FTX founder Sam Bankman-Fried faces the potential of a lengthy prison sentence, after US charges against him began to be unveiled.

Bahamian authorities had arrested Sam Bankman-Fried at the request of US prosecutors, based on a sealed indictment, and he is scheduled to appear on Tuesday in a magistrates’ court in the Caribbean country’s capital, Nassau.

He is expected to be extradited to the United States to face charges there.

Fraud charges

Now the US financial regulator, the Securities and Exchanges Commission (SEC), has announced its official charges against Sam Bankman-Fried.

The federal agency alleged that the defendant concealed his diversion of FTX customers’ funds to crypto trading firm Alameda Research, while raising more than $1.8 billion from investors, including approximately $1.1 billion from approximately 90 US-based investors.

“The Securities and Exchange Commission today charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder,” the SEC announced. “Investigations as to other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.”

The SEC said that in his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets.

The complaint alleges that, in reality, Bankman-Fried orchestrated 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 complaint further alleges that Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.

House of cards

“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,” said SEC Chair Gary Gensler. “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,” said Gensler. “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.”

“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and 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,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

“FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike,” Grewal added. “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.

Separate charges would be announced by the U.S. Attorney’s Office for the Southern District for New York and the Commodity Futures Trading Commission later on Tuesday, the SEC said.

FTX collapse

The spectacular collapse last month of FTX, one of the world’s largest cryptocurrency exchanges, came after traders sought to withdraw $6 billion from the platform in just 72 hours.

FTX Crypto Exchange Files For Bankruptcy, CEO Resigns

The collapse of FTX is also under investigation in Bahamas where it is headquartered, and has resulted in regulators seizing nearly a half-billion dollars in assets from the firm.

FTX Under ‘Active’ Investigation In Bahamas

According to a court filing last month, FTX owes its 50 biggest creditors some $3.1 billion (£2.6bn), with two creditors owed more than $200m each.

FTX Owes Top 50 Creditors $3.1bn

Current FTX CEO John Ray lambasted the previous management of FTX, saying “never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

Lawsuit Against FTX Founder, As New Boss Slams Previous Management

The US Department of Justice earlier this month called for an ‘independent investigation’ into FTX, after it filed for bankruptcy in November after a possible merger with rival crypto exchange Binance failed to materialise.

DoJ Watchdog Seeks Investigation Into FTX Collapse


https://www.silicon.co.uk/e-enterprise/merger-acquisition/crypto-market-rocked-as-binance-drops-ftx-rescue-deal-485213

Tom Jowitt

Tom Jowitt is a leading British tech freelancer and long standing contributor to Silicon UK. He is also a bit of a Lord of the Rings nut...

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