The feds are reportedly investigating whether beleaguered FTX founder Sam Bankman-Fried manipulated the market for two cryptocurrencies that crumbled earlier this year – eventually resulting in the downfall of his own company.
Prosecutors are examining whether Bankman-Fried engaged in illicit trading activity to drive down the prices of TerraUSD and Luna – a pair of cryptocurrencies interlinked by algorithms that became essentially worthless in May, the New York Times reported. The collapse of those digital currencies erased more than $50 billion in market value.
Just before the crash, traders reportedly noticed “a flood of sell orders” for TerraUSD that “overwhelmed the system” and eventually caused the prices of both cryptocurrencies to plummet.
Most of the sell orders for Terra USD originated from the cryptocurrency trading firm Alameda Research, a source with knowledge of the situation told the Times. Bankman-Fried owned both FTX and Alameda, which was led by his ex-lover, CEO Caroline Ellison.
Alameda Research reportedly had active bets that the price of Luna would fall at the time of the alleged incident.
Alameda faces scrutiny over the events that led to FTX’s downfall. Reuters reported that Bankman-Fried secretly transferred $10 billion in FTX client funds to help prop up Alameda’s risky bets before the cryptocurrency exchange fell into bankruptcy. Alameda has since ceased operation.
The downfall of TerraUSD and Luna caused major volatility in the broader cryptocurrency sector and destabilized Alameda.
Last month, Ellison purportedly told Alameda staffers that the firm had used FTX customer cash to cover a shortfall on loans that were “recalled” in the wake of the Luna and TerraUSD meltdown, according to the Times.
The investigation is still in its early stages and it’s unclear if the feds have already pinned any wrongdoing on Bankman-Fried, the report said.
Representatives for the US attorney’s office for Southern District of New York reportedly declined to comment.
Bankman-Fried denied wrongdoing in a statement to the paper, claiming he was “not aware of any market manipulation and certainly never intended to engage in market manipulation.”
“To the best of my knowledge, all transactions were for investment or for hedging,” Bankman-Fried added.
Aside from the investigation into alleged market manipulation, the feds are also probing whether FTX violated money laundering regulations under the Bank Secrecy Act. Bloomberg first reported on that investigation last month.
Bankman-Fried, Ellison and their associates face mounting legal and Congressional scrutiny over their actions in the days prior to FTX’s bankruptcy.
Earlier this week, Senate Banking Committee Chairman Sherrod Brown (D-Ohio) called on Bankman-Fried to testify about FTX’s collapse at a Dec. 14 hearing on Capitol Hill. Brown said the committee would issue a subpoena if Bankman-Fried did not voluntarily attend the hearing.
The House Financial Services Committee has also asked Bankman-Fried to testify at a separate hearing next week.
Bankman-Fried has hired Mark S. Cohen to represent him in the brewing legal battle. Cohen is best known for serving as defense attorney to convicted sex offender Ghislaine Maxwell – the longtime companion and enabler of convicted pedophile Jeffrey Epstein, who died in prison while awaiting trial for sex trafficking.
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