Sam Bankman-Fried, the former CEO of cryptocurrency giant FTX, defrauded investors by funneling money into his private hedge fund and conspired to commit bank fraud against customers and lenders, federal authorities said Tuesday.
Bankman-Fried, 30, the once-famous founder of FTX, was arrested in the Bahamas on Monday, following his indictment by a federal grand jury in the Southern District of New York on Friday, US Attorney Damian Williams told reporters.
The Manhattan panel indicted Bankman-Fried on eight counts: conspiracy to commit customer fraud, conspiracy to commit customer fraud, conspiracy to commit wire fraud against lenders, conspiracy to commit wire fraud against lenders, conspiracy to commit securities fraud, conspiracy to commit securities fraud, to commit money laundering and conspiracy to defraud the United States and violate campaign finance laws.
“This investigation is very ongoing and it̵[ads1]7;s moving very quickly,” Williams said. “While this is our first public announcement, it will not be our last.”
The federal prosecutor urged all business associates of Bankman-Fried to contact investigators sooner rather than later.
“I would strongly encourage you to come see us before we come to you,” Williams said.
The indictment alleges that Bankman-Fried knowingly engineered the scheme to defraud customers of FTX by “misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research,” his own privately held crypto hedge fund, to make investments.
8 billion dollar loss for customers
Bank fraud against lenders and customers began in or around 2019 and lasted until November 2022, according to the filing.
Gretchen Lowe, acting director of the Commodity Futures Trading Commission’s Division of Enforcement, pegged customer losses at more than $8 billion.
But that number may pale in comparison to the potential damage to public confidence in the system, according to Lowe.
“The ripple effects of the defendant’s fraud are enormous and have done significant damage to the integrity of the developing digital asset market,” she said.
The indictment also alleges that Bankman-Fried defrauded lenders to Alameda by obtaining money and property by providing “false and misleading information to those lenders regarding Alameda Research’s financial condition.”
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 candidates for federal office, joint fundraising committees and independent expenditure committees totaled $25,000 and more in a calendar year, according to the filing. He also allegedly made corporate contributions to candidates and committees in the Southern District of New York “that were reported in another person’s name.”
Seeking influence on both sides of the aisle, FBI says
The “tens of millions of dollars in illegal campaign contributions” were given to “candidates and committees affiliated with both Democrats and Republicans,” according to Williams.
“These contributions were disguised to appear as if they came from wealthy co-conspirators, when in fact the contributions were funded by Alameda Research with stolen client money,” the federal prosecutor said.
“All of this dirty money was used to serve Bankman-Fried’s desire to buy bipartisan influence and influence the direction of public policy in Washington.”
Separately, the SEC accused him in a filing Tuesday, 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 raised more than $1.8 billion from equity investors since he founded FTX in May 2019, based in the Bahamas, and that he allegedly “orchestrated a year-long fraud to conceal” the undisclosed diversion of FTX customers’ funds to Alameda.
He also allowed the undisclosed special treatment of Alameda on the platform, including a “virtually unlimited line of credit” funded by the platform’s customers and exempting Alameda from certain key FTC risk mitigation measures, the SEC said.
He then allegedly used FTX clients’ funds at Alameda “to make undisclosed venture investments, lavish real estate purchases and large political donations.”
The SEC further alleged that Bankman-Fried hid from investors “undisclosed risks” from FTX’s exposure to Alameda’s “substantial holdings of overvalued, illiquid assets such as FTX-linked tokens.”
“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors it was one of the safest buildings in crypto,” SEC Chairman Gary Gensler said.
Officials said investigations into other securities offenses related to the alleged misconduct are ongoing.
The SEC’s complaint accuses Bankman-Fried of violating the anti-fraud provisions of the Securities Act and seeks an injunction against future violations of the Securities Act, meaning that if convicted, he could be barred from future securities trading beyond as an individual.
The SEC said the Commodity Futures Trading Commission is also charging Bankman-Fried.
FTX boss promises continued exploration cooperation
Also on Tuesday, a congressional hearing on FTX’s collapse and missteps took place where the company’s new CEO, John J. Ray III, testified. Bankman-Fried was scheduled to appear at the hearing before he was arrested.
During the House Financial Services Committee hearing, lawmakers shared harsh criticism of Bankman-Fried with Ranking Member Patrick McHenry, RN.C., calling his arrest “welcome 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 have stemmed from the absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls necessary for a company entrusted with other people’s money or assets,” 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 just before 6pm on Monday.
He is expected to appear in court on Tuesday, and US authorities are expected to request his extradition.
Bahamas Prime Minister Philip Davis said in a statement that the island nation is continuing a regulatory and criminal investigation into the company’s collapse.
FTX was once seen as the face of the industry, a company reported to be worth $32 billion that attracted celebrity endorsements and major sports sponsorships. Bankman-Fried was seen as a crypto underdog who graced the cover of Forbes and Fortune and had emerged as a major Democratic donor.
But last month, after a crypto-focused news site published the balance sheet of an investment firm also owned by Bankman-Fried, FTX experienced the equivalent of a bank run: Customers and observers questioned whether the loans and investments were worth more than the debt. . They also questioned whether the company could pay people who try to withdraw money.
Within days, Bankman-Fried resigned and the company filed for bankruptcy protection. Speaking at The New York Times DealBook Summit on Nov. 30, Bankman-Fried said he was not “trying to defraud anybody.”
CORRECTION (December 13, 2022, 7:55 am): An earlier version of this article misstated how much Bankman-Fried raised from equity investors. It was $1.8 billion, not $1.8 million.