Prosecutors and regulators say that since the launch of FTX, Bankman-Fried has funneled client money from the cryptocurrency trading platform to an affiliated hedge fund called Alameda Research, where it has become a piggy bank for the 30-year-old and his inner circle to finance a lavish lifestyle and a multi-million dollar glamor offensive in Washington, all by making risky investments in cryptocurrencies. And at every turn, prosecutors and regulators argue in sweeping statements this week, Bankman-Fried lied to clients and investors.
If what regulators say is true, Bankman-Fried’s recent media blitz only adds to his danger, legal experts say. That’s because the former billionaire’s attempts to whitewash his record could help prosecutors prove he knew what he did was wrong. A Bankman-Fried spokesperson declined to comment.
“Sometimes it’s said that a false exculpatory story is almost as good for the government as a confession,” said Harry Sandick, a former assistant U.S. attorney in the Southern District of New York who is pursuing the criminal case. against Bankman-Fried. “If you’re trying to hide something, it’s more likely that there was something to hide.”
The former chief executive faces a series of accusations. Federal prosecutors on Tuesday revealed an eight-count indictment, detailing felonies from fraud to money laundering and campaign finance violations. He is in prison in the Bahamas. On Thursday, Bankman-Fried filed a new bail request with the Supreme Court of the Bahamas, according to Eyewitness News. The nation’s highest court will hear his case on January 17 after a judge denied him bail on Tuesday arguing his financial resources made him a flight risk.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are also filing civil suits against Bankman-Fried. The two market regulators, in a pair of documents totaling 68 pages, presented a detailed reconstruction of the massive fraud that, according to them, the founder of FTX directed behind the scenes.
US accuses FTX founder Sam Bankman-Fried of criminal fraud
The dramatic contrast between the two sides’ versions of events goes to the heart of FTX’s multi-billion dollar destruction. Here are four areas where they diverge:
1. Did Bankman-Fried knowingly send FTX client funds to Alameda?
Bankman-Fried avoided addressing him directly deliberately diverted consumer funds to Alameda, which is fundamental to the case of government. Pressed by ABC George Stephanopoulos, Bankman-Fried said: “I didn’t know there was any misuse of client funds.” And in an interview with Andrew Ross Sorkin at the New York Times DealBook conference, Bankman-Fried said, “I have not knowingly mixed funds. … I wasn’t looking to merge funds.
The SEC says Bankman-Fried diverted client deposits to its hedge fund, Alameda Research, from the early days of FTX’s operations, through May 2019. The agency says it used the deposits to make “undisclosed venture investments, lavish real estate purchases and large political donations”.
According to the SEC, Bankman-Fried had two methods of guaranteeing the funds. It encouraged FTX customers to deposit traditional currency into Alameda-controlled bank accounts; and allowed the hedge fund to draw on a “virtually unlimited” credit line at FTX funded by client assets. Bankman-Fried tried to cover up the activity, the SEC says, by opening bank accounts under an Alameda branch called North Dimension that made no public mention of that affiliation “in an effort to hide the fact that the funds were being sent to a controlled account” by the hedge fund.
2. Bankman-Fried directed Alameda?
Bankman-Fried said he doesn’t control the company. “Look, I didn’t manage Alameda,” he told DealBook. “I didn’t know exactly what was going on. …Obviously, this is a big mistake and an oversight, which I was no longer aware of. I think I was afraid of — I was nervous because of the conflict of interest about getting too involved.
The SEC notes that he owned 90 percent of the company and “remained the final decision maker” even after appointing two partners, Caroline Ellison and Sam Trabucco, as co-CEOs in October 2021. He retained “direct decision-making authority over all Alameda’s major business, investment and financial decisions,” the CFTC added, noting that it remained a signatory on the company’s bank accounts.
Lawmakers are grappling with the sheer scale of FTX’s missing billions
Bankman-Fried and his team have been using the fund as a “personal piggy bank,” leveraging it for luxury condos, private jets, personal loans and risky private investments, the SEC and CFTC said.
3. Did Bankman-Fried use client funds to pay off Alameda’s creditors?
The former executive denied any knowledge of FTX clients’ money being used to pay off debts his hedge fund had accumulated. “I don’t know if the FTX deposits are being used to pay off Alameda’s creditors,” Bankman-Fried told ABC’s Stephanopoulos.
The SEC, however, says Bankman-Fried diverted mind-boggling amounts for just that purpose. The agency says Bankman-Fried’s “house of cards” began to unravel in May, when a downturn in the cryptocurrency market prompted other companies Alameda had borrowed from to seek repayments. By then, the hedge fund had already embezzled hundreds of millions of dollars in FTX client funds. But Bankman-Fried “ordered FTX to divert billions more in client assets” to maintain its ties to its lenders and keep the firm afloat.
4. Where do Bankman-Fried’s political contributions come from?
Bankman-Fried has invested at least $40 million in political campaigns this year, making him one of the top donors in the country. He said he made the money, telling DealBook he got it from “basically, profits. It was substantially less than the amount of trading profits Alameda had made in previous years.
But political spending is at the heart of one of the Justice Department’s allegations, which argues in part that Bankman-Fried violated a ban on using corporate money for campaigns. The SEC said the funds for “large political donations” came from customer deposits that Alameda withdrew from FTX.
While prosecutors appear to have ample evidence to support their case, Bankman-Fried’s public relations tour could help them drive it home, said Timothy Howard, a former Manhattan federal prosecutor. “You may see a prosecutor playing a video of the DealBook summit. It’s very compelling for a jury to watch him speak,” he said, especially if Bankman-Fried decides not to take sides. “Prosecutors would like a closing argument in which they just rattle off every lie they think they can prove.”
Paulina Villegas of Nassau, Bahamas contributed to this report.
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