Last year, employees at the cryptocurrency exchange FTX stumbled upon a line of code that gave the company special privileges for moving crypto around quietly — and then one of them got fired.

As the Wall Street Journal has discovered, employees at LedgerX, a smaller crypto firm that FTX purchased in 2021, found lines of code months before the exchange's collapse that gave its sister firm Alameda Research privileges that normal accounts didn't have.

"Just wanted to point out that there are currently a few places in the… code base where Alameda gets special treatment in one way or another," LedgerX employee Jim Outen wrote in a May 5, 2022 message to his boss, which was reviewed by the WSJ.

The lines in question were discovered while LedgerX employees were analyzing whether the code from FTX's international exchange, which was based in the Bahamas, could be used in the US, where laws are much stricter.

As the smaller firm's chief risk officer Julie Schoening told Outen when he brought it up to her, "there are less rigid rules" offshore, but she admitted that FTX nevertheless "should clean up this sort of stuff."

The glaring exemption allegedly operated as a backdoor, effectively allowing FTX to use its sister firm as a slush fund to pay off its debts.

It's yet another shocking revelation, highlighting the exchange's infamously shady business practices — which comes the same week as the beginning of FTX founder Sam Bankman-Fried's trial.

The disgraced CEO has since pleaded not guilty to seven counts of fraud and conspiracy but is facing over 100 years of jail time.

According to the WSJ's sources, the LedgerX team found several strange instances where Alameda and FTX seemed to handle risk and account liquidations in problematic ways. The code that Outen brought up to Schoening, for example, allowed Alameda to have a negative balance and not auto-liquidate the way other FTX accounts were supposed to when they bottomed out.

Although the smaller firm wasn't fully aware of what they'd chanced upon, it concerned the CRO enough to report it up the chain of command. The tip eventually made its way to Nishad Singh, a member of disgraced FTX founder Sam Bankman-Fried's inner circle and the exchange's director of engineering, who was said to have deleted the section.

In early August, Schoening was fired, the WSJ learned. Although there was a document circulated among FTX executives claiming that she sent inappropriate messages to other employees, others at the firm said that the images were manipulated or taken out of context, and that the real reason Schoening's position was terminated was that she had "irritated" her superiors by pointing out the code.

After being fired, Schoening hired a lawyer and threatened to sue FTX for wrongful termination. She and the exchange were in talks of a multi-million dollar settlement, the WSJ's sources said, when the exchange collapsed in November 2022.

This alleged backdoor is, among other things, very pertinent to the court case against Bankman-Fried that began this week — and we'll undoubtedly learn more about it and FTX's other purported wrongdoing over the next couple of weeks.

More on FTX: Sam Bankman-Fried Apparently Told Caroline Ellison That "In a Lot of Ways I Don't Really Have a Soul"

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