The quant trading firm Sam Bankman-Fried founded was able to quietly use customer funds from his exchange FTX in a way that flew under the radar of investors, employees and auditors in the process, according to a source.
The way they did it was by using billions from FTX users without their knowledge, says the source.
Alameda Research, the fund started by Bankman-Fried, used billions in customer funds from its founder’s exchange, FTX, according to a source familiar with company operations, who asked not to be named because the details were confidential.
The crypto exchange drastically underestimated the amount FTX needed to keep on hand if someone wanted to cash out, according to the source. Trading platforms are required by their regulators to hold enough money to match what customers deposit. They need the same cushion, if not more, in the event that a user borrows money to make a trade. According to the source, FTX did not have nearly enough on hand.
Its biggest customer, according to a source, was the hedge fund Alameda. The fund was partially able to cover up this activity because the assets it was trading never touched its own balance sheet. Instead of holding any money, it was borrowing billions from FTX users, then trading it, the source said.
None of this was disclosed to customers, to CNBC’s knowledge. In general, mixing customer funds with counterparties and trading them without explicit consent, according to U.S. securities law, is illegal. It also violates FTX’s terms of service. Sam Bankman-Fried declined to comment on allegations of misappropriating customer funds, but did say its recent bankruptcy filing was a result of issues with a leveraged trading position.
