The Securities and Exchange Commission (SEC) has filed fraud charges against Sam Bankman-Fried, founder and former CEO of FTX. The crypto exchange filed bankruptcy last month as allegations of malfeasance surfaced. In a simultaneous action, the Commodities Futures Trading Commission (CFTC) announced charges as well.
According to the SEC’s complaint:
“Bankman-Fried raised more than $1.8 billion from investors, including U.S. investors, who bought an equity stake in FTX believing that FTX had appropriate controls and risk management measures. Unbeknownst to those investors (and to FTX’s trading customers), 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 complaint also states:
“When prices of crypto assets plummeted in May 2022, Alameda’s lenders demanded repayment on billions of dollars of loans. 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. 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.”
Yesterday, the US Department of Justice announced criminal charges against Bankman-Fried. The Bahamas, where Bankman-Fried is located, has stated it would extradite Bankman-Fried once a formal request was made.
The SEC claims that Bankman-Fried orchestrated a scheme to defraud equity investors in FTX Trading Ltd. (FTX). The SEC said that investigations into other violations and into other entities and persons are ongoing.
The SEC said that approximately 90 US-based investors backed Bankman-Fried, who represented the platform as safe and responsible, incorporating sophisticated risk protocols. In reality, the SEC alleges nothing could be further from the truth as Bankman-Fried pursued a multi-year fraud, concealing:
(1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund;
(2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures; and
(3) undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.
Additionally, the SEC claims that Bankman-Fried comingled funds with Alameda making undisclosed investments while purchasing lavish real estate properties and showering politicians with large donations.
SEC Chairman Gary Gensler issued the following statement:
“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. 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. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said FTX operated behind a veneer of legitimacy while touting best-in-class controls.
“FTX’s adherence to specific investor protection principles and detailed terms of service. But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent. FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike. While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers.”
The SEC’s complaint charges Bankman-Fried with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s complaint seeks injunctions against future securities law violations; an injunction that prohibits Bankman-Fried from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar.
SEC v. FTX 12.13.22