Author: Jordan, PANews
The aftermath of FTX’s bankruptcy is still affecting the cryptocurrency market. As related lawsuits continue to deepen and more and more information is disclosed in related documents, some unknown inside stories are slowly coming to light.
According to FTX creditor Louis Origny on the X platform, FTX's lawsuit against the "smart, greedy, and organized" criminal Nawaaz Mohammad Meerun has attracted community attention. This person's methods are very crazy and even incredible, but FTX's various "sexy operations" are equally puzzling.
This article will analyze this incident in depth and may provide some warnings to the crypto market.
Massive accumulation of low-liquidity tokens, pushing up prices and then pledging to FTX to borrow huge amounts of funds
According to the lawsuit documents filed in the Delaware Bankruptcy Court of the United States, Meerun is a citizen of Mauritius and a "veteran" in market manipulation. He mainly focuses on some tokens with poor liquidity for market manipulation. In addition, he has been suspected of various money laundering operations and Ponzi schemes over the past decade, and has connections with organized crime networks in Poland, Romania and Ukraine, as well as Islamic extremist networks.
Starting in January 2021, Meerun accumulated a large position in BTMX (BTMX is a platform token pegged to the BitMax exchange). In total, he bought about half of the BTMX token supply, resulting in a 10,000% surge in the token price within three months.
Later, Meerun took advantage of the FTX leverage function and margin trading rules loopholes and borrowed tens of millions of dollars from FTX using BTMX as collateral. At this time, BitMax discovered the problem and contacted FTX to issue a warning. However, what is puzzling is that FTX did nothing! It is reported that Ryan Salame, then co-CEO of FTX Digital Markets, had received an alert for suspicious activity, but he ignored it. Later, when it was discovered that the scale of the loophole was at least $400 million, Ryan Salame simply commented: "Oh, I didn't realize the account had become so crazy."
It is reported that between August and December 2021, Meerun also repeated the above operations using new accounts and aliases to exploit the less liquid tokens BAO, TOMO and SXP. Before FTX realized the problem, he had defrauded nearly US$200 million through joint market operations. It is said that Meerun was discovered when he tried to manipulate another token called KNC again.
According to the lawsuit, Meerun was well aware that once market manipulation stopped, BTMX prices would plummet, which meant he would be required to return all the "borrowed" assets, but Meerun clearly had no intention of complying with FTX rules, and over time, he withdrew a large amount of stablecoins and other tokens. It was not until this time that FTX discovered that the loophole was extremely large, so it locked Meerun's account. What is puzzling is that FTX "forgot" to stop Meerun's withdrawal function, which allowed him to easily transfer more than $450 million from market manipulation!
According to information disclosed in the lawsuit, FTX did not want the outside world to discover such a huge loophole in its platform at the time, so it used the old routine of "taking money from Peter to pay Paul" to cover up the fact and transferred the losses to its sister company Alameda Research.
Using short selling strategies to “force” Alameda Research to invest huge amounts of money to close its positions
The lawsuit also pointed out that because Meerun’s behavior on FTX was not dealt with quickly, he was given a lot of time to “be allowed” to operate more tokens on the FTX platform. He allegedly shorted a worthless underground guano coin Mobile Coin (MOB) on FTX. FTX also did not take any action against Meerun, but simply asked him to provide more collateral.
In addition to Meerun holding a large number of MOB short positions, Alameda Research also held a number of short positions. In order to cover these short positions, Alameda Research began to buy a large number of MOB tokens from the market. During Alameda's weeks-long buying spree, the price of MOB soared by 750%, forcing Alameda to pay the cost of a sharp price increase, and then the MOB token finally collapsed shortly after Alameda slowed down its buying spree. By August 2021, when the dust settled on the BTMX/MOB incident, Alameda personnel estimated that Meerun's actions had caused Alameda to lose up to $1 billion.
However, Meerun does not recognize FTX's accusation of market manipulation, and claims that FTX's claims are groundless and without evidence. He said: "I have been operating within the scope of the FTX exchange. I have not received any offers for FTX accounts. Facts have also proved that the amount deposited into the FTX account far exceeds the final withdrawal amount, which means that trading in FTX is actually a loss. I have no connection with any organized crime network, nor with any extremist or terrorist network, and have never provided funds for them."
Of course, Meerun’s words cannot be disbelieved, but they cannot be fully believed, because according to the lawsuit documents, he was suspected of participating in a "governance attack" on the lending platform Compound Finance using COMP tokens under the identity of "Humpy the Whale". By accumulating a large number of COMP tokens and then attempting to transfer more than US$20 million in assets from other protocol users, he eventually used his influence to reach a "peace treaty" with Compound in exchange for no longer seeking to attack the protocol to obtain additional rewards.
What lessons can be learned from this incident?
Meerun’s market manipulation methods can be simply summarized into three categories:
1. Initially accumulating a large number of tokens with poor liquidity, which drives up the price of the relevant tokens, and then using these tokens as collateral to borrow funds from cryptocurrency exchanges and cash out;
2. Establishing a large number of short positions to force Alameda Research to take over and invest huge amounts of money to close the positions;
3. Jointly purchase multiple low-liquidity tokens and repeatedly use the market manipulation method of “pushing up prices and then mortgaging them to FTX to borrow huge amounts of funds”.
As the details of the Meerun lawsuit are revealed, it is undoubtedly a profound wake-up call for the crypto industry, but it also provides valuable lessons:
For exchanges, it is necessary to continuously improve KYC procedures, strictly implement "know your customer" and "anti-money laundering" regulations, conduct comprehensive verification of user identities, prevent criminals from using the platform for illegal activities, and strengthen supervision of internal personnel, establish and improve internal control mechanisms, and conduct regular training for employees to prevent "inaction" of internal personnel from giving criminals an opportunity to take advantage. At the same time, exchanges must establish a sound risk assessment system, conduct regular risk assessments on their businesses, identify potential risks and take corresponding measures, especially strengthen monitoring of cross-account and margin transactions, and focus on low-liquidity assets.
For investors, they need to be wary of abnormal price fluctuations of low-liquidity tokens, pay attention to large-scale on-chain transfer activities of whale accounts of sensitive tokens, and give priority to trading platforms that operate in regulated jurisdictions and are certified by the relevant regulatory authorities.
