The Securities and Exchange Commission today charged FTX founder and former CEO, Samuel Bankman-Fried, with organizing a scheme to defraud investors in crypto trading platform FTX trading Ltd.
The official press release mentioned there is currently an investigation into other securities law violations. The agency seeks injunctions against future securities law violations and a ban on Bankman-Fried, as well as a civil penalty.
FTX’s collapsed happened in the beginning of November, starting with a liquidity crisis which shed light into transfers of customers’ fund to crypto trading firm Alameda Research, also owned by Bankman-Fried.
SEC alleges that from May 2019, FTX’s Bahamas-based business raised more than $1.8 billion from equity investors, including $1.1 billion gathered from 90 US-based investors. The US regulator highlighted that the former CEO presented FTX as safe crypto trading platform with sophisticated, automated risk measures in place to protect customers assets. According to the financial markets watchdog, Bankman-Fried “orchestrated a years-long fraud to conceal from FTX’s investors” the transfer of funds to his privately-held crypto hedge fund and the preferential treatment of Alameda on the FTX platform.
Furthermore, SEC noted that FTX’s founder provided Alameda with an almost unlimited “line of credit” funded by the platform’s customers and freeing Alameda from certain key FTX risk mitigation measures. Additionally, he failed to disclose the risk coming from the trading platform’s exposure to Alameda’s substantial holdings of overvalued, illiquid assets such as FTX-affiliated tokens.
The agency also pointed out as a key problem that Bankman-Fried kept the funds of Alameda and FTX mixed up together. The regulator alleges that he used that to make undisclosed investments, luxurious real estate purchases, and large political donations.
SEC Chair Gary Gensler commented:
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. 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. 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.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, added:
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. FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike.
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 Commodity and Futures Trading Commission (CFTC) has also announced charges against Bankman-Fried in a parallel case.
Bankman-Fried was arrested yesterday in the Bahamas, just a day prior to he was to testify virtually before the U.S. House Financial Services Committee. This was supposed to be his first hearing since the collapse of FTX.
The arrest comes as criminal charges have been filed against the Bankman-Fried and is expected that the US is going to request an extradition.
U.S. Attorney’s Office for the Southern District of New York, said on Twitter:
USA Damian Williams: Earlier this evening, Bahamian authorities arrested Samuel Bankman-Fried at the request of the U.S. Government, based on a sealed indictment filed by the SDNY. We expect to move to unseal the indictment in the morning and will have more to say at that time.
The official criminal charges against the former FTX CEO brought by the US attorney are unknown at this moment. The New York Times has stated that they might include wire fraud, securities fraud, money laundering, and possibly conspiracy charges.
