According to an indictment from the US Attorney for the Southern District of New York, FTX founder Samuel Bankman-Fried was indicted on eight criminal charges, including wire fraud and conspiracy by misusing customer funds.
Bankman-Fried, 30, was arrested at his home in the Bahamas on Monday and was scheduled to appear in court in Nassau on Tuesday for an extradition hearing.
Separately, US securities regulators charged Sam Bankman-Fried with defrauding investors and customers through his failed cryptocurrency exchange FTX on Tuesday.
According to the Securities and Exchange Commission, Bankman-Fried “orchestrated a years-long fraud” to conceal the diversion of customer funds to Alameda Research, his crypto trading hedge fund, from FTX investors.
“We allege that Sam Bankman-Fried built a house of cards on deception while telling investors it was one of the safest buildings in crypto,” SEC Chair Gary Gensler said in a statement.
In a parallel action with the SEC, the Commodity Futures Trading Commission also charged Bankman-Fried.
Ad Feedback regulators warned that this could be the first of many charges. The SEC stated that investigations into “other securities law violations” as well as other entities and individuals are ongoing.
“Mr. Bankman-Fried is reviewing the charges with his legal team and considering all of his legal options,” said Bankman-attorney, Fried’s Mark S. Cohen, in a statement.
Bankman-Fried, also known as “SBF,” is a crypto celebrity who became a pariah overnight after his company experienced a liquidity crisis and declared bankruptcy last month, leaving at least a million depositors unable to access their funds.
Charges of conspiracy and fraud
Prosecutors in the Southern District of New York unveiled an indictment Tuesday charging Bankman-Fried with wire fraud and multiple counts of conspiracy, including conspiracy to defraud investors, lenders, and the United States, commit commodities and securities fraud, money laundering, and violate campaign finance laws.
Prosecutors claim Bankman-Fried and others conspired on a number of schemes, including misusing customer deposits held in FTX to cover Alameda’s expenses. Bankman-Fried is also accused of defrauding Alameda’s lenders by providing false information about the hedge fund’s financial condition.
The 14-page indictment also alleges that Bankman-Fried conspired with others to violate federal election laws by making political donations to federal candidates and joint fundraising committees in excess of federal legal limits and in the names of others between 2020 and November 2022.
Risky wagers, extravagant spending
Since its inception in May 2019, FTX has raised more than $1.8 billion in funding, including from sophisticated investors such as BlackRock, Sequoia Capital, and the Ontario Teachers’ Pension Plan. Star athletes and celebrities who backed FTX, including Tom Brady and Gisele, reportedly received stock in the company.
The SEC claims that Bankman-Fried misled investors who supported FTX by portraying it as a “safe, responsible” crypto trading firm that used “sophisticated, automated” risk management to protect customer funds.
According to the complaint, Bankman-Fried secretly diverted FTX customer funds to effectively provide Alameda with a “unlimited ‘line of credit.'” According to the SEC, Bankman-Fried also concealed from investors the risk associated with FTX’s exposure to significant holdings of overvalued, illiquid assets such as FTX-related tokens.
Bankman-Fried did not simply invest FTX customer funds in his hedge fund. The SEC claims he used the funds to make undisclosed venture investments, “opulent” real estate purchases, and large political contributions.
“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by 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,” said Gurbir Grewal, director of the SEC’s division of enforcement, in a statement. “However, as we allege in our complaint, that veneer was not only thin, but also fraudulent.”
‘I messed up.’
In the four weeks since FTX declared bankruptcy, Bankman-Fried has attempted to portray himself as a somewhat hapless CEO who got out on his skis, denying allegations that he defrauded FTX’s customers.
“I didn’t do it knowingly,” he told the BBC over the weekend. “I didn’t intend for any of this to happen. I was clearly not as capable as I thought I was.”
Bankman-Fried, on the other hand, has previously admitted to making mistakes while leading FTX, from which he stepped down last month after it declared bankruptcy.
“Look, I screwed up,” Bankman-Fried admitted during a virtual visit to the New York Times’ DealBook Summit. “There are some things I would do over again.”
The speed with which Bankman-Fried was apprehended surprised observers, including US lawmakers. Lawyers who aren’t involved in the case speculated that the quick turnaround indicates that former FTX employees are assisting prosecutors.
“Given Bankman-apparent Fried’s inability to stop talking,” said Howard A. Fischer, a former SEC lawyer, “the smart move by former employees would be to rush to become a cooperator in exchange for more lenient treatment, and it would not be surprising to learn that one or more of them had done so.” “The fact that only one person has been charged thus far would seem to indicate this as well,” he added.
The case, according to Andrew Jennings, an assistant professor at Brooklyn Law School, “has come together remarkably quickly for such a complex matter.”
“The SEC’s civil suit…includes detailed behind-the-scenes allegations about what Bankman-Fried did and knew, implying that the government received valuable assistance from informants, including potential co-conspirators.”
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