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CFTC piles on with latest charges against Bankman-Fried

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FTX logo on mobile screen with crypto coins are displayed for illustration.

Jonathan Raa | Nurphoto | Getty Images

Charges proceed to mount for disgraced FTX co-founder Sam Bankman-Fried, with the Commodity Futures Trading Commission unveiling latest charges Tuesday against the onetime crypto billionaire, alleging that FTX commingled customer funds and that Bankman-Fried violated the Commodities Exchange Act.

Follow CNBC’s live blog covering Tuesday’s hearing on the collapse of cryptocurrency exchange FTX before the House Financial Services Committee.

The costs got here moments before prosecutors within the Southern District of Recent York unveiled criminal charges against Bankman-Fried, who’s languishing in Bahamian jail after being seized Monday evening by law enforcement there.

The CFTC filing alleges that Alameda Research, Bankman-Fried’s hedge fund, enjoyed access to as much as “$8 billion in customer funds,” in an account nominally on FTX books but controlled and within the name of Alameda.

From the very founding of FTX in 2019, the CFTC alleges that Alameda “accessed and used FTX customer funds for Alameda’s own operations and activities, including to fund its trading, investment, and borrowing/lending activities.”

The CFTC filing echoes charges that the SEC unveiled earlier Tuesday, which said that Bankman-Fried operated his empire as a fraud “from the beginning.”

FTX allowed Alameda access to massive amounts of liquidity, backstopping dangerous bets on crypto assets and derivatives. Alameda was given favored-nation status and an exemption from Alameda’s automatic risk management protocols, which acted similarly to an automatic margin call and would liquidate a traditional client position algorithmically.

Alameda had no such limitation on its trades, by design.

“At Bankman-Fried’s direction, FTX executives created features within the underlying code for FTX that allowed Alameda to take care of an essentially unlimited line of credit on FTX,” the CFTC alleged.

The financial discovery process unearthed this “back door” in FTX’s books that was created with bespoke software, based on sources chatting with Reuters. They went on to describe it as a way that ex-CEO Bankman-Fried could make changes to the corporate’s financial record without flagging the transaction either internally or externally. That mechanism theoretically could have, for instance, prevented multibillion-dollar transfers to Alameda from being flagged to either his internal compliance team or to external auditors.

Reuters said Bankman-Fried issued an outright denial of implementing a so-called back door.

“FTX Trading executives also created other exceptions to FTX’s standard processes that allowed 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,” read the statement from the CFTC.

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