Dec 22, 2022 - Economy

U.S. securities regulator alleges price manipulation by FTX

 In this photo illustration, the FTX logo is seen on a computer on November 10, 2022 in Atlanta, Georgia.

Photo: Michael M. Santiago/Getty Images

Sam Bankman-Fried allegedly directed FTX employees to manipulate the price of the crypto token associated with his exchange, FTT, according to an updated civil complaint submitted by the U.S. Securities and Exchange Commission.

Why it matters: Uncertainty about the FTT token moved investors to begin withdrawing billions of dollars from FTX in early November, which precipitated the company's collapse and exposure of alleged fraud by Bankman-Fried and others.

Details: The updated complaint, which now also includes FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison, contains a section titled: "Alameda Manipulated the Market Price of FTT and, as a Result, Further Inflated the Value of Its Collateral."

  • The SEC argues this is under its purview as a security regulator by explaining how FTT was sold as an investment contract, detailing how early buyers were convinced to expect FTT to rise in value because of the work FTX would do.
  • FTT was sold for between $0.10 and $0.80 around the time of its July 2019 launch. It sold for around $23 before CoinDesk raised questions about solvency at FTX and Alameda.
  • It alleges instances in 2019 and 2021 when Bankman-Fried directed Ellison to make purchases of FTT in order to support the token's price.

Bombshell: After the CoinDesk story, Binance CEO Changpeng Zhao indicated that he would start selling FTT his company had received in order to buy back Binance's equity stake in FTX.

  • Caroline Ellison then tweeted that she would repurchase Binance's supply at $22 per token.
  • The SEC offers a new detail about this crucial moment: "When Ellison sent this message she knew, or was reckless in not knowing, that in order for Alameda to be able to actually purchase Binance’s FTT for $22 per token, Alameda would have to draw down additional funds from FTX itself, further extending its line of credit, or obtain funds from third party lenders without disclosing its own tenuous financial condition."

The bottom line: On Nov. 19, according to a complaint by the Commodity Futures Trading Commission, Ellison would confess to her staff that Alameda had been using customer funds to make investments. The complaint says, "Shortly after this meeting, most of Alameda’s staff resigned."

Go deeper: Sam Bankman-Fried to be released on $250 million bond

Go deeper