Wang with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s complaint seeks injunctions against future securities law violations; an injunction that prohibits Ellison and Wang from participating in the issuance, purchase, offer, or sale of any securities, except for their own personal accounts; disgorgement of their ill-gotten gains; a civil penalty; and an officer and director bar. Ellison and Wang have consented to bifurcated settlements, which are subject to court approval, under which they will be permanently enjoined from violating the federal securities laws, the above-described conduct-based injunctions, and officer and director bars. Upon motion of the SEC, the court will determine whether and what amount of disgorgement of ill-gotten gains plus prejudgment interest and/or a civil penalty is appropriate, as well as the length of the officer and director bar and the conduct-based injunction imposed against Wang.
