When it rains, it pours. Hours after former FTX CEO Sam Bankman-Fried was arrested in the Bahamas at the request of U.S. prosecutors, the Securities and Exchange Commission has filed charges alleging that he defrauded investors and customers in a years-long scheme.
“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 in a statement, calling the charges a “clarion call” to other crypto platforms to comply with securities law.
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“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.
The SEC is accusing Bankman-Fried of running a fraudulent crypto empire where billions of dollars in FTX customer funds were funnelled to sister hedge fund Alameda Research both directly via transfers and by drawing on an infinite line of credit at FTX. The SEC alleges that there was no real distinction between the two entities, and that Alameda Research commingled FTX customer funds with its own assets. The SEC further alleges that while this was going on, Bankman-Fried touted himself to investors as a responsible CEO paying keen attention to risk management in order to secure more funding, when in reality he was running a massively fraudulent scheme.
Despite his humble public image, the SEC also points to Bankman-Fried’s “lavish” spending in the Bahamas—for example, on a multi-million dollar condo—and to personal loans FTX made to Bankman-Fried and other top executives using commingled funds as further evidence that he defrauded investors and clients.
Since the sudden collapse of Bankman-Fried’s crypto empire last month, he has gone on a press tour that has had the main goal of portraying himself as not having a clue what was really going on at FTX. The SEC, however, alleges Bankman-Fried was the “ultimate decision-maker” at both FTX and Alameda until he resigned after they went bankrupt.
Besides the SEC’s charges, the CFTC is also expected to bring its own charges against Bankman-Fried. While U.S. prosecutors have yet to formally announce their own charges, the New York Times reported that they are also related to wire fraud, securities fraud, and money laundering.
“FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike,” Grewal said. “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.”
