Former FTX co-founder Gary Wang testified over the past week that what co-founder and CEO Sam Bankman-Fried said was a market-making service for traders on the cryptocurrency exchange soon became a means of siphoning off customers’ money for speculation at Alameda Research, a sister-company crypto hedge fund.

Testifying before a New York jury, Mr. Wang, who had been FTX’s chief technology officer, college roommate, and longtime friend of Mr. Bankman-Fried, stated that FTX affiliate Alameda Research was given the ability to borrow money from FTX accounts starting in July 2019, without customers’ knowledge or consent.

“The money belonged to customers, and the customers did not give us permission to use [it] for other things,” Mr. Wang stated.

He testified that Mr. Bankman-Fried instructed him to code Alameda’s accounts in order to give it access to FTX funds. Mr. Wang has already pleaded guilty to securities fraud and is testifying as part of a plea deal with prosecutors.

Securities exchanges typically include market-making firms that facilitate trading by acting as a go-between for buyers and sellers.

Mr. Bankman-Fried’s attorneys argued in his defense that Alameda was playing the role of market-maker and that this is why it was granted a special relationship with the FTX exchange.

Mr. Wang testified that Mr. Bankman-Fried falsely told FTX customers and investors that Alameda did not have a special relationship with FTX and that Alameda’s trading account terms were the same as any other investor that traded on the exchange.

Alameda's line of credit with FTX was in fact increased on several occasions, Mr. Wang said, reaching an ultimate limit of $65 billion.

At the time of FTX’s founding, the crypto market was a virtual one-way bet. Prices for the digital currencies trended ever upward as investors sought havens from fiat currencies like the U.S. dollar that were losing their value to inflation.

However, when the market turned in the spring of 2022, Alameda began to lose money and its creditors began calling in their loans. 

Suddenly, the virtual currencies that had been portrayed as a safe harbor against inflation quickly shifted to becoming an industry replete with allegations of fraud, scandal, and inflated valuations.

Creditors who had lent money to Alameda demanded that the loans be repaid.

Mr. Bankman-Fried and other senior managers of FTX realized then that Alameda had run up debts of $11 billion to FTX, Mr. Wang stated.

But Mr. Bankman-Fried nonetheless instructed Alameda to pay off its creditors by taking more money from FTX customers, who were unaware that their investments were being siphoned off for other purposes, Mr. Wang said.

In media interviews before and during the trial, Mr. Bankman-Fried and his attorneys have claimed that the overnight collapse of FTX and Alameda, which cost investors approximately $9 billion, was not a case of fraud but rather mismanagement and errors made in “good faith.”

Mr. Bankman-Fried has been charged with seven counts of securities fraud, wire fraud, conspiracy, and money laundering. If found guilty he could face up to 115 years in prison. 

Ex-Alameda CEO Is Next

Starting on Oct. 10, former Alameda CEO Caroline Ellison will testify. She is the former CEO of Alameda Research and a reported ex-paramour of Mr. Bankman-Fried.

Ms. Ellison has also pleaded guilty to securities fraud and is expected to testify against Mr. Bankman-Fried from the perspective of Alameda Research.

To prove fraud and conspiracy charges, prosecutors are working to make a case regarding not only Mr. Bankman-Fried’s knowledge of alleged illicit money transfers between FTX and Alameda but also his intentions.

While the technical aspects of the crypto market are complex and opaque, many analysts say the FTX collapse appears to be a standard case of securities fraud, similar to the case of Bernie Madoff.

Madoff was convicted of securities fraud in 2009 for co-mingling and misusing investors’ money between his stock brokerage and asset management business.

Before FTX’s collapse, Mr. Bankman-Fried’s net worth was estimated to be more than $16 billion, although some estimates put it as high as $26 billion.

He had been lionized in the media as a selfless philanthropist whose intention was to generate as much wealth as possible so he could give it away to causes ranging from global warming to fighting pandemics.

FTX received high-profile endorsements from Hollywood celebrities and sports stars.

Mr. Bankman-Fried also spent lavishly on himself, residing in a $40 million seaside penthouse in a gated condominium complex and marina called Albany that is outside of Nassau, Bahamas.

Mr. Bankman-Fried became an influential political figure as well, reportedly donating $5.2 million to President Joe Biden’s election campaign in 2020, making him one of Mr. Biden’s largest donors.

He reportedly also gave more than $70 million to election campaigns and another $40 million to politicians and political action committees during the 2022 midterm elections.

Most of the money went to Democrats and liberal-leaning groups, making him the second-largest donor to the Democratic Party and left-leaning causes after George Soros. He reportedly also donated far lesser amounts to Republicans.

Government officials often consulted Mr. Bankman-Fried about crypto regulation, and he reportedly had a private meeting with SEC Chairman Gary Gensler in March 2022, before FTX’s collapse.