Months before the collapse of FTX, some of its U.S.-based employees discovered the so-called backdoor that Alameda Research allegedly used to withdraw billions of dollars of customer funds from the cryptocurrency exchange, the Wall Street Journal reported. The employees who made the discovery reported it to the boss of their division, who discussed it with one of FTX founder Sam Bankman-Fried’s lieutenants. But the problem never got fixed. In the summer of 2022, the leader of the team that raised concerns about Alameda’s special privileges was fired. The backdoor figures prominently in the case against Bankman-Fried, whose trial on criminal charges of fraud began in a New York federal court this week. The former head of FTX has pleaded not guilty to all charges. Prosecutors say Bankman-Fried stole funds from FTX customers, in part, by secretly ordering the programming of “special features” that gave Alameda — his crypto trading firm — the ability to treat FTX as a giant slush fund. Court filings have revealed a line buried deep in FTX’s code that allowed Alameda to have a negative balance of as much as $65 billion on the exchange. Read more. (Subscription required.)
In related news, splashy advertisements featuring football star Tom Brady and comedian Larry David were among the first evidence seen by jurors Wednesday as prosecutors launched a historic fraud case against cryptocurrency maven Sam Bankman-Fried, depicting him as a villain who portrayed himself as the Robin Hood of the crypto world, the Associated Press reported. Assistant U.S. Attorney Nathan Rehn said in his opening statement in Manhattan federal court that it was only a year ago that Bankman-Fried seemed to be “on top of the world,” operating the multibillion dollar company he founded, FTX, a seemingly pioneering cryptocurrency trading platform. Rehn said the 31-year-old lived in a $30 million apartment in the Bahamas, jetted around the world on private planes, socialized with celebrities and spent billions of dollars as he flaunted power and made big political donations to gain influence in Washington over cryptocurrency regulation. The prosecutor, though, said that the son of two Stanford law professors was not as he seemed. “Sam Bankman-Fried was committing a massive fraud by taking billions of dollars from thousands of victims,” Rehn said. When his businesses were collapsing, he backdated documents and tried to cover up his crimes by deleting messages and ordering employees to automatically delete all messages every month, the prosecutor said. Read more.