`
`
`Case No. ___________
`
`
`COMPLAINT FOR INJUNCTIVE
`AND OTHER EQUITABLE RELIEF
`AND FOR CIVIL MONETARY
`PENALTIES UNDER THE
`COMMODITY EXCHANGE ACT
`AND COMMISSION REGULATIONS
`
`JURY TRIAL DEMANDED
`
`
`SAMUEL BANKMAN-FRIED, FTX TRADING
`LTD D/B/A FTX.COM, AND ALAMEDA
`RESEARCH LLC,
`
`
`v.
`
`Defendants.
`
`
`
`
`
`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 1 of 40
`
`
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`
`
`COMMODITY FUTURES TRADING
`COMMISSION,
`
`
`Plaintiff,
`
`
`Plaintiff Commodity Futures Trading Commission (“CFTC” or “Commission”), by and
`
`through its undersigned attorneys, hereby alleges as follows:
`
`
`
`SUMMARY
`
`1.
`
`Samuel Bankman-Fried (“Bankman-Fried”) co-founded Alameda Research LLC
`
`(“Alameda”), a digital asset trading and investment firm, in Berkeley, California in 2017. In May
`
`2019, he and others launched FTX Trading Ltd. b/d/a FTX.com (“FTX Trading”) and various
`
`subsidiaries, affiliates, and related entities, collectively doing business as “FTX.com” or simply
`
`“FTX,” a centralized digital asset exchange. (These parties are collectively referred to as
`
`“Defendants”). Alameda and FTX were large and well-known players in the digital asset industry,
`
`and Bankman-Fried was their young, high-profile leader.
`
`2.
`
`At its peak, the daily trading volume on FTX.com was over $20 billion, and it had
`
`garnered a $32 billion valuation. FTX had prominent paid sponsorships, including the naming
`
`rights to a professional sports arena in Miami, celebrity endorsements, and a 2022 Super Bowl
`
`commercial that touted FTX as “the safest and easiest way to buy and sell crypto.”
`
`
`
`1
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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 2 of 40
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`
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`3.
`
`On November 11, 2022, Bankman-Fried’s empire abruptly collapsed. FTX
`
`customers and the world at large discovered that FTX, through its sister-company Alameda, had
`
`been surreptitiously siphoning off customer funds for its own use—and over $8 billion in customer
`
`deposits were now missing.
`
`4.
`
`Beginning no later than May 2019 and continuing through at least November 11,
`
`2022 (the “Relevant Period”), Bankman-Fried owned, operated, and/or controlled FTX Trading,
`
`along with its numerous subsidiaries and related entities around the world, all doing business as
`
`FTX.com. He also owned, operated, and/or controlled Alameda and its various subsidiaries and
`
`related entities, as well as numerous other related entities in the digital asset industry. Throughout
`
`the Relevant Period, Alameda operated as a primary “market maker” on FTX.com, providing
`
`liquidity to its various digital asset markets, and also performed a number of other key functions
`
`for the exchange. Bankman-Fried operated Defendant entities as a common enterprise.
`
`5.
`
`Throughout the Relevant Period, and unbeknownst to all but a small circle of
`
`insiders, FTX customers deposits, including fiat currency and digital assets such as bitcoin (BTC)
`
`and ether (ETH), that were intended to be used for trading or custodies on FTX, were regularly
`
`accepted, held by, and/or appropriated by Alameda for its own use.
`
`6.
`
`At Bankman-Fried’s direction, FTX executives created features in the underlying
`
`code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX.
`
`FTX Trading executives also created other exceptions to FTX’s standard processes that allowed
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`Alameda to have an unfair advantage when transacting on the platform, including quicker
`
`execution times and an exemption from the platform’s distinctive auto-liquidation risk
`
`management process.
`
`
`
`2
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`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 3 of 40
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`7.
`
`Throughout the Relevant Period, at the direction of Bankman-Fried and at least one
`
`Alameda executive, Alameda used FTX funds, including customer funds, to trade on other digital
`
`asset exchanges and to fund a variety of high-risk digital asset industry investments.
`
`8.
`
`Bankman-Fried and other FTX executives also took hundreds of millions of dollars
`
`in poorly-documented “loans” from Alameda that they used to purchase luxury real estate and
`
`property, make political donations, and for other unauthorized uses.
`
`9.
`
`Throughout the Relevant Period, Defendants, through a web of subsidiaries,
`
`affiliates, and other related entities (collectively the “FTX Enterprise”) misappropriated customer
`
`funds for their own use and benefit.
`
`10.
`
`Despite this, FTX Trading represented, in its Terms of Service and elsewhere, that
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`customers were the “owner[s]” of all assets in their accounts, had “control” over the assets at all
`
`times, and that those assets were “appropriately safeguarded and segregated” from FTX’s own
`
`funds.
`
`11.
`
`Through this conduct and the conduct further described herein, Defendants violated
`
`Section 6(c)(1) of the Commodity Exchange Act (the “Act” or “CEA”), 7 U.S.C. § 9(1), and
`
`Commission Regulation (“Regulation”) 180.1(a), 17 C.F.R. §180.1(a) (2021). Unless restrained
`
`and enjoined by this Court, Defendants are likely to continue to engage in the acts and practices
`
`alleged in this complaint and similar acts and practices, as more fully described below.
`
`12.
`
`Accordingly, the CFTC brings this action pursuant to Section 6c of the Act, 7
`
`U.S.C. § 13a-l, to enjoin Defendants’ unlawful acts and practices and to compel their compliance
`
`with the Act. In addition, the CFTC seeks civil monetary penalties and remedial ancillary relief,
`
`including, but not limited to, trading and registration bans, disgorgement, restitution, pre- and post-
`
`judgment interest, and such other relief as the Court may deem necessary and appropriate.
`
`
`
`3
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`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 4 of 40
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`
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`JURISDICTION AND VENUE
`
`13.
`
`This Court has jurisdiction over this action under 28 U.S.C. § 1331 (federal
`
`question jurisdiction) and 28 U.S.C. § 1345 (district courts have original jurisdiction over civil
`
`actions commenced by the United States or by any agency expressly authorized to sue by Act of
`
`Congress). Section 6c of the CEA, 7 U.S.C. § 13a-1(a), authorizes the CFTC to seek injunctive
`
`relief against any person whenever it shall appear to the CFTC that such person has engaged, is
`
`engaging, or is about to engage in any act or practice constituting a violation of any provision of
`
`the CEA or any rule, regulation, or order thereunder.
`
`14.
`
`Venue properly lies with this Court pursuant to Section 6c(e) of the Act, 7 U.S.C.
`
`§ 13a-1(e), because Defendants transacted business in the Southern District of New York and
`
`engaged in acts and practices in violation of the Act and Regulations within this District.
`
`
`
`PARTIES
`
`A.
`
`The CFTC
`
`15.
`
`Plaintiff Commodity Futures Trading Commission is the independent federal
`
`regulatory agency charged by Congress with the administration and enforcement of the
`
`Commodity Exchange Act (“CEA”) and Regulations promulgated thereunder.
`
`B.
`
`Defendants
`
`16.
`
`Samuel Bankman-Fried (“Bankman-Fried”) is a United States citizen who has
`
`resided in various locations during the Relevant Period, most recently in the Bahamas. Bankman-
`
`Fried is the founder and majority owner of FTX Trading, Alameda, and FTX US. Bankman-Fried
`
`resided in and performed work for FTX Trading and Alameda in various locations during the
`
`Relevant Period, including in the United States. He has never been registered with the Commission
`
`in any capacity.
`
`
`
`4
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`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 5 of 40
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`
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`17.
`
`FTX Trading Ltd. (“FTX Trading”) is a corporation registered in Antigua and
`
`Barbuda. FTX Trading Ltd. along with its subsidiaries and affiliate entities, including without
`
`limitation FTX Digital Markets Ltd. (“FTXDM”), located in the Bahamas, collectively did
`
`business as “FTX.com” or “FTX” and operated the digital asset trading exchange during the
`
`Relevant Period. FTX Trading had numerous employees, including key personnel, that were based
`
`in and perform work from the United States, including in this District. FTX Trading had regularly
`
`engaged in advertising and promotional activities in the United States. None of the FTX Trading
`
`entities has ever been registered with the Commission in any capacity. FTX Trading is currently
`
`in Chapter 11 bankruptcy proceedings in the U.S. Bankruptcy Court for the District of Delaware.
`
`18.
`
`Alameda Research LLC (“Alameda”) is a Delaware limited liability company.
`
`Alameda, along with its parent, subsidiary, and affiliate entities collectively operated and did
`
`business as the digital asset trading and investment firm “Alameda.” Alameda was founded in,
`
`maintained offices in, and had numerous employees, including key personnel, that were based in
`
`and perform work from the United States during the Relevant Period. None of the Alameda entities
`
`has been registered with the Commission in any capacity. Alameda is currently in Chapter 11
`
`bankruptcy proceedings in the U.S. Bankruptcy Court for the District of Delaware.
`
`19.
`
`During the Relevant Period, FTX Trading, Alameda Research, together with other
`
`entities under the majority ownership and control of Bankman-Fried operated as a single,
`
`integrated common enterprise under the sole ultimate authority of Bankman-Fried as their mutual
`
`owner. They are referred to collectively in this complaint as the “FTX Enterprise.” Bankman-
`
`Fried regularly exercised control over each of the component entities of the FTX Enterprise
`
`throughout the Relevant Period, including regularly serving as signatory on core corporate
`
`agreements, as well as corporate bank accounts and trading accounts, many of which were held in
`
`
`
`5
`
`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 6 of 40
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`
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`the U.S. The FTX Enterprise failed to observe corporate formalities, including failure to segregate
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`funds, operations, resources, and personnel, or to properly document intercompany transfers or
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`funds and other resources. The entities regularly shared office space, systems, accounts, and
`
`communications channels. On information and belief, assets flowed freely between the FTX
`
`Enterprise entities, often without documentation or effective tracking.
`
`
`
`STATUTORY BACKGROUND AND LEGAL FRAMEWORK
`
`20.
`
`The purpose of the CEA is to “serve the public interests . . . through a system of
`
`effective self-regulation of trading facilities, clearing systems, market participants and market
`
`professionals under the oversight of the Commission,” as well as “to deter and prevent price
`
`manipulation or any other disruptions to market integrity; to ensure the financial integrity of all
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`transactions subject to [the] Act and the avoidance of systemic risk; to protect all market
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`participants from fraudulent or other abusive sales practices and misuses of customer assets; and
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`to promote responsible innovation and fair competition among boards of trade, other markets and
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`market participants.” Section 3 of the Act, 7 U.S.C. § 5.
`
`21.
`
`A digital asset is anything that can be stored and transmitted electronically and has
`
`associated ownership or use rights. Digital assets include virtual currencies, such as bitcoin (BTC),
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`ether (ETH), and tether (USDT), which are digital representations of value that function as
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`mediums of exchange, units of account, and/or stores of value. Certain digital assets are
`
`“commodities,” including bitcoin (BTC), ether (ETH), tether (USDT) and others, as defined under
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`Section 1a(9) of the Act, 7 U.S.C. § 1a(9).
`
`22.
`
`In recent years, as digital asset markets have evolved, the CFTC has approved the
`
`offer of futures contracts on digital assets, including bitcoin and ether futures and options, by
`
`
`
`6
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`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 7 of 40
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`
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`boards of trade registered with the Commission, including the Chicago Mercantile Exchange
`
`(“CME”) and Chicago Board Options Exchange (“CBOE”).
`
`23.
`
`Section 6c(1) of the CEA, 7 U.S.C. § 9(1), in relevant part, makes it unlawful for
`
`any person, directly or indirectly, to:
`
`use or employ, or attempt to use or employ, in connection with any swap,
`or a contract of sale of any commodity in interstate commerce, or for future
`delivery on or subject to the rules of any registered entity, any manipulative
`or deceptive device or contrivance, in contravention of such rules and
`regulations as the Commission shall promulgate . . .
`
`CFTC Regulation 180.1(a), 17 C.F.R. § 180.1(a), promulgated pursuant to the
`
`24.
`
`authority in CEA Section 6(c)(1), makes it unlawful for any person, directly or indirectly, in
`
`connection with any swap, or contract of sale of any commodity in interstate commerce, or contract
`
`for future delivery on or subject to the rules of any registered entity, to intentionally or recklessly:
`
`(1) Use or employ, or attempt to use or employ, any manipulative device,
`scheme, or artifice to defraud;
`
`(2) Make, or attempt to make, any untrue or misleading statement of a
`material fact or to omit to state a material fact necessary in order to make
`the statements made not untrue or misleading; or
`
`(3) Engage, or attempt to engage, in any act, practice, or course of business,
`which operates or would operate as a fraud or deceit upon any person.
`
`25.
`
`Section 13c(b) of the Act, 7 U.S.C. § 13c(b) provides that “any person who, directly
`
`or indirectly, controls any person who has violated any provision of this chapter or any of the rules,
`
`regulations or orders issued pursuant to this Act may be held liable for such violation in any action
`
`brought by the Commission to the same extent as such controlled person. In such action, the
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`Commission has the burden of proving that the controlling person did not act in good faith or
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`knowingly induced, directly or indirectly, the acts constituting the violation.”
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`
`
`7
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`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 8 of 40
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`
`
`FACTS
`
`A.
`
`Founding of Alameda and the FTX Trading Exchange
`
`26.
`
`Bankman-Fried co-founded Alameda in November 2017 in Berkeley, California.
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`Initially, Alameda primarily engaged in high-frequency digital asset arbitrage trading. This
`
`practice consisted of using proprietary algorithmic quantitative computer programs, commonly
`
`known as “bots,” to identity arbitrage opportunities due to price differentials between various
`
`digital asset platforms. Alameda engaged in high-frequency arbitrage trading across a large variety
`
`of digital asset exchanges, including certain exchanges operating in the United States.
`
`27.
`
`In a June 29, 2019 “white paper” Alameda represented that within a year of its
`
`inception, it had “become the largest liquidity provider and market maker in the [digital asset]
`
`space,” trading “$600 million to 1 billion a day” and accounting for “roughly 5% of global volume
`
`in digital asset trading.”
`
`28.
`
`Throughout the Relevant Period, Bankman-Fried has owned 90% of Alameda.
`
`Bankman-Fried was CEO of Alameda until October 2021, at which time he selected and appointed
`
`two co-CEOs to replace him.
`
`29.
`
`Even after stepping down as CEO of Alameda, Bankman-Fried continued to
`
`maintain control over Alameda. For example, Bankman-Fried remained a signatory on Alameda
`
`Research’s bank accounts and an authorized trader for Alameda’s accounts with CFTC registered
`
`futures commission merchants. Bankman-Fried also maintained direct decision-making authority
`
`over all of Alameda’s major trading, investment, and financial decisions. This authority was
`
`exercised at least in part through Bankman-Fried’s regular, often daily participation in various in-
`
`person and mobile chat communications with senior personnel at Alameda.
`
`30.
`
`Over time, Alameda expanded its activities into a number of new digital asset
`
`business models, including making large equity investments in various companies in the digital
`
`
`
`8
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`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 9 of 40
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`
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`asset industry, including by securing large loans from digital asset lending platforms to enable it
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`to increase the size and variety of its digital asset industry investments.
`
`31.
`
`By late 2018, Bankman-Fried and others employed at Alameda’s offices in
`
`Berkeley, California had begun building the centralized digital asset derivatives exchange, whcih
`
`would ultimately become FTX. The platform development was funded, in part, by another digital
`
`asset exchange, Binance, which, upon information and belief, had acquired an approximately 20%
`
`stake in FTX in or before November 2019.
`
`32.
`
`In early 2019, Bankman-Fried and others moved to Hong Kong to finalize and
`
`launch the FTX Trading platform to the public. The FTX.com website was launched and made
`
`available to the public by no later than May 2019. Bankman-Fried was at all times during the
`
`Relevant Period the majority shareholder of FTX trading and related entities.
`
`33.
`
`FTX offered trading in a large variety of digital assets, including digital
`
`commodities such as bitcoin, ether, tether, and others. FTX operated primarily as a derivatives
`
`exchange and offered trading in various types of options, futures, swaps, perpetual swaps, and
`
`other digital commodity derivative products. FTX allowed customers to place buy (long) and sell
`
`(short) orders in an electronic order book, and matched customer orders via its “trading engine” or
`
`“matching engine.” FTX also offered a number of additional services related to the trading of
`
`digital asset products. For example, FTX operated a peer-to-peer (P2P) margin lending program
`
`where customers could offer margined and leveraged offerings to one another.
`
`34.
`
`Customers could access the FTX platform through the FTX.com website, through
`
`a mobile application, and through an Application Programming Interface (API). FTX also offered
`
`an off-exchange “over the counter” (OTC) portal that enabled customers to connect and request
`
`
`
`9
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`

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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 10 of 40
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`
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`quotes for spot digital assets and trade directly, rather than placing resting orders on a central limit
`
`order book.
`
`35.
`
`In marketing materials and in communications with federal regulators and others,
`
`FTX touted its auto-liquidation risk management engine, cross-margin functionality, and backstop
`
`liquidity provider (“BLP”) programs as unique features that limited risk. Alameda was a leading
`
`participant in the BLP program.
`
`36.
`
`FTX relied on Alameda resources, funds, and personnel to carry out a number of
`
`core functions for the FTX.com platform, including creating liquid submarkets for all of the
`
`products offered on FTX Trading, maintaining an appropriate balance of various digital assets on
`
`the exchange, and supporting the “peer to peer” margin lending program.
`
`37.
`
`FTX grew quickly. By June 2019, for example, just months after its launch,
`
`according to FTX, the daily volume of futures trading on FTX often exceeded $100 million.
`
`Beginning no later than 2020, FTX Trading was consistently ranked as one of largest digital asset
`
`exchanges in the world by trading volume. In 2021, according to FTX, FTX entities held
`
`approximately $15 billion in assets on their platforms, FTX entities accounted for approximately
`
`10% of global digital asset volumes, and they transacted $16 billion of volume per day.
`
`38.
`
`Because of the perception of potential conflicts of interest between FTX and
`
`Alameda, Defendants and their employees understood that it was important to present a public
`
`perception that there was strong separation between Alameda and FTX. On information and belief,
`
`this was one key motivation for Bankman-Fried’s resignation as CEO of Alameda. Bankman-
`
`Fried and others also reinforced a separate spheres narrative in their public statements. For
`
`example, in August 2022, during a media appearance, Alameda’s CEO said the following with
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`respect to the nature of the relationship between FTX and Alameda:
`
`
`
`10
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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 11 of 40
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`
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`They’re both owned by Sam [Bankman-Fried], obviously. So ultimately,
`sort of aligned incentives in that way. We keep them quite separate in terms
`of day-to-day operations. We definitely have a Chinese wall in terms of
`information sharing to ensure that no one in Alameda would get customer
`information from FTX or anything like that, or any sort of special treatment
`from FTX. They really take that pretty seriously.
`
`Such public representations by and on behalf of Defendants did not reflect reality.
`
`39.
`
`Throughout the Relevant Period, Alameda and FTX continued to share office space, first in
`
`Berkeley, California and later in Hong Kong and the Bahamas. They also shared key personnel,
`
`technology and hardware, intellectual property, and other resources. Bankman-Fried and other
`
`senior management at Alameda and FTX also had widespread access to each other’s systems and
`
`accounts.
`
`40.
`
`In January 2020, Bankman-Fried and others established a separate group of
`
`operating entities operating a digital asset exchange specifically for U.S. persons. These entities
`
`collectively did business as “FTX US” and were incorporated primarily in the State of Delaware.
`
`The FTX US entities also held various registrations, including as a licensed Money Transmitter
`
`under the laws of the State of South Dakota. FTX US offered trading to U.S. persons in a large
`
`number of digital assets, including but not limited to spot digital commodities.
`
`41.
`
`In October 2021, FTX US acquired a commodity derivatives company called
`
`LedgerX LLC, which then began doing business as “FTX US Derivatives.” FTX US Derivatives
`
`operated as a CFTC-registered Designated Contract Market (“DCM”), Derivatives Clearing
`
`Organization (“DCO”), and Swap Execution Facility (“SEF”). FTX US Derivatives maintained
`
`separate bank accounts and, upon information and belief, appropriately segregated and accounted
`
`for customer funds at all relevant times.
`
`42.
`
`During the Relevant Period, FTX Trading purported to block U.S.-based customers
`
`from using its exchange to transact in digital asset products, and to instead direct those U.S.
`
`
`
`11
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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 12 of 40
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`
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`customers to transact exclusively through the FTX US and FTX US Derivatives entities. On
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`information and belief, some U.S. persons and entities were able to use FTX Trading to transact
`
`in digital assets, including digital commodity products, futures, options, swaps, and derivatives.
`
`C.
`
`FTX and Alameda Comingled, Mishandled, and Misappropriated
`FTX Trading Customer Funds From the Moment of FTX’s Launch
`
`At the time Bankman-Fried and others launched FTX, FTX have the requisite bank
`
`43.
`
`accounts to accept and hold customer funds. Instead, customers seeking to deposit “fiat” currency
`
`(i.e. traditional government-issued currency) into their FTX accounts were directed to wire their
`
`funds to bank accounts that were owned and controlled by Alameda. Some or all of those bank
`
`accounts were opened in the name of an entity called North Dimension, a Delaware-registered
`
`wholly-owned subsidiary of Alameda that, on information and belief, deliberately did not have a
`
`name that was readily-identifiable with Alameda. Certain of these bank accounts were located and
`
`based in the U.S.
`
`44.
`
`Once received, FTX customer funds were not segregated from Alameda funds or
`
`placed into accounts designated as being “for the benefit of” (FBO) FTX customers. When FTX
`
`customer funds were deposited into Alameda bank accounts, Alameda personnel manually
`
`credited FTX customer accounts with the corresponding amount of fiat currency on FTX internal
`
`ledger system. Customers accessing their FTX accounts would be able to observe on the
`
`exchange’s website (and later mobile application) that their funds had been posted to their FTX
`
`accounts, even though the funds actually remained in Alameda-controlled bank accounts.
`
`45.
`
`For a small subset of customer deposits, Alameda exchanged customer deposit
`
`funds to fiat-backed stablecoins such as USDC and USDT (which are generally understood to be
`
`pegged 1:1 and backed 1:1 by U.S. Dollars) and then transferred an equivalent amount of such
`
`stablecoins to FTX’s digital asset wallets. Alameda treated fiat currency and stablecoins as
`
`
`
`12
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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 13 of 40
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`
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`fungible and this was the designated method for crediting customer accounts for fiat bank deposits.
`
`While this happened occasionally, customer funds typically remained solely in bank accounts in
`
`the name of Alameda, where they continued to be comingled with Alameda’s own funds.
`
`46.
`
`The Alameda-owned bank accounts holding FTX customer fiat funds were
`
`collectively reflected on FTX’s internal ledger systems as the “fiat@ftx” account. During the
`
`Relevant Period, this account held a balance of as much as $8 billion in customer funds.
`
`47.
`
`By approximately August 2020, FTX had opened its own FBO fiat bank accounts.
`
`However, FTX Trading customer funds that had previously been wired to Alameda and reflected
`
`in the “fiat@ftx” group of Alameda bank accounts were not transferred to FTX’s bank accounts.
`
`Furthermore, even after August 2020, at least some FTX customers continued to send fiat deposits
`
`to Alameda-owned accounts.
`
`48.
`
`Consistently from the launch of FTX and throughout the Relevant Period, Alameda
`
`accessed and used FTX customer funds for Alameda’s own operations and activities, including to
`
`fund its trading, investment, and borrowing/lending activities. Alameda’s use of FTX customer
`
`funds included both customer fiat deposits that were sent to Alameda-owned bank accounts and
`
`customer digital asset deposits and holdings that Alameda accessed via the unbounded withdrawal
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`capabilities of its FTX Trading account.
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`D. Misrepresentations Related to the Operations of FTX and Alameda
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`The use of customer funds by Alameda was not authorized by FTX customers, and
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`49.
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`FTX customers were not made aware that their funds were being used by Alameda. To the
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`contrary, FTX’s Terms of Service expressly prohibited such use of customer funds. Specifically,
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`Section 8.2.6 of the FTX Trading Terms of Service states:
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`All Digital Assets are held in your Account on the following basis:
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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 14 of 40
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`
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`(A) Title to your Digital Assets shall at all times remain with you and
`shall not transfer to FTX Trading. As the owner of Digital Assets in your
`Account, you shall bear all risk of loss of such Digital Assets. FTX Trading
`shall have no liability for fluctuations in the fiat currency value of Digital
`Assets held in your Account.
`
`(B) None of the Digital Assets in your Account are the property of, or
`shall or may be loaned to, FTX Trading; FTX Trading does not represent or
`treat Digital Assets in User’s Accounts as belonging to FTX Trading.
`
`(C) You control the Digital Assets held in your Account. At any time,
`subject to outages, downtime, and other applicable policies (including the
`Terms), you may withdraw your Digital Assets by sending them to a
`different blockchain address controlled by you or a third party.
`
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`Defendants were aware of the need to segregate and protect customer assets. In
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`50.
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`fact, FTX developed internal policy documents relating to the protection of customer assets. For
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`example, in an FTXDM policy document entitled “Safeguarding of Assets & Digital Token
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`Management Policy” dated August 2021, this affiliated entity of FTX Trading indicated that:
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`FDM has a responsibility to ensure that customer assets are appropriately
`safeguarded and segregated from its own funds. This includes customer
`assets that may be held by third party service providers. FDM will ensure
`that:
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`● Customer assets (both fiat and virtual assets) are segregated from its own
`assets;
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`● Customer assets (both fiat and virtual assets) will be clearly designated
`and easily identifiable;
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`● All third-party service providers are aware that customer funds do not
`represent property of FDM and are therefore protected from third-party
`creditors; and
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`● All third-party providers are aware that customer assets are held in trust.
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`Regarding customer fiat assets, FDM will maintain customer accounts with
`a regulated credit, e-money or payment institution that is acceptable to the
`Securities Commission of The Bahamas (SCB). Customer accounts will be
`designated as such, and the monies contained therein will be appropriately
`ring-fenced and protected from claims against FDM.
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`Customer monies will be appropriately ring-fenced to protect from:
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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 15 of 40
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`
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` The unlikely event FDM becomes insolvent;
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` ●
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`● The use of customer monies being used to benefit others; and
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`● FDM using customer monies to finance its own operations.
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`Written notice will be provided to the relevant regulated credit, e-money, or
`payment institution to clarify that the assets contained are held by us on trust
`for our customers and they are not entitled to combine the account any other
`account, or to exercise any right of set-off or counterclaim against the
`money in those accounts, in respect of any debt owed by us.
`
`All customer accounts will be under the dual signatory of two directors or
`of one director, together with a senior member of the management team.
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`Throughout the Relevant Period, Bankman-Fried and other representatives of FTX
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`51.
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`consistently and repeatedly reiterated, in a variety of contexts, that customer assets were properly
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`segregated and custodied by FTX at all times, in conformance with both FTX’s Terms of Service
`
`and generally understood best practices for derivatives exchanges, which presume a requirement
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`for customer disclosure and consent in order to engage in rehypothecation of customer assets (i.e.
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`re-use of deposited assets).
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`52.
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`Such statements about the treatment and custody of customer assets include
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`misstatements that Bankman-Fried and others made and/or caused to be made to the U.S.
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`Congress, the CFTC, and/or other federal and state government agencies, investors, and in public
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`venues such as Twitter.
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`53.
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`For example, during February 9, 2022 testimony before the U.S. Senate Committee
`
`on Agriculture, Nutrition and Forestry, Bankman-Fried, while advocating for the implementation
`
`of legislation regarding digital assets and the extension of certain legal protections to digital asset
`
`exchanges, testified as follows with respect to FTX’s treatment of customer funds:
`
`FTX has policies and procedures for its platforms today that reflect this
`basic principle by maintaining liquid assets for customers withdrawals,
`including a sufficient balance of digital assets funded by the company for
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`Case 1:22-cv-10503 Document 1 Filed 12/13/22 Page 16 of 40
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`its non-U.S. platform. The resources are funded to provide sufficient cover
`against user losses under certain events and extreme scenarios in order to,
`among other purposes, ensure a customer without losses can redeem its
`assets from the platform on demand.
`[…]
`In keeping with this principle, FTX provides a user experience that enables
`any user to easily view account balances for all assets, for all of its
`platforms, in real time. By logging in to the customer’s account at FTX, the
`customer can immediately view the types of assets they own held in custody
`by FTX. The assets are ledgered and easily identifiable to the user (but held
`in an omnibus wallet in the case of the customer’s tokens in order to better
`promote liquidity on the platform) pursuant to internal policies and
`procedures, and FTX regularly reconciles customers’ trading balances
`against cash and digital assets held by FTX. Additionally, as a general
`principle FTX segregates customer assets from its own assets across our
`platforms.
`
`54.
`
`Contrary to such representations and without disclosure to FTX customers,
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`Alameda and FTX comingled funds and freely used FTX customer funds as if they were their
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`own, including as capital to deploy in their own trading and investment activities. On information
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`and belief, Bankman-Fried, his parents, and other FTX and Alameda employees used FTX
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`customer funds for a variety of personal expenditures, including luxury real