The feds are reportedly investigating whether Sam Bankman-Fried, the founder of FTX, manipulated the two cryptocurrency markets that crashed earlier this year — leading to the downfall of his own company.
Prosecutors are investigating whether Bankman-Fried engaged in illegal trading activities to drive down the prices of TerraUSD and Luna, a pair of cryptocurrencies linked by algorithms that became worthless in May. The New York Times reported. The collapse of these digital currencies wiped out more than $50 billion in market value.
Before the crash, traders reportedly noticed a “flood of sell orders” for TerraUSD that “overwhelmed the system” and eventually caused the price of both cryptocurrencies to plummet.
Most of the sell orders for Terra USD came from cryptocurrency trading firm Alameda Research, a source familiar with the situation told the Times. Bankman-Fried owned FTX and Alameda, which was run by his ex-girlfriend, CEO Caroline Ellison.
Alameda Research is reportedly actively betting that Luna’s price will drop during the predicted event.
Alameda is in control of the events that led to the downfall of FTX. Reuters reports that Bankman-Fried secretly transferred $10 billion in FTX client funds to back Alameda’s risky bets before the cryptocurrency exchange went bankrupt. Alameda has since ceased operations.
The collapse of TerraUSD and Luna created massive volatility in the broader cryptocurrency sector and caused instability in Alameda.
Last month, Ellison told Alameda employees that the company used cash from FTX customers to cover shortfalls in loans that were “forgotten” by the Luna and TerraUSD crises, the Times reported.
The report says the investigation is still in its early stages, and it’s unclear whether the feds have committed any wrongdoing against Bankman-Fried.
Representatives of the US Attorney’s Office for the Southern District of New York reportedly declined to comment.
In a statement to the newspaper, Bankman-Fried denied wrongdoing, claiming that he was “not aware of any market manipulation and never intended to manipulate the market.”
“To the best of my knowledge, all transactions were for investment or hedging purposes,” Bankman-Fried added.
In addition to the market manipulation investigation, the feds are also investigating whether FTX violated money laundering rules under the Bank Secrecy Act. First reported by Bloomberg on an investigation last month.
Bankman-Fried, Ellison and their partners are facing legal and congressional scrutiny over their actions in the days leading up to FTX’s bankruptcy.
Earlier this week, Senate Banking Committee Chairman Sherrod Brown (R-Ohio) called Bankman-Fried to testify about the FTX collapse at a Dec. 14 hearing on Capitol Hill. Brown said the committee will issue a subpoena if Bankman-Fried does not voluntarily appear at the hearing.
The House Financial Services Committee also asked Bankman-Fried to testify in a separate hearing next week.
Bankman-Fried hired Mark S. Cohen to represent the brewery in its legal battle. Cohen is best known for being a defense attorney for sex offender Ghislaine Maxwell – the longtime companion and assistant of pedophile Jeffrey Epstein, who died in prison on sex trafficking charges.