Fired FTX worker who flagged Alameda back door was told about ‘less rigid rules’: WSJ

Prosecutors say Alameda Research, the crypto hedge fund co-founded by FTX’s Sam Bankman-Fried, was helped by a back door in the computer code.

The Wall Street Journal reported today that FTX employees in the US discovered this back door as early as May 2022 — six months before the collapse of the company which led to its bankruptcy.

When regular users on the crypto exchange went into the red, their holdings were sold off by FTX. Alameda had the ability to lose money, but was exempt from the normal auto-liquidation procedures, people familiar with the matter told the WSJ.

There were a few places in the code base where Alameda got special treatment in “one way or another,” Jim Outen, the chief economist at LedgerX, which FTX had acquired in August 2021, told his boss Julie Schoening on May 5, 2022, according to the report.

There are “less rigid rules” on the offshore exchange, meaning FTX, Schoening told Outen, before adding, “but yea we should clean up this sort of stuff.”

Schonening was fired in early August 2022, months after raising these concerns with LedgerX CEO Zach Dexter.

Dexter reportedly raised the issue with Nishad Singh. He believed the issue was resolved after Singh removed a section of the code, according to the WSJ’s sources.

Earlier this year, LedgerX was acquired by Miami International Holdings.

“Following a thorough internal investigation, LedgerX has found no evidence that any of its employees were aware of any reported code enabling Alameda to take FTX customer assets and firmly denies any contrary allegation,” A spokesperson at Miami International Holdings told DL News in an emailed statement.

Adam Morgan McCarthy is DL News’ London-based Markets Correspondent. Got a tip? Reach out at adam@dlnews.com.