Citigroup Considered Partnering With Alameda Research But Backed Out Because It Lacked Risk Management

Alameda Research, a crypto trading firm founded by Sam Bankman-Fried in 2017, was on the brink of collapse long before FTX was launched, and at one point, it held talks with Citigroup for a potential partnership with the latter deciding against it because the company lacked risk management framework.

"The thing that I picked up on immediately that was causing us heartburn was the complete lack of a risk-management framework that they could articulate in any meaningful way," Austin Campbell, former co-head of digital assets rates trading at Citigroup, told the Wall Street Journal, noting that he became skeptical of the trading firm after firing questions and getting vague answers.

The report, citing former Alameda Research employees, also said that the crypto trading firm almost collapsed back in 2018 as it was having problems and incurring losses due to its trading algorithm.

The algorithm of the crypto trading platform was reportedly designed to make a significant number of fast and automated trades, but the firm was losing money because it was giving off wrong price movements.

When the XRP token plummeted in value in 2018, Alameda Research reportedly lost almost two-thirds of its entire assets but was saved by Bankman-Fried when he raised funds from investors and lenders on a promise of 20% return on investment.

In 2019, Alameda Research sponsored the Binance Blockchain Week conference, which Bankman-Fried used to get funding from investors to finance his trading firm.

In April of that year, Bankman-Fried launched the centralized crypto derivatives exchange FTX and, from then on, used Alameda Research to fuel the CEX's growth since it turned out to be among the major players in the industry.

Over the past weeks since FTX and over 100 of its affiliates filed for Chapter 11 Bankruptcy protection, Bankman-Fried, in different instances, denied his involvement with the trading firm and said that both businesses operated independently, which, based on the statement of former Alameda Research CEO Caroline Ellison, is not at all true.

In the transcript of her plea hearing, Ellison said, "From 2019 to 2022, I was aware that Alameda was provided access to a borrowing facility on FTX.com, the cryptocurrency exchange run by Mr. Bankman-Fried." She admitted that she "understood that executives had implemented special settings on Alameda's FTX.com account that permitted Alameda to maintain negative balances in fiat currencies and cryptocurrencies."

Ellison also revealed to the court that she agreed to provide materially misleading financial statements to Alameda's lenders" in or around July 2022 to October 2022 and said that team provided lenders with botched quarterly reports that blurred "the extent of Alameda's borrowing."

Bankman-Fried is scheduled to attend a court hearing on Jan. 3.