FTX Employees Uncovered a $65B Backdoor Months Before Collapse 

• Employees identified a backdoor that revealed financial misconduct by SBF and Alameda Research.
• Prosecutors allege preferential treatment of Alamadeda Research by FTX.
• New evidence and witness testimonies strengthen the DOJ’s case against SBF.

As the trial surrounding the collapse of the infamous cryptocurrency exchange FTX continues, new revelations have shed light on significant events in the lead-up to the exchange’s bankruptcy. 

The latest evidence in the case points to more complications for the disgraced CEO, Sam Bankman-Fried, as details emerge of a ‘backdoor’ discovered by former employees, which revealed that the exchange was on shaky financial ground before its collapse in November.

FTX as Alameda’s Financial Reservoir?

According to a report by the Wall Street Journal, a group of employees from the U.S.-based LedgerX Team, acquired by FTX in 2021, discovered a backdoor in its code that allowed Alameda Research, the cryptocurrency hedge fund company co-founded by SBF, to conduct unlimited withdrawals of customers’ funds. 

While ordinary FTX users would face account liquidation if their balance fell below zero, the loophole allowed Alameda to maintain a line of credit of up to a staggering $65 billion. 

The team reportedly raised concerns about the vulnerability to team head and Chief Risk Officer Julie Schoenig, who subsequently reported to FTX’s Director of Engineering Nishad Singh. Despite the early warnings, the issue was never addressed, and Schoenig was fired months later under the guise of improper conduct.

Subsequent evidence revealed that her termination was directly linked to the backdoor identified, suggesting FTX’s alleged attempt to maintain its operations for the benefit of  Alameda.

FTX co-founder and former Chief Technology Officer Gary Wang corroborated the allegations in his recent testimony, adding fuel that Alameda received preferential treatment over other investors.

SBF Indulged In Investor and Wire Fraud

On October 5th, Wang pleaded guilty to committing wire, securities, and commodities fraud with other FTX executives, including Nishad Singh and Caroline Ellison, all under the direction of Bankman-Fried.

During his testimony as the fourth witness called by the Department of Justice, the former CTO further admitted that Alameda had also withdrawn $8 billion from FTX, along with its existing line of credit by the time the exchange collapsed.

When called to the stand, co-founder and managing partner of crypto investment company Paradigm Matthew Huang stated that assurances from SBF led to Paradigm investing $278 million in FTX in 2021. This was despite concerns about the lack of formal structure at FTX and its shady entanglement with Alameda. 

Huang added that SBF was “resistant to having investors on the board,” and pointed out that crucial information about Almaeda’s access to funds had been kept shielded from investors.

On the Flipside

• SBF faces up to 115-155 years imprisonment if found guilty.
• The Department of Justice has confiscated SBF’s private jets, valued at $28 million, alleging that they were purchased through a loan from FTX to a Bahamian company.
• FTX developer Adam Yedidia also testified that the exchange mishandled customers’ deposits.

Why This Matters

The recent discoveries in the ongoing case could significantly impact the course and outcome of the trial. The new testimonies also add substantial weight to the prosecutor’s claims of SBF’s criminal charges, further strengthening the case against him.

Read here to discover more details about the ongoing SBF trial:
DOJ Slams SBF’s Illusionary Wealth, Power, and Influence

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