Disgraced FTX CEO Sam Bankman-Fried ‘orchestrated yearslong fraud’ on investors and customers, SEC and criminal charges say

Sam Bankman Friedthe former CEO of cryptocurrency giant FTX, defrauded investors by funneling money to his private hedge fund and conspired to commit wire fraud against clients and lenders, federal authorities said Tuesday.

Bankman-Fried, 30, the famous founder of FTX, was arrested in the Bahamas Monday, following his indictment by a federal grand jury in the Southern District of New York on Friday, U.S. Attorney Damian Williams told reporters.

Bahamas Chief Justice Joyann Ferguson-Pratt denied Bankman-Fried’s bail request, saying she was unhappy with her legal team’s arguments. A hearing on his extradition to the United States is scheduled for February 8.

The Manhattan panel charged Bankman-Fried with eight counts: conspiracy to commit wire fraud on customers, wire fraud on customers, conspiracy to commit wire fraud on lenders, wire fraud on lenders, conspiracy to commit commodity fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and a conspiracy to defraud the United States and violate the laws on campaign finance.

“This investigation is ongoing and moving very quickly,” Williams said. “While this is our first public announcement, it won’t be our last.”

The federal prosecutor urged all Bankman-Fried business associates to contact investigators as soon as possible.

“I strongly encourage you to come see us before we come see you,” Williams said.

The indictment alleges that Bankman-Fried knowingly engineered the scheme to defraud FTX customers by “diverting deposits from those customers and using those deposits to pay the expenses and debts of Alameda Research,” his own. private crypto hedge fund, to make investments.

$8 billion in customer losses

The wire fraud on lenders and customers began around 2019 and lasted until November, according to the filing.

Gretchen Lowe, acting director of the enforcement division of the Commodity Futures Trading Commission, estimated customer losses at more than $8 billion.

But that number might pale in comparison to the potential damage to public trust in the system, according to Lowe.

“The rippling consequences of defendant’s fraud are wide-ranging and have caused significant damage to the integrity of the evolving digital asset market,” she said.

The indictment also alleges that Bankman-Fried tricked Alameda’s lenders into obtaining money and property by providing “false and misleading information to such lenders regarding the financial condition of Alameda Research.”

The indictment also charges Bankman-Fried with campaign finance violations for conspiring with others and making campaign contributions to candidates and political committees above the federal donation limit.

His contributions to federal election candidates, joint fundraising committees and independent spending committees totaled $25,000 and more in a calendar year, according to the record. He also allegedly made corporate contributions to candidates and committees in the Southern District of New York “that were reported in someone else’s name.”

Seeking influence from both sides of the aisle, says feds

The “tens of millions of dollars in illegal campaign contributions” were made to “candidates and committees associated with both Democrats and Republicans,” according to Williams.

“These contributions were disguised to appear to have come from wealthy co-conspirators when, in fact, the contributions were funded by Alameda Research with money from stolen clients,” the federal prosecutor said.

“All that dirty money was used in service of Bankman-Fried’s desire to buy bipartisan influence and impact the direction of public policy in Washington.”

Separately, the SEC accused him in a Tuesday filing, also in the Southern District of New York, of defrauding investors and enriching his hedge fund Alameda Research LLC.

The SEC said in a press release that Bankman-Fried has raised more than $1.8 billion from equity investors since he founded the Bahamas-based FTX in May 2019 and would ” orchestrated a year-long fraud to cover up” the undisclosed embezzlement of FTX customers. funds in Alameda.

It also authorized Alameda’s undisclosed special treatment on the platform, including a “virtually unlimited line of credit” funded by the platform’s customers and exempted Alameda from certain key risk mitigation measures. from the FTC, the SEC said.

He then allegedly used funds from FTX clients at Alameda “to make undisclosed venture capital investments, lavish real estate purchases, and large political donations.”

The SEC further alleged that Bankman-Fried concealed from investors an “undisclosed risk” related to FTX’s exposure to Alameda’s “significant holdings of overvalued and illiquid assets such as FTX-affiliated tokens.”

“We allege that Sam Bankman-Fried built a house of cards based on deception while telling investors that it was one of the safest buildings in crypto,” the chairman said. the SEC, Gary Gensler.

Officials said investigations into other securities law violations related to the alleged misconduct are ongoing.

The SEC complaint accuses Bankman-Fried of violating securities law anti-fraud provisions and seeks injunctions against future securities law violations, meaning that if found guilty, he may be prohibited from future trading in securities beyond that as an individual.

The SEC said the Commodity Futures Trading Commission is also charging Bankman-Fried.

FTX CEO pledges further investigative cooperation

Also on Tuesday, a congressional hearing into FTX’s collapse and missteps was underway at which the company’s new CEO, John J. Ray III, testified. Bankman-Fried was scheduled to appear in court before his arrest.

During the House Financial Services Committee hearing, lawmakers shared harsh criticism of Bankman-Fried with ranking member Patrick McHenry, RN.C., calling his arrest “good news “.

Ray spoke about the issues that led to FTX’s downfall and said his team is cooperating with the Southern District of New York and SEC officials.

“The collapse of the FTX Group appears to stem from an absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals who have implemented virtually none of the systems or controls necessary for a busy business money or assets of others,” Ray told lawmakers.

Bankman-Fried was arrested after US authorities filed criminal charges against him and he was taken into custody in the capital, Nassau, shortly before 6 p.m. Monday.

In a statement Tuesday, an attorney for Bankman-Fried said his client is “reviewing the charges with his legal team considering all of his legal options.”

Bahamas Prime Minister Philip Davis said in a statement that the island nation was pursuing a regulatory and criminal investigation into the company’s collapse.

FTX was once considered the face of the industry, a $32 billion company that attracted celebrities and major sports endorsements. Bankman-Fried was considered a crypto prodigy who graced the cover of Forbes and Fortune and had become a major Democratic donor.

But last month, after the publication of a crypto-focused news site the balance sheet of an investment firm also owned by Bankman-Fried, FTX experienced the equivalent of a bank run: customers and observers wondered if its loans and investments were worth more than its debts. They also wondered if the company could pay people trying to withdraw funds.

Within days, Bankman-Fried resigned and the company filed for bankruptcy protection. Speaking at the New York Times DealBook Summit on November 30Bankman-Fried said he didn’t “try to defraud anyone.”

CORRECTION (December 13, 2022, 7:55 a.m.): An earlier version of this article misrepresented how much Bankman-Fried had raised from equity investors. It was $1.8 billion, not $1.8 million.

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