Report: FTX Workers Knew of Alameda ‘Backdoor’ Long Before Collapse

A new report sheds more light on FTX’s relationship with sister firm Alameda Research.

In the months leading up to FTX’s collapse, some of its employees uncovered the “backdoor” allegedly used by Alameda to siphon away billions in customer funds from the cryptocurrency exchange, The Wall Street Journal (WSJ) reported Thursday (Oct. 5).

The report, citing sources familiar with the matter, said the workers who made this discovery flagged it with their boss, who informed one of FTX founder Sam Bankman-Fried’s lieutenants.

However, nothing was done. In fact, the head of the team that uncovered the backdoor was fired in the summer of 2022, the report said.

As the WSJ notes, the backdoor is a key piece in the case against Bankman-Fried, who went on trial this week in one of the largest white collar fraud cases in U.S. history. Bankman-Fried, 31, has pleaded not guilty.

“The defendant took billions of dollars in FTX customer deposits from Alameda bank accounts and he spent it — and the customers had no way to know that their money was being used in this way,” federal prosecutor Nathan Rehn told jurors Wednesday (Oct. 4). “When customers thought their money was going into the exchange, they were actually sending their money right into the defendant’s pocket.”

Testifying before the House Financial Services Committee last year, current FTX CEO John J. Ray said that Alameda could move assets from FTX “on an unlimited basis to take positions with other people’s money,” noting also that the company did not perform daily reconciliations.

“FTX was operated as one company,” he told lawmakers. “As a result there is no distinction between the operations of the company and who controlled those operations. We can confirm that user funds were deposited directly into Alameda instead of FTX.”

Prosecutors allege this happened in part because of a special feature Bankman-Fried had ordered programmed in that let Alameda dip into its accounts with impunity. According to the WSJ report, a group of FTX employees uncovered these features last spring.

“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,” Jim Outen, an employee of the FTX-owned Ledger X, wrote in a May 5, 2022 message seen by the WSJ.

His supervisor, LedgerX Chief Risk Officer Julie Schoening, wrote back that “there are less rigid rules” because FTX was based in the Bahamas and not the U.S., and added: “but yea we should clean up this sort of stuff.”

Schoening was later fired, and the WSJ report points to conflicting accounts of why that happened. However, court filings from earlier this year accuse FTX under Bankman-Fried of a pattern of silencing whistleblowers.

Meanwhile, Bankman-Fried’s attorneys argued in their opening statement that the software code allowing Alameda Research to borrow from FTX customers was not a secret and that any “senior developer at FTX” could see it.