Just one month after his $32 billion crypto empire collapsed in bankruptcy, Sam Bankman-Fried, the founder and now ex-CEO of FTX Group, is facing both criminal and civil charges on an alleged fraud purported to have gone on since FTX’s very beginning.
Bankman-Fried, who was arrested in the Bahamas Monday, was charged Tuesday with defrauding FTX’s customers and lenders. He also faces charges of securities and commodities conspiracy, as well as money laundering and campaign finance violations.
“Bankman-Fried agreed with others to defraud customers of FTX.com by misappropriating those customers’ deposits and using those deposits to·pay expenses and debts of Alameda Research, Bankman-Fried’s proprietary crypto hedge fund, and to make investments,” Damian Williams, the U.S. attorney for the Southern District of New York, alleged in the indictment.
FTX was headquartered in the Bahamas. No date has been set for Bankman-Fried’s extradition to the U.S.
The Securities and Exchange Commission also charged Bankman-Fried with fraud in a separate civil action on Tuesday. SEC chair Gary Gensler said the ex-CEO “built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.”
Bankman-Fried’s arrest came less than 24 hours before he was scheduled to testify before the House Committee on Financial Services on the collapse of his firm. Bankman-Fried had originally balked at testifying before he eventually relented. The congressional testimony would have been under oath, which could have put him at risk of perjury charges if he lied.
Despite his apparent reluctance to testify under oath, the disgraced crypto kingpin had spent the last few weeks conducting a blizzard of media interviews and Twitter Spaces conversations. He repeatedly apologized for the collapse, but said he was unaware of the movement of customer deposits from FTX to Alameda, seeming to cast the blame for any alleged wrongdoing on Alameda’s CEO Caroline Ellison, his onetime girlfriend.
In contrast to Bankman-Fried’s statements, however, the SEC said the FTX founder “remained the ultimate decision-maker at Alameda.”
(Ellison, who has not been charged, has hired a former SEC crypto investigator as her criminal defense attorney. She was recently photographed in New York City, leading to speculation that she is cooperating with the authorities.)
According to the SEC, Bankman-Fried’s fraud goes back to the firm’s beginning.
“From at least May 2019 through November 2022, Bankman-Fried engaged in a scheme to defraud equity investors in FTX Trading Ltd. (‘FTX’), the crypto asset trading platform of which he was CEO and co-founder, at the same time that he was also defrauding the platform’s customers,” the SEC said in its complaint.
The regulator alleged that Bankman-Fried was “orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire.”
The SEC said the ex-CEO used customer funds “to make undisclosed venture investments, lavish real estate purchases, and large political donations.”
The fraud grew after the crypto market tanked in May of 2022, which led Alameda’s lenders to demand repayment of loans, according to the SEC.
“Despite the fact that Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations,” the SEC said. “Bankman-Fried directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors.”
And while Bankman-Fried told investors that his trading platform had an advantage due to an automated risk mitigation system, he did not disclose that Alameda was exempted from such controls.
Alameda’s “multi-billion-dollar liability was reflected in an internal account in the FTX database that was not tied to Alameda but was instead called ‘fiat@ftx.com,’” the SEC alleged. “Characterizing the amount of customer funds sent to Alameda as an internal FTX account had the effect of concealing Alameda’s liability in FTX’s internal systems.”
Bankman-Fried, an MIT graduate who had previously worked at algorithmic trading firm Jane Street, convinced some of the most sophisticated investors to finance him, including names like Sequoia Capital, Tiger Global Management and Third Point. Some of these investors — including Third Point’s Dan Loeb — even agreed to be on an FTX board of advisors.
But Bankman-Fried lied to them to get their backing, according to the SEC. “Not only did Bankman-Fried fail to tell investors that he had exempted Alameda from FTX’s risk engine, he also falsely told certain investors that FTX had no exposure to FTT.” (FTT was the proprietary token of FTX, which was used as collateral for loans FTX made to Alameda.)
During its series B fundraising round in the summer of 2021, Bankman-Fried told one investor who put in $30 million that FTX did not hold FTT, according to the SEC.
As the SEC noted, Bankman-Fried promoted himself as a “visionary leader” in crypto. He donated millions to lawmakers and made dozens of trips to Washington to meet with lawmakers and regulators — including SEC Chair Gensler. Bankman-Fried was also behind legislative efforts to regulate crypto through the CFTC, which the industry viewed as less aggressive than the SEC. The legislation would have given FTX the authority to settle its own trades, which critics point out is how Bernie Madoff was able to conduct his ponzi scheme for years without detection.
Bankman-Fried “conducted an intensive public relations campaign to brand himself and his companies as honest stewards of crypto,” the SEC said. “The reality was very different.”
