The dramatic collapse of cryptocurrency exchange FTX and its trading firm Alameda Research is slowly revealing a tangled web of complex operations, as detailed in ongoing bankruptcy court proceedings and criminal trials.
Central to these developments is the assertion of a “secret” mechanism embedded within the FTX code, allegedly designed to grant Alameda special privileges, including the ability to access customer funds without explicit permission.
FTX co-founder Gary Wang allegedly created a secret channel for Alameda to access customer funds from the exchange, as revealed by FTX attorney Andrew Dietderich to the Delaware bankruptcy court.
Dietderich described this as a “backdoor, a secret way for Alameda to borrow from customers on the exchange without permission,” according to his testimony.
This alleged backdoor was reportedly created by Wang inserting “a single number into millions of lines of code for the exchange,” thereby establishing a line of credit from FTX to Alameda.
Dietderich stressed that this secret line of credit, reportedly as high as $65 billion, was an arrangement to which customers never gave their consent, raising serious questions about the legitimacy of the operations.
The Commodity Futures Trading Commission (CFTC) had previously made similar allegations against Wang in December, though they described the line of credit as “virtually unlimited” without specifying a dollar amount.
Dietderich’s testimony is believed to be the first instance where an FTX official has provided a firm dollar value for this alleged credit line.
This preferential treatment for Alameda was apparently a known issue within FTX even before the company’s sudden and spectacular downfall.
Julie Schoening, who served as the former chief risk officer at LedgerX, a firm owned by FTX, was terminated just months after she raised questions about special privileges afforded to Alameda Research.
According to the Wall Street Journal, citing individuals familiar with the situation, Schoening’s team made a significant discovery in May 2022.
Internal investigations uncovered code suggesting Alameda enjoyed special privileges, including the ability to run up negative balances up to an astonishing $65 billion.
As reported by The Wall Street Journal, an employee at LedgerX, Jim Outen, flagged this preferential treatment in a message, stating, “Just wanted to point out that there are currently a few places in the…code base where Alameda gets special treatment in one way or another.”
Schoening allegedly brought these findings to her superior, Zach Dexter, who then discussed the critical issue of auto-liquidation with senior FTX engineer Nishad Singh.
While Dexter initially believed the concern was resolved after Singh purportedly removed some code, the special treatment for Alameda ultimately persisted.
Schoening was dismissed in August 2022. Reports suggest that some FTX executives circulated what were allegedly doctored inappropriate messages sent by her, leading to her termination.
Lawyers for Schoening assert that her dismissal from FTX was a direct result of her bringing to light serious concerns about the company’s risk management practices.
Following her firing, Schoening reportedly threatened legal action against FTX and reached a tentative $5 million settlement agreement concerning her termination.
However, this settlement deal was never finalized before FTX filed for bankruptcy and subsequently collapsed in November 2022.
The existence of this alleged backdoor, granting Alameda special access, is a pivotal component of the criminal fraud charges currently facing Sam Bankman-Fried.
The internal operations of both FTX and Alameda Research have undergone intense scrutiny since the collapse of the exchange in November 2022.
Meanwhile, Sam Bankman-Fried is gearing up to take the stand and testify in his own defense at his ongoing criminal fraud trial, a move that is both unusual and carries significant potential risks.
