FTX founder Sam Bankman Fred faces an inquiry about market manipulation

Federal prosecutors are investigating whether FTX founder Sam Bankman-Fried manipulated the market for two cryptocurrencies last spring, causing them to crash and creating a domino effect that ultimately caused his cryptocurrency exchange to collapse last month, according to two people who have . Find out.

U.S. prosecutors in Manhattan are examining the possibility of Bankman Fried steering the prices of two interrelated currencies, TerraUSD and Luna, to the benefit of entities he controls, including FTX and Alameda Research, a hedge fund he co-founded and owned, People said.

The investigation is in its early stages, and it is not clear whether prosecutors have identified any wrongdoing by Mr Bankman-Fried, or when they have begun looking into the TerraUSD and Luna trades. The matter is part of a broader investigation into the collapse of the Bahamas-based cryptocurrency empire founded by Mr. Bankman Fried, and the possible misappropriation of billions of dollars of client funds.

Federal prosecutors and the Securities and Exchange Commission are examining whether FTX violated the law by funneling its clients’ funds to Alameda. Last month, a run on deposits exposed an $8 billion hole in the stock exchange’s accounts, causing the company to collapse. Mr. Bankman Fried resigned as CEO of FTX when the company declared bankruptcy on November 11.

Three people familiar with the investigation said FTX is also under investigation for violating US money laundering laws that require money transfer companies to know their customers and report potential illegal activity to law enforcement. This investigation, first reported by Bloomberg News, began several months before FTX’s bankruptcy. Investigators are also looking into the activities of offshore cryptocurrency trading platforms.

In a statement, Bankman Freed said it was “not aware of any market manipulation and certainly did not intend to engage in market manipulation.”

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

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

The focus on potential market manipulation is adding to the legal storm brewing around Mr Bankman Fried. It is illegal for an individual to knowingly orchestrate 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 from a second coin called Luna through a complex set of algorithms. Merchants within the digital ecosystem can mint these coins, the prices of which fluctuate based on the number of coins in circulation. Anytime the price of TerraUSD drops, the supply of Luna will increase, as traders have created more Luna to try and cash in on the difference.

In May, major cryptocurrency market makers — exchanges or individuals who arrange for buyers and sellers — noticed an influx of “sell” orders coming into TerraUSD, said one of the people familiar with the market activity. The person said the orders were in small categories, but they were served very quickly.

The sudden jump in sell orders for TerraUSD overwhelmed the system, making it difficult to find matching “buy” orders. Under normal circumstances, any sell orders that have not been fulfilled for a long time will be matched with buy orders at a lower price. The longer the orders go without being matched, the more TerraUSD will drop in price and cause a corresponding drop in Luna’s price due to the way the coins have been pegged.

The exact reasons for the collapse of the two cryptocurrencies are still unclear. However, the bulk of the sell orders for TerraUSD appear to be coming from one place: Sam Bankman-Fried’s cryptocurrency exchange, which has also placed a large bet on Luna’s price falling, according to the person familiar with the market activity.

Had the trade gone as expected, the lower prices in Luna could have resulted in a huge profit. Instead, the bottom fell out of the entire TerraUSD-Luna ecosystem. The crash caused more trouble for the cryptocurrency industry, leading to many high-profile bankruptcies and wiping out about $1 trillion worth of value from the cryptocurrency market.

The ripple effects of Luna’s crash ultimately contribute to the collapse of Mr. Bankman Fried’s business empire. In November, Alameda CEO Carolyn Ellison told employees that loans to Alameda had been pulled as a result of the market chaos created by the crash, according to a person familiar with the matter. But the money Alameda borrowed was no longer readily available, Ms. Ellison told employees, so the company used FTX clients’ money to make the payments.

Ms. Ellison’s attorney did not respond to requests for comment.

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