FTX and Alameda Research founder Sam Bankman-Fried (SBF) was the town’s buzziest megadonor. Over the past couple of years, he had given tens of millions to federal candidates and groups that earned him the poster child of crypto in the eyes of regulators.
The success story turned into a swift trainwreck after his crypto empire collapsed in November. FTX is now being touted as one of the biggest financial frauds in American history, dragging down its orchestrator as well as several other companies into bankruptcy. That has not pushed Bankman-Fried to lay low. In fact, he has been on an aggressive media tour and even jumped on a handful of less formal Twitter spaces for impromptu conversations.
But very little was revealed on camera beyond what reporters have already exposed, and the exec cunningly circumnavigated questions. Despite being apologetic, his emphasis is on negligence and not committing fraud. Regulators, however, aren’t sold.
All the political and philanthropic influence failed to shield the disgraced exec. Bankman-Fried was arrested on criminal charges on 12th December in the Bahamas. The authorities said that the US is likely to formally request extradition where the former exec faces a litany of charges brought by three separate government agencies – the Department of Justice (DOJ), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).
Let’s dive deeper into the charges themselves.
SEC: 2 Counts of Securities Fraud
The US Securities and Exchange Commission (SEC) was the first to announce actions against Bankman-Fried. and charged him with two counts of civil securities fraud. The former FTX chief was accused of violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.
The complaint alleges that Bankman-Fried orchestrated “brazen multi-year” fraud to hide from FTX’s investors about:
- The diversion of customers’ funds to its sister trading Alameda Research LLC,
- The special treatment afforded to Alameda on the FTX platform, including providing the former with a virtually unlimited “line of credit” funded by the bankrupt exchange’s customers and exempting Alameda from certain key risk mitigation measures;
- The risk originating from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets, including FTX-affiliated tokens.
On several occasions, Bankman-Fried had touted FTX to be a safe place to invest because of an automated “risk engine” that would dispose of users’ assets to make sure their collateral stayed at the necessary levels. According to the SEC, however, the exec did not disclose to investors or customers that Alameda had special access to the funds in the exchange and could easily bypass any of the “auto-liquidation” backstops put in place. The hedge fund could also maintain an unlimited negative balance with FTX so that it could use user-deposited funds for trading.
The unlimited negative balance did not have any material impact until the stunning declines in the crypto prices which prompted lenders to demand repayment from Alameda. SBF allegedly directed the firm to pay them with FTX’s funds, giving Alameda access to a “virtually unlimited ‘line of credit” unknowingly funded by the customers of the exchange.
The allegations also focus on Bankman-Fried leveraging “commingled” user funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and political donations in American politics. The regulatory watchdog, in its complaint, seeks injunctions against future securities law violation that bars the exec from participating in the issuance, purchase, offer, or sale of any securities except for his own personal account.
In a statement, SEC Chair Gary Gensler said,
“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.”
CFTC: 2 Counts of Fraud
The United States Commodity Futures Trading Commission (CFTC) filed a complaint against Bankman-Fried, FTX as well as Alameda charging all three defendants with fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce. Two counts of violating the anti-fraud provisions of the Commodity Exchange Act were slapped on the former billionaire – one count of fraud and one count of “fraudulent misstatements” to customers.
The filing stated that the trio’s actions caused the loss of more than $8 billion in FTX customer deposits.
Despite Bankman-Fried distancing himself from the workings of Alameda, CFTC argued that he was in control of the trading firm. According to the complaint, the exec was a signatory on Alameda’s bank accounts and was an “authorized trader” for the hedge fund’s accounts with CFTC futures commissions merchants. Bankman-Fried also allegedly had direct control over all of its major tradings, investment, and financial decisions.
The company alleged that FTX customer deposits, including both fiat currency and crypto-assets, were regularly held by “and/or appropriated” by Alameda for its own use from May 2019 through November 11th, 2022.
The CFTC is now seeking restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.
Department of Justice (DOJ): 8 Criminal Charges
The US Attorney Damian Williams, the lead prosecutor for the Southern District of New York, hit Bankman-Fried with a total of eight criminal charges on 13 December. The Justice Department has also demanded that he forfeits his assets.
According to the official document, the federal prosecutors alleged that the exec has a long-standing history of criminal activity, as far back as 2019, of perpetrating a scheme to defraud customers of FTX by misappropriating billions of dollars of user funds. He’s also accused of making illegal political campaign contributions under aliases, using stolen customer funds from FTX.
The 30-year-old is charged with two counts of wire fraud conspiracy, two counts of wire fraud, and one count of conspiracy to commit money laundering. Each of these carries a maximum sentence of 20 years. Conspiracy to commit commodities fraud, conspiracy to commit securities fraud, and conspiracy to defraud the United States and commit campaign finance violations, were also levied against the founder, each of which carries a maximum sentence of five years.
- 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 commodities fraud
- Conspiracy to commit securities fraud
- Conspiracy to commit money laundering
- Conspiracy to defraud the United States and violate the campaign finance law
If convicted, the exec faces the possibility of decades in prison.
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