FTX: when the risk controls had an exception
The SEC’s 2022 complaint described a dangerous gap between the safeguards investors were sold and the treatment of an affiliated trading firm.
The historical record
In December 2022, the SEC charged FTX co-founder Samuel Bankman-Fried with defrauding equity investors. Its complaint alleged that customer funds were diverted to Alameda Research, his trading firm, and that Alameda received special treatment, including a virtually unlimited customer-funded credit line and exemptions from some risk controls. The SEC also alleged undisclosed exposure to overvalued, illiquid affiliated tokens. These are descriptions of the allegations in that dated complaint, not a summary of every subsequent court proceeding.
What investors had been told
According to the SEC, FTX raised more than $1.8 billion from equity investors while presenting itself as a responsible platform with sophisticated automated safeguards. The complaint alleged that commingled customer money funded investments, property purchases and political donations. The contradiction between the advertised controls and the alleged exceptions is the central decision in this case study.
Our analysis: inspect the exception
A rule that applies to everyone except the party able to cause the largest loss may provide very little protection. When evaluating a business process, ask who can override a limit, who records that override, and who independently sees the result. “We have a risk engine” is a description of software. It is not evidence that every relevant account is constrained by it.
A balance is a claim, not a photograph
An account screen can display a number without showing the assets and obligations behind that number. That distinction matters when thinking about custody. The useful questions concern segregation, withdrawal rights, independent verification and what happens if another business in the group fails. A familiar brand and a smooth interface cannot answer those questions on their own.
The lesson
Our takeaway is to separate reputation from evidence. Write down the promise being made, identify the record that would support it, and look for someone independent who can examine that record. Where the answer depends entirely on trusting the person who benefits from the claim, uncertainty remains. This is an analysis of a historical failure, not a ranking of today's exchanges or a recommendation to move funds.