Former employees of ftx and alameda research were allegedly involved in a massive fraud. according to the commission, gary wang and engineer nishad singh had created software code to give alameda special access to ftx users’ funds, while sam bankman-fried had full access to alameda’s records and databases, overseeing its investments and operations. the fraudulent activities took place over a period of years, and the source of alameda’s “line of credit” was allegedly taken from ftx users.
Users were allowed to redeem funds at any time according to ftx’s terms of service, but wang and ellison had allegedly created a line of credit labeled “email@example.com” in the ftx database, through which over $8 billion in ftx customer assets were transferred to alameda. in addition, bankman-fried had allegedly propped up the ftt token with his trading activity in order to inflate the token’s value and allow alameda to continue borrowing against it.
Howey test defines a security as an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others, which is applicable to the ftt token. investors were promised that the token would be listed at $1, but were offered discounts of up to $0.10 if they bought it ahead of time. it appears that the former employees of ftx and alameda research had treated both firms’ assets and liabilities as one big “personal piggy bank”, regardless of whether it was known or recklessly unknown, in order to reap the profits and benefits.