The Securities and Exchanges Commission this week charged former FTX founder and CEO Samuel Bankman-Fried with defrauding equity investors in the crypto trading platform. “Investigations as to other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing,” the agency said.
The agency accused Bankman-Fried of orchestrating a years-long fraud to conceal from FTX’s investors:
1. The undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his crypto hedge fund.
2. Providing Alameda with a virtually unlimited “line of credit” using customer funds and exempting Alameda from certain key FTX risk mitigation measures.
3. The undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.
The SEC complaint also alleges that Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.
“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,” SEC Chair Gary Gensler said. “To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”
The U.S. Attorney for the Southern District of New York and the Commodity Futures Trading Commission (CFTC) also announced charges against Bankman-Fried.
Federal prosecutors secured a criminal indictment, alleging that Bankman-Fried committed eight counts of conspiracy to commit wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission and commit campaign finance violations.
“The charges in the Indictment arise from an alleged wide-ranging scheme by the defendant to misappropriate billions of dollars of customer funds deposited with FTX, the international cryptocurrency exchange founded by the defendant, and mislead investors and lenders to FTX and to Alameda Research, the cryptocurrency hedge fund also founded by the defendant,” the U.S. attorney said.
“At Bankman-Fried’s direction, FTX executives created features in the underlying code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX. FTX Trading executives also created other exceptions to FTX’s standard processes that allowed Alameda to have an unfair advantage when transacting on the platform, including quicker execution times and an exemption from the platform’s distinctive auto-liquidation risk management process,” the CFTC said. Worth noting is that the agency described FTX’s services as offering “trading in a large variety of digital assets, including digital commodities such as bitcoin, ether, tether, and others.”
“FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike,” the SEC said.