FTX Founder Sam Bankman-Fried Face Market Manipulation Investigation

Federal prosecutors are investigating whether FTX’s founder, Sam Bankman-Fried, manipulated the market for the two cryptocurrencies last spring, leading to their collapse and creating a domino effect that ultimately led to the implosion of his own cryptocurrency exchange last month. Knowledge of the subject.

US Attorneys in Manhattan Mr. Bankman-Fried is exploring the possibility of leveraging the prices of two interconnected currencies, TerraUSD and Luna, for companies he controls, including FTX and Alameda Research, a hedge fund he co-founded and owns. People said.

The investigation is in its early stages, and Mr. It’s unclear whether prosecutors discovered any wrongdoing by Bankman-Fried or when they began looking into the TerraUSD and Luna trades. This matter, Mr. Bankman-Fried’s case is part of a broader investigation into the collapse of a Bahamas-based cryptocurrency empire and the alleged misappropriation of billions of dollars in client funds.

Federal prosecutors and the Securities and Exchange Commission are investigating whether FTX broke the law by moving its client funds to Alameda. Last month, a run on deposits exposed an $8 billion hole in the exchange’s accounts, causing the company to collapse. When the company filed for bankruptcy on November 11, Mr. Bankman-Fried stepped down as chief executive of FTX.

FTX is also under investigation for violating U.S. money-laundering laws, which require money transfer businesses to know who their customers are and flag any illegal activity to law enforcement, three people familiar with the investigation said. That investigation, first reported According to Bloomberg News, FTX started bankruptcy months before it went bankrupt. Investigators are also looking into the operations of other offshore cryptocurrency trading platforms.

In a statement, Mr. Bankman Fried said he was “not aware of any market manipulation and certainly did not want to engage in market manipulation.”

“As far as I know, all transactions are for investment or hedging,” he added.

Representatives for the U.S. Attorney for the Southern District of New York declined to comment. Representatives for FTX did not immediately respond to requests for comment.

Focusing on potential market manipulation Mr. A legal storm is brewing for Bankman-Fried. It is illegal for an individual to knowingly stage market activity designed to move the price of an asset up or down.

TerraUSD was a so-called stablecoin, but unlike other stablecoins, its value was not directly backed by the US dollar. Instead, it maintained its value through a complex mechanism from a second currency called Luna. Traders in the digital ecosystem can print these coins, whose prices vary depending on the circulation. Whenever the price of TerraUSD fell, the supply of Luna would increase as traders created more Luna to take advantage of the difference.

In May, major cryptocurrency market makers — exchanges or individuals that arrange to match buyers and sellers — noticed “sell” orders coming in for TerraUSD, said a person with knowledge of market activity. The orders were in small batches, but they were placed very quickly, the person said.

A sudden surge of sell orders for TerraUSD overwhelmed the system, making it difficult to match “buy” orders for them. Under normal conditions, any sell orders that remain unfulfilled for a long time will be matched with buy orders at lower prices. As long as the orders went unmatched, they forced the price of TerraUSD down, causing a corresponding drop in the price of Luna due to the way the two currencies were linked.

The exact reasons for the decline of the two cryptocurrencies are unclear. However, most of the sell orders for TerraUSD appeared to come from the same place: Sam Bankman-Fried’s cryptocurrency trading firm, which placed a big bet on Luna’s price drop, according to a person with knowledge of market activity.

If trading had gone as expected, the price drop in Luna could have yielded a fat profit. Instead, the entire TerraUSD-Luna ecosystem fell apart. The crash caused more trouble in the cryptocurrency industry, sending several major companies into bankruptcy and wiping out about $1 trillion in value from the crypto market.

The ripple effects of the Luna accident ultimately cost Mr. contributed to the downfall of Bankmann-Fried’s business empire. In November, Alameda’s chief executive, Carolyn Ellison, told staff that loans to Alameda had been withdrawn as a result of the market turmoil unleashed by the crash, a person familiar with the matter said. But Alameda borrowed funds were no longer readily available, Ms. Ellison told employees, so the company used FTX customer funds to make the payments.

Mrs. Ellison’s attorney did not return requests for comment.

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