Prosecutors and regulators say since FTX’s launch, Bankman-Fried funneled client money from the crypto-trading platform to an affiliated hedge fund called Alameda Research, where it became a piggy bank for the 30-year-old and his inner circle to fund a lavish lifestyle and a multimillion-dollar charm offensive in Washington, all while making risky crypto investments. And at every turn, prosecutors and regulators argued in extensive filings this week, Bankman-Fried lied to clients and investors.
If what regulators say is true, Bankman-Fried’s latest media blitz only reinforces his danger, legal experts say. That’s because the former billionaire’s attempt to whitewash his record could help prosecutors prove he knew what he was doing was wrong. A spokesman for Bankman-Fried declined to comment.
“It’s sometimes said that a false exculpatory story is almost as good for the government as a confession,” said Harry Sandick, a former assistant U.S. attorney for the Southern District of New York, who is prosecuting Bankman-Fried. “If you try to cover something up, it makes it more likely that there was something to cover up.”
The former CEO is facing a whirlwind of charges. Federal prosecutors unsealed an eight-count indictment Tuesday, detailing offenses ranging from fraud to money laundering and campaign finance violations. He is in prison in the Bahamas. On Thursday, Bankman-Fried submitted a new request for bail to the Bahamas Supreme Court, according to Eyewitness News. The nation’s highest court will hear his case on Jan. 17 after a judge denied him bail Tuesday, arguing that his financial resources made him a flight risk.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are also filing civil charges against Bankman-Fried. The two market regulators put in a couple of documents of a total of 68 pages a detailed reconstruction of the massive fraud they say the FTX founder led behind the scenes.
The US charges FTX founder Sam Bankman-Fried with criminal fraud
The dramatic contrast between the two sides’ versions of events goes to the heart of FTX’s multibillion-dollar wipeout. Here are four areas where they diverge:
1. Did Bankman-Fried knowingly send FTX client funds to Alameda?
Bankman-Fried has avoided directly addressing him deliberately diverted consumer funds to Alameda, which is at the heart of the government’s case. Pressed by ABC George Stephanopoulos, Bankman-Fried said: “I was not aware of any misuse of client funds.” And in an interview with Andrew Ross Sorkin at the New York Times’ DealBook conference, Bankman-Fried said, “I did not knowingly mix funds. … I was not trying to mix funds.”
The SEC says Bankman-Fried diverted client deposits to his hedge fund, Alameda Research, from the earliest days of FTX’s operations, back to May 2019. The agency says he used the deposits making “undisclosed venture investments, lavish real estate purchases and large political donations.”
According to the SEC, Bankman-Fried had two methods of securing the funds. He encouraged FTX customers to deposit traditional currency into bank accounts controlled by Alameda; and he allowed the hedge fund to draw down a “virtually unlimited” line of credit with FTX funded by customer funds. Bankman-Fried tried to hide the activity, the SEC says, setting up the bank accounts under an Alameda subsidiary called North Dimension that did not publicly mention that affiliation “in an effort to hide the fact that the funds were sent to an account controlled” by the hedge fund.
2. Did Bankman-Fried lead Alameda?
Bankman-Fried said he did not control the firm. “Look, I didn’t run Alameda,” he told DealBook. “I didn’t know exactly what was going on. … It is obviously a rather large error and oversight, which I was not more aware of. I think I was afraid of — I was nervous because of the conflict of interest of being too involved.”
The SEC notes that he owned 90 percent of the company and “remained the ultimate decision-maker” there even after appointing two associates, Caroline Ellison and Sam Trabucco, to serve as co-CEOs in October 2021. He retained “direct decision-making.” authority over all of Alameda’s major trading, investment and financial decisions,” the CFTC added, noting that he remained a signatory on the firm’s bank accounts.
Lawmakers are grappling with the size of FTX’s missing billions
Bankman-Fried and his team used the fund as a “personal piggy bank,” using it for luxury condos, private jets, personal loans and risky private investments, the SEC and CFTC said.
3. Did Bankman-Fried use customer funds to pay off Alameda’s lenders?
The former director denied any knowledge of using FTX client money to pay off debt incurred by his hedge fund. “I don’t know if FTX deposits are being used to pay off Alameda creditors,” Bankman-Fried told ABC’s Stephanopoulos.
However, the SEC says Bankman-Fried diverted eye-popping amounts for that very purpose. The agency says Bankman-Fried’s “house of cards began to crumble” in May, when a downturn in the crypto market prompted other companies Alameda had borrowed from to demand repayment. By that time, the hedge fund had already taken off hundreds of millions of dollars in FTX client funds. But Bankman-Fried “directed FTX to divert billions in customer funds” to maintain ties with lenders and keep the company afloat.
4. Where did Bankman-Fried’s political contributions come from?
Bankman-Fried plowed in at least $40 million into political campaigns this year, making him one of the top donors in the country. He said he made the money, telling DealBook he took it from “basically profits. It was significantly less than the amount of trading profits that Alameda had made over the previous years.”
But the political spending is the focus of one of the Justice Department’s charges, which alleges in part that Bankman-Fried violated a ban on using corporate money for campaigns. The SEC said the funds for the “large political donations” came from customer deposits that Alameda took from FTX.
While prosecutors appear to have plenty of evidence to advance their case, Bankman-Fried’s public relations tour could help them bring it home, said Timothy Howard, a former federal prosecutor in Manhattan. “You could see a prosecutor playing video of the DealBook summit. It’s very persuasive for a jury to see him speak,” he said, especially if Bankman-Fried chooses not to take the stand. “The prosecution would love a closing argument where they just rattle off every lie they think they can prove.”
Paulina Villegas in Nassau, Bahamas, contributed to this report.