Following his arrest in the Bahamas, the US Securities and Exchange Commission (SEC) has charged FTX co-founder Sam Bankman-Fried with "defrauding investors," it announced. It alleges that Bankman-Fried "concealed his diversion of FTX customers' funds to [the] crypto trading firm Alameda Research while raising more than $1.8 billion from investors."
"We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto," said SEC Chair Gary Gensler. "The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws."
The SEC alleges that since at least May 2019, FTX raised $1.8 billion from equity investors, including $1.1 billion from 90 US investors alone. Bankman-Fried promoted the exchange as a safe trading platform with "sophisticated, automated measures to protect customer assets," it said. "In reality, though, Bankman-Fried orchestrated a fraud to conceal the diversion of customer funds to his privately-held crypto hedge fund, Alameda Research."
That fund was given special treatment, "including an unlimited 'line of credit' funded by the platform's customers and exempting Alameda from certain key FTX risk mitigation measures," the commissioner added. And finally, customers were exposed to undisclosed risk from FTX's exposure to Alameda holdings of "overvalued, illiquid assets such as FTX-affiliated tokens." It further alleges that Bankman-Fried used commingled FTX customer funds to make "undisclosed venture investments, lavish real estate purchases and large political donations."
Bankman-Fried was set to be testifying today in Congress, but that isn't happening now. In a draft transcript of his testimony seen by Forbes, he would have led by saying "I fucked up." Later in the transcript, Bankman-Fried claims Alameda's position on the platform was twice as large as displayed on FTX's dashboards due to "a historical accounting quirk," as opposed to any malfeasance. He also planned to say that FTX's US business is fully solvent and could pay back customers immediately. Among other statements, he notes that he was pressured into filing for Chapter 11, and that ultimately the Chapter 11 documents were filed against his wishes.
The SEC is seeking injunctions including barring Bankman-Fried from future securities dealings, seizing alleged ill-gotten gains, a civil penalty and an officer and director bar. "FTX operated behind a veneer of legitimacy," said SEC enforcement director Surbir S. Grewal. "But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent."
At the same time, the US Attorney's Office of the Southern District of New York and the Commodity Futures Trading Commission (CFTC) also announced charges against Bankman-Fried in parallel actions. The unsealed indictment in United States of America v. Samuel Bankman-Fried has eight counts: Conspiracy to commit wire fraud on customers; wire fraud on customers; conspiracy to commit wire fraud on lenders; wire fraud on lenders; conspiracy to commit commodities fraud; conspiracy to commit securities fraud; conspiracy to commit money laundering and conspiracy to defraud the United States and violate the campaign finance laws.
The CFTC's suit names Bankman-Fried alongside FTX and Alameda Research. Alongside similar allegations to the criminal and SEC cases, the CFTC claims that Bankman-Fried and other FTX executives took "hundreds of millions of dollars in poorly-documented 'loans' from Alameda that they used to purchase luxury real estate and property, make political donations, and for other unauthorized uses."
Update 12/13 11:30AM ET: This article was updated to include details on the criminal charges and CFTC suits.