FTX chief engineer Nishad Singh made secret changes to the trading platform’s software in August 2020, exempting founder Sam Bankman-Fried (SBF)’s hedge fund Alameda Research. The original function of the software was to automatically sell Alameda’s assets after it lost too much of its borrowed capital. Singh explained in a note to the modified software that FTX should never have sold Alameda’s position, “with extreme care not to liquidate it.” This exemption allows Alameda to continue to borrow from FTX regardless of the value of the loan collateral. The change in the code caught the attention of the SEC, which filed a civil lawsuit against SBF on Tuesday, accusing him of fraud. The SEC said the change gave Alameda a nearly unlimited line of credit, and that FTX lent money not from its own reserves, but from clients’ funds. The SEC said SBF directed its subordinates to make the change in mid-2020, allowing Alameda’s account to maintain a negative balance. Only SBF, Singh, and a few executives at FTX and Alameda were aware of the exemption, former executives said.
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