The Commodity Futures Trading Commission is reporting that the US District Court for the Southern District of New York has entered a consent order of permanent injunction and other relief against FTX Trading and Alameda Research. The duo has been ordered to pay $12.7 billion in monetary relief to FTX customers and victims of FTX’s fraud. The two related firms filed for bankruptcy following the fraud allegations with assets now being distributed to creditors. Alameda was a crypto hedge fund with “back door” access to the FTX trading platform.
The order requires FTX to pay $8.7 billion in restitution and $4 billion in disgorgement, which will be used to compensate victims for losses suffered as a result of the massive fraud initiated by FTX founder and former CEO Sam Bankman-Fried.
The consent order also finds FTX violated the Commodity Exchange Act (CEA) and CFTC regulations, imposes injunctions against further violations of the CEA and CFTC regulations as well as trading and registration prohibitions, and requires FTX and Alameda to cooperate with the CFTC in its ongoing litigation.
The court noted that FTX promoted itself as “the safest and easiest way to buy and sell crypto,” – a statement which was obviously not true.
In a related settlement agreement approved by the Court, the CFTC agreed not to seek a civil monetary penalty against FTX and to subordinate its monetary claims to those of victims of the FTX fraud scheme.
As described by FTX in its proposed reorganization plan filed in the bankruptcy proceeding, payments by FTX towards its CFTC disgorgement obligation will be used to further compensate victims through a supplemental remission fund. The plan remains subject to approval in the bankruptcy proceeding.
CFTC Chairman Rostin Behnam said that FTX used “age-old” tactics to pursue its fraudulent activities, and customer protections and basic governance were illusory.
“Like countless other CFTC crypto resolutions, including major players Binance, BitMEX, and Tether, this resolution with FTX is consistent with the enforcement commitments I have long made as Chairman. But, as I have been saying for years, this is just the tip of the iceberg. In the absence of digital asset legislation to fill regulatory gaps, entities will continue to operate in the shadows without these basic tools of sound regulation, sharpening their deceptive practices and continuing to dupe customers.”
Division of Enforcement Director Ian McGinley noted the multi-billion dollar recovery for victims the was the largest in CFTC history.
Case Background
The consent order resolves the CFTC’s litigation against FTX, leaving the case pending as to the four individual defendants including Bankman-Fried.
In its continuing litigation, the CFTC seeks restitution to defrauded victims, disgorgement of ill-gotten gains, civil monetary penalties, permanent trading and registration bans, and permanent injunctions against further violations of the CEA and CFTC regulations.
On another note, the CFTC announced a $1 million payment to a whistleblower, which aided in an enforcement action connected to the digital asset markets. This action could be separate from the FTX enforcement action.
