Disgraced FTX CEO Sam Bankman-Fried ‘orchestrated years’ worth of fraud’ on investors and clients, SEC and criminal charges say

Disgraced FTX CEO Sam Bankman-Fried ‘orchestrated years’ worth of fraud’ on investors and clients, SEC and criminal charges say

Disgraced FTX CEO Sam Bankman-Fried ‘orchestrated years’ worth of fraud’ on investors and clients, SEC and criminal charges say

Sam Bankman-Fried, the former CEO of cryptocurrency giant FTX, has defrauded investors by funneling money into his private hedge fund and conspired to commit wire fraud against customers and lenders, federal authorities said Tuesday.

Bankman-Fried, 30, the celebrated founder of FTX, was arrested in the Bahamas on Monday, following his indictment by a federal grand jury in the Southern District of New York on Friday, the states attorney told reporters United Damian Williams.

The Manhattan panel indicted Bankman-Fried on 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 merchandise fraud, conspiracy to committing securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the United States and violate campaign finance laws.

“This investigation is very ongoing and moving very quickly,” Williams said. “While this is our first public announcement, it won’t be our last.”

The federal prosecutor has urged all of Bankman-Fried’s business associates to contact investigators sooner rather than later.

“I strongly encourage you to come see us before we come see you,” Williams said.

The indictment alleges that Bankman-Fried knowingly masterminded the scheme to defraud FTX clients by “misappropriating those clients’ deposits and using those deposits to pay the expenses and debts of Alameda Research”, its private crypto hedge fund, to make investments.

$8 billion loss for customers

The wire fraud on lenders and customers began around 2019 and lasted until November 2022, according to the filing.

Gretchen Lowe, acting director of the Commodity Futures Trading Commission’s Enforcement Division, estimated client losses at more than $8 billion.

But that number may pale in comparison to the potential damage to public trust in the system, according to Lowe.

“The rippling consequences of the defendant’s fraud are vast and have done significant damage to the integrity of the evolving market for digital assets,” he said.

The indictment also alleges that Bankman-Fried deceived Alameda lenders into obtaining money and property by providing “false and misleading information to such lenders regarding the financial condition of Alameda Research.”

The indictment also charges Bankman-Fried with campaign finance violations for conspiring with others and making campaign contributions to political candidates and committees in excess of the federal donation limit.

His contributions to candidates for federal office, joint fundraising committees, and independent spending committees totaled $25,000 and more in a calendar year, according to the filing. He also allegedly made corporate contributions to candidates and committees in the Southern District of New York “that were reported in another person’s name.”

I’m looking for influence on both sides of the aisle, the feds say

The “tens of millions of dollars in illegal campaign contributions” were given to “candidates and committees associated with both Democrats and Republicans,” according to Williams.

“These contributions were disguised as appearing to come from wealthy accomplices when in reality the contributions were funded by Alameda Research with money stolen from clients,” the federal prosecutor said.

“All of this dirty money was used in service of Bankman-Fried’s desire to gain bipartisan influence and influence the direction of public policy in Washington.”

Separately, the SEC charged him in a filing Tuesday also in the Southern District of New York, with defrauding investors and enriching his hedge fund Alameda Research LLC.

The SEC said in a press release that Bankman-Fried has raised more than $1.8 billion from equity investors since he founded Bahamas-based FTX in May 2019, and that he allegedly “orchestrated a years-long fraud to hide” undisclosed diversion of FTX clients funds to Alameda.

It also enabled Alameda’s special treatment on the platform, including a “virtually unlimited credit line” funded by the platform’s customers and exempted Alameda from some key FTC risk mitigation measures, the SEC said.

He then allegedly used funds from FTX clients in Alameda “to make undisclosed venture investments, lavish real estate purchases and large political donations.”

The SEC further said that Bankman-Fried hid from investors the “undisclosed risk” from FTX’s exposure to Alameda’s “significant holdings of overvalued and illiquid assets such as FTX-affiliated tokens.”

“We argue that Sam Bankman-Fried built a house of cards based on deception while telling investors it was one of the most secure buildings in crypto,” SEC Chairman Gary Gensler said.

Officials said investigations were underway into other securities law violations in connection with the alleged misconduct.

The SEC complaint accuses Bankman-Fried of violating the anti-fraud provisions of the securities law and seeks injunctions against future securities law violations, meaning that if convicted, he could be banned from future securities trading as well as an individual.

The SEC said the Commodity Futures Trading Commission is also charging Bankman-Fried.

FTX CEO pledges to continue cooperation with probe

Also on Tuesday, a congressional hearing into FTX’s collapse and missteps was underway at which the company’s new CEO, John J. Ray III, testified. Bankman-Fried was due to appear at the hearing before his arrest.

During the House Financial Services Committee hearing, lawmakers shared harsh criticisms of Bankman-Fried with Ranking Member Patrick McHenry, RN.C., calling his arrest “good news.”

Ray spoke about the issues leading up to FTX’s downfall and said his team is working with the Southern District of New York and SEC officials.

“The collapse of the FTX group appears to result from the sheer concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals who have failed to implement virtually any of the systems or controls necessary for a company entrusted with other people’s money or possessions,” Ray told lawmakers.

Bankman-Fried was arrested after US authorities filed criminal charges against him and was arrested in the capital, Nassau, just before 6pm on Monday.

He is expected to appear in court on Tuesday and US authorities are expected to request his extradition.

Bahamian Prime Minister Philip Davis said in a statement that the island nation was continuing a regulatory and criminal investigation into the company’s collapse.

FTX was once seen as the face of the industry, a rumored $32 billion company that attracted celebrity endorsements and major sports endorsements. Bankman-Fried was seen as a crypto prodigy who graced the cover of Forbes and Fortune and had emerged as a top Democratic donor.

But last month, after a cryptocurrency-focused news site released the balance sheet of an investment firm also owned by Bankman-Fried, FTX experienced the equivalent of a bank run: Clients and observers fell wondered if his loans and investments were worth more than his debts. They also questioned whether the company could pay people who attempt to withdraw funds.

Within days, Bankman-Fried resigned and the company filed for bankruptcy. Speaking at the New York Times DealBook Summit Nov. 30, Bankman-Fried said he hadn’t “attempted to defraud anyone.”

CORRECTION (Dec 13, 2022, 7:55 am): An earlier version of this article incorrectly disclosed how much Bankman-Fried raised from equity investors. It was $1.8 billion, not $1.8 million.

Leave a Reply

Your email address will not be published. Required fields are marked *