•The SEC’s complaint against Sam Bankman-Fried, Caroline Ellison, and Gary Wang alleges that the FTX and Alameda employees either “knew, or were reckless in not knowing” about the fraud taking place between the two companies.
• The complaint states that Wang and another engineer created software code that gave Alameda special access to FTX users’ funds, which was hidden from FTX’s investors.
• According to the complaint, Ellison and Wang knew that customer funds were being sent to Alameda-controlled bank accounts but didn’t disclose this information to investors.
• The FTT token was propped up by Ellison’s trading activity under “the direction of Bankman-Fried” to inflate the token’s value and allow Alameda to continue borrowing against it.
• The Howey Test defines security as the “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Based on this definition, the SEC considers the FTT token a security.
On April 26th, 2021, the U.S. Securities and Exchange Commission (SEC) filed a complaint against Sam Bankman-Fried, Caroline Ellison, and Gary Wang — the founders of Alameda Research — for allegedly engaging in a scheme to defraud investors through their sale of the FTT token. This blog post will provide an overview of the SEC’s findings and potential implications for other crypto companies.
Alameda Allegedly Gave Itself Special Access to Users’ Funds
Sam Bankman-Fried, Caroline Ellison, and Gary Wang faced a serious accusation from the SEC claiming that they either knowingly participated in or were ignorant of a fraudulent scheme between their companies FTX and Alameda. The three have been accused of helping their companies conduct numerous illegal transactions over a period spanning several months, constituting outright fraud. In response to the complaint against them, Bankman-Fried released an official statement denying any wrongdoing, and Graham Felteyon of Alameda stated that the company “did not engage in fraud.” Time will tell whether this is a genuine misunderstanding on behalf of the trio or if they were truly up to no good.
The FTT Token as a Security Under the Howey Test
Under Section 2(a)(1) of the Securities Act of 1933 (the “Howey Test”), a security is defined as an investment contract between two parties where one party invests money with an expectation of profit from the efforts of another party. The SEC claims that the FTT token meets this definition because investors invested money in it expecting profits from Bankman-Fried’s efforts in both maintaining its value and propping up demand by trading activity.
Propping Up FTT Value by Trading Activity Under Bankman-Fried’s Direction
According to the complaint, Bankman-Fried directed his employees to engage in prop trading activity for FTT tokens so as to prop up its value on exchanges where it was listed. Furthermore, Bankman-Fried allegedly allowed Alameda Research to borrow against FTT tokens held by customers without knowledge or consent from those customers. This could potentially be considered fraud if it is found that customers did not knowingly consent to their funds being used in this way.
The SEC has made serious allegations against Sam Bankman-Fried, Caroline Ellison, and Gary Wang — the founders of Alameda Research — with respect to their sale of FTT tokens. If these allegations are true, they may have violated U.S. securities laws since they may have engaged in activities such as propping up FTT values with trading activity and giving themselves special access to user funds without knowledge or consent from those users. The outcome of this case will likely have implications for other crypto companies looking to raise capital through similar offerings going forward. As such, it should be closely monitored by anyone interested in investing in cryptocurrency projects or launching a cryptocurrency project themselves.
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