An analytics firm has now also accused Alameda of frontrunning FTX token listings.
Alameda Research CEO Caroline Ellison allegedly told staffers that just she, Sam Bankman-Fried and top FTX executives knew exchange customers’ funds were being used to prop up the trading firm she ran. An analytics firm also accused Alameda of frontrunning FTX token listings.
Allegations of behavior that ranges from regulatory violations to potentially criminal keep coming as details of the inner operations Sam Bankman-Fried’s now bankrupt FTX crypto exchange and Alameda Research trading firm break.
To start, Alameda appears to have been frontrunning cryptocurrency listings on FTX, amassing large numbers of a variety of tokens before their listing was announced and driving prices up, blockchain analytics firm Argus told the Wall Street Journal on Nov. 14.
“We can't really conclude to what extent they sell all their tokens or not — but given the timing of their market entrance shortly before listings, it seems not coincidental,” Argus co-founder and CEO Owen Rapaport told The Block.
As one of the world’s largest and formerly most respected exchanges, FTX listings almost inevitably sent token prices up, adding a seal of approval and vital market liquidity to cryptocurrencies that are often relatively small and have little track record. This is nothing new. For years, the so-called Coinbase Effect sent newly listed tokens’ prices skyrocketing, in large part because of the U.S. exchange’s reputation for due diligence that weeded out badly designed and scam tokens.
The same day, a New York Times article said that a “person familiar with the matter” alleged that Alameda CEO Caroline Ellison apologetically told employees at a Wednesday, Nov. 9, staff meeting that the company had run into trouble after borrowing heavily for venture investments, turning to FTX when the loans were recalled after the crypto market crash.
“But the funds that Alameda had spent were no longer easily available, so the company used FTX customer funds to make the payments,” the Times reported. She said that she, Bankman-Fried and two top FTX executives knew of the transfers. It has been reported elsewhere that Bankman-Fried allegedly used a “backdoor” in the firm’s software to transfer as much as $10 billion without notifying compliance and legal staffers.
The Times also said that a person who visited the offices said Ellison’s desk was in view of monitors displaying FTX trading data. If true, it could render the firewall between the exchange and the trading operation moot.
Ellison is one of nine top lieutenants who reportedly lived with Bankman-Fried in a Bahamas resort penthouse and is said to have been romantically linked with him at times. She allegedly said only the two of them and two top FTX executives — also penthouse residents — were aware of the scheme.
Reuters reported today that federal prosecutors from the Southern District of New York are the ones investigating Bankman-Fried’s use of customer funds. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have also opened investigations as have the Bahamas Police’s Financial Crimes Investigation Branch. Both firms are registered and headquartered there.
Nothing New
Allegations of frontrunning and market manipulation — which SEC Chairman Gary Gensler says remains endemic — are nothing new in the crypto industry.
Authorities have already begun cracking down. On June 1, prosecutors from the Southern District of New York brought insider trading, money laundering and wire fraud charges against an executive of top NFT marketplace OpenSea for trading based on which NFTs it planned to feature. Three weeks later, they indicted a former Coinbase employee for insider trading based on upcoming token listings.
In June, the Bank for International Settlements (BIS) released a report saying that even the blockchain miners and validators who collect and validate transactions before they are written onto blockchains like Bitcoin and Ethereum have been accused of acting based on knowledge of trades — some of which can be large enough to be market moving — before they are made public.
“Since these intermediaries can choose which transactions they add to the ledger and in which order, they can engage in activities that would be illegal in traditional markets such as front-running and sandwich trades,” the BIS wrote. “The resulting profit is termed ‘miner extractable value’ (MEV) [...] Addressing this form of market manipulation may call for new regulatory approaches to this new class of intermediaries.”
