FTX staffers found a so-called backdoor at its sister crypto trading firm Alameda Research that was allegedly used to withdraw billions of dollars of customer funds months before the crypto firm imploded, according to a report.
One worker at an FTX affiliate flagged the issue to his supervisor — who ended up getting fired after a member of Sam Bankman-Fried’s inner circle was alerted, people familiar with the matter told The Wall Street Journal.
“Just wanted to point out that there are currently a few places in the…code base where Alameda gets special treatment in one way or another,” employee Jim Outen wrote in a May 2022 message viewed by The Journal.
At the time, Outen, who worked for LedgerX — a Bitcoin and Ether-derivatives exchange FTX acquired in 2021 — was digging through FTX’s code to determine whether its main Bahamas-based operation could be used in the US, where regulations were much tighter.
His boss, LedgerX Chief Risk Officer Julie Schoening, replied that “there are less rigid rules” on the offshore exchange, but said, “we should clean up this sort of stuff.”
Schoening’s team proceeded to discover a slew of problematic practices with how FTX handled risk and liquidations, as well as Alameda’s exemption from FTX’s standard auto-liquidation process.
The backdoor is expected to figure prominently in the federal fraud trial against Bankman-Fried, who’s accused of stealing $10 billion of customer funds to fund lavish vacations, donate to politicians, and pay off lenders.
The trial kicked off in Manhattan this week and the FTX founder has pleaded not guilty to all charges.
Prosecutors have alleged Alameda’s “special features” included a buried line of code that enabled the hedge fund’s balance to fall deep into the negatives — some $65 billion deep — allowing FTX to function as a sort of fund for Alameda from the time it was founded in 2019 until FTX collapsed last November.
FTX’s customers, however, weren’t allowed to have a negative balance and were automatically taken through a liquidation process — where FTX sold off their assets — if their balance fell below zero, according to The Journal.
Schoening relayed the team’s findings to LedgerX boss Zach Dexter, who raised the problems to FTX’s director of engineering Nishad Singh, sources familiar with the matter told The Journal.
The sources said Dexter believed the auto-liquidation was fixed after Singh allegedly removed a section of code, according to The Journal.
Schoening was fired in August under disputed circumstances that ended with her agreeing to a $5 million settlement after she sued for wrongful termination, according to the Journal.
However, the paperwork for the transaction wasn’t completed before the firm collapsed months later, the outlet reported.
Schoening was axed after FTX executives shared internal documents among themselves that supposedly contained screenshots of inappropriate messages she sent to other staffers, people familiar with the matter told The Journal.
Other sources told the news site that the messages were taken out of context, and Schoening simply irritated FTX’s higher-ups by identifying the company’s grave issues.
Schoening hired lawyer Lisa Banks, who threatened to sue for wrongful termination before FTX collapsed in 2022, according to The Journal.
The Post has sought comment from Schoening’s lawyer Lisa Banks, Bankman-Fried’s lawyer Mark Cohen of Cohen & Gresser, and LedgerX, which was acquired by Miami International Holdings in May.
Representatives for Miami International Holdings, which owns several US financial exchanges, did not immediately respond to The Post’s request for comment.
Singh pleaded guilty to fraud charges earlier this year and is expected to testify against Bankman-Fried.
Another star witness expected to take the stand is Caroline Ellison, Bankman-Fried’s ex-lover who served as the CEO of Alameda.
The trial, which is expected to last about six weeks, comes nearly a year after FTX’s collapse shocked markets.
Selection of the panel of 12 jurors and six alternates took place on Wednesday, followed by opening statements, and federal prosecutors on Thursday are set to continue arguing that the 31-year-old Bankman-Fried headed up one of the biggest financial frauds of his generation.
Should he be convicted on all charges, Bankman-Fried faces over 100 years in prison.
This story originally appeared on NYPost
