The Securities and Exchange Commission (SEC) has filed a litigation release regarding allegations that Sam Bankman-Fried defrauded equity investors in FTX.
The U.S. Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission (CFTC) have also announced charges against Bankman-Fried.
The SEC noted that investigations into other securities law violations, including other entities and individuals, is ongoing, foreshadowing the potential of more charges in the future.
According to the SEC’s complaint from December, FTX Trading Ltd in the Bahamas raised over $1.8 billion from investors, which included around $1.1 billion from US-based investors.
The SEC claims that Bankman-Fried told investors that FTX was a safe and responsible crypto exchange – touting its sophistication including risk mitigation controls but these claims were a misrepresentation.
To quote the complaint:
“Bankman-Fried portrayed himself as a responsible leader of the crypto community. He touted the importance of regulation and accountability. He told the public, including investors, that FTX was both innovative and responsible. Customers around the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform. But from the start, Bankman-Fried improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research LLC (“Alameda”), and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.”
The SEC notes that “the house of cards” began to crumble when crypto markets tanked in 2022.
The complaint alleges that Bankman-Fried pursued a years-long fraud to conceal from FTX’s investors:
(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.
The SEC also alleges that Bankman-Fried comingled user funds with Alameda and used these funds to make significant political donations, purchase real estate and make venture investments.