SEC Secures Consent Judgments Against FTX and Alameda Executives

TLDR:

• Three former FTX and Alameda executives agreed to permanent antifraud injunctions pending court approval.
• Ellison faces a 10-year officer-director bar while Wang and Singh each received eight-year bans.
• Executives allegedly diverted over $1.8 billion in customer funds through unlimited credit to Alameda.
• All defendants consented without admitting guilt and accepted five-year conduct-based restrictions.

The U.S. Securities and Exchange Commission filed proposed final consent judgments against two former executives involved in the FTX collapse. 

Caroline Ellison, former CEO of Alameda Research, along with Gary Wang and Nishad Singh, both former FTX executives, agreed to permanent antifraud injunctions. The settlements require court approval and include conduct-based restrictions. 

Furthermore, the executives accepted officer-and-director bars ranging from eight to ten years. These actions stem from allegations of fraud and misuse of customer funds during the cryptocurrency exchange’s operations.

Court Documents Detail Settlement Terms

The SEC submitted the proposed consent judgments to the U.S. District Court for the Southern District of New York. Subject to judicial approval, all three defendants agreed to permanent injunctions against violating federal securities laws. 

Specifically, the agreements cover Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Additionally, they address Section 17(a) of the Securities Act of 1933. Each executive also consented to five-year conduct-based injunctions limiting their activities.

The settlement terms vary based on each executive’s role in the alleged scheme. Ellison accepted a ten-year ban from serving as an officer or director of any public company. 

Meanwhile, Wang and Singh each agreed to eight-year bars from such positions. These restrictions aim to prevent similar misconduct in the future. The executives did not admit or deny the SEC’s allegations as part of the consent process.

The original complaints against these individuals were filed at different times. Wang and Ellison faced charges in December 2022, while Singh’s complaint came in February 2023. 

The SEC’s enforcement action represents one part of the broader legal proceedings surrounding FTX’s collapse. 

Multiple agencies have pursued cases against the company’s leadership since November 2022.

Allegations of Customer Fund Misappropriation

The SEC’s complaints alleged that FTX raised over $1.8 billion from investors between May 2019 and November 2022. Investors were told that FTX maintained sophisticated risk management systems to protect customer assets. 

However, the complaints stated that these representations were false. Samuel Bankman-Fried and other executives allegedly exempted Alameda Research from standard risk controls.

According to the complaints, Alameda received special treatment on the FTX platform. The hedge fund, owned by Bankman-Fried and Wang, enjoyed a virtually unlimited line of credit. 

This credit facility was funded by customer deposits rather than Alameda’s own capital. Wang and Singh allegedly created software code that enabled the diversion of customer funds. 

Ellison reportedly used these misappropriated funds for Alameda’s trading operations.

The complaints further alleged that hundreds of millions of dollars in customer funds were redirected. Bankman-Fried directed these transfers with the knowledge of Ellison, Wang, and Singh. 

The diverted funds allegedly financed venture investments and loans to FTX executives. These included loans to Bankman-Fried himself, as well as to Wang and Singh. The scheme allegedly continued until FTX’s collapse in November 2022.

The SEC’s Cyber and Emerging Technologies Unit led the investigation and litigation efforts. Amy Burkart conducted the litigation proceedings on behalf of the Commission. 

The investigation team included Burkart, Devlin Su, Ivan Snyder, and David S. Brown. Brian Huchro and Pasha Salimi also contributed to the investigation. Laura D’Allaird and Amy Flaherty Hartman supervised the investigation in their roles within the Enforcement Division.

Michael Brennan provided additional supervisory support throughout the process. The team’s work culminated in these proposed consent judgments. 

The final approval rests with the federal district court in New York. These settlements follow similar enforcement actions taken against other cryptocurrency industry participants. 

The SEC has increased its scrutiny of digital asset platforms in recent years. Regulatory agencies continue to pursue cases involving alleged investor fraud and asset misappropriation.

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