Police in The Bahamas on Monday nabbed Sam Bankman-Fried (SBF), former CEO of failed cryptocurrency exchange FTX and crypto hedge fund Alameda Research, at the request of the US government, based on charges filed by multiple federal agencies.
On Tuesday, following that arrest, those charges were made public and are expected to be followed by a request to extradite SBF from the Bahamas to the US.
Prosecutors for the Southern District of New York filed an eight-count criminal indictment [PDF] for conspiracy to commit wire fraud and securities fraud; committing securities fraud wire fraud, and money laundering; and conspiracy to violate campaign finance rules.
The Feds contend that from about November 2019 up through the collapse of FTX and affiliated companies in November 2022, SBF participated in a scheme to defraud investors by using FTX customer funds to pay for expenses and debts incurred by his private hedge fund Alameda Research.
In other words, it is claimed, FTX secretly funneled billions in people’s private funds into Alameda, which then gambled – sorry – invested the money into a wide range of startups and projects as well as covering the org’s expenses. When concerns over Alameda and FTX surfaced last month or so, and people tried to pull their money out of the exchange, it was unable to comply due to what appeared to be a liquidity crunch, and imploded, ultimately filing for bankruptcy.
The US Securities and Exchange Commission has also brought a civil complaint [PDF] against SBF alleging a scheme to defraud investors. “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 chairman Gary Gensler in a statement.
“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.”
The SEC filing claims that while SBF told investors that “FTX had top-notch, sophisticated automated risk measures in place to protect customer assets” and that Alameda has no special privileges on the FTX platform, that was acually false.
“In truth, Bankman-Fried had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited ‘line of credit’ funded by the platform’s customers,” the SEC complaint says.
Finally, America’s Commodity Futures Trading Commission filed a civil complaint [PDF] against SBF, FTX, and Alameda in the Southern District of New York alleging fraud and material misrepresentations in the sale of digital commodities that led to the loss of $8 billion in FTX customer deposits.
FTX, one of the world’s largest crypto exchanges, was valued at $32 billion at one point.
“As defendants touted and marketed FTX.com as a model digital commodity asset platform, defendants were committing fraud to the detriment of US investors and to the credibility of the digital asset markets,” said CFTC Acting Director of Enforcement Gretchen Lowe, in a statement. “We will work tirelessly to use the full scope of our enforcement authority to hold such fraudsters accountable.”
The CFTC complaint suggests a broader set of people beyond SBF could be charged. It states, “Bankman-Fried, his parents, and other FTX and Alameda employees used FTX customer funds for a variety of personal expenditures, including luxury real estate purchases, private jets, documented and undocumented personal loans, and personal political donations.”
Mark Cohen, a partner at New York law firm Cohen & Gresser which is representing SBF, did not immediately respond to a request for comment.
According to Bloomberg, at least $73 million in political donations could be clawed back if the government’s litigation is successful, including more than $6 million given to a super political action committee for House Democrats, $3.5 million given to a GOP Senate leader fund, and $3 million given to a fund supporting Senate Democrats.
Some political leaders have tried to get out ahead of the scandal. Beto O’Rourke, a Democrat who ran unsuccessfully to be the Governor of Texas, reportedly returned an unsolicited $1 million donation from SBF on November 4, 2022, just before Election Day.
SBF had been scheduled to testify before the House Financial Services Committee on Tuesday but he will not appear. His arrest precludes the possibility that he might make false statements under oath, which would broaden his legal jeopardy.
Congresswoman Maxine Waters (D-CA), Chairwoman of the House Financial Services Committee, issued a statement expressing surprise at SBF’s arrest and disappointment that he will not provide the public with answers.
“Although Mr Bankman-Fried must be held accountable, the American public deserves to hear directly from Mr. Bankman-Fried about the actions that’ve harmed over one million people, and wiped out the hard-earned life savings of so many,” said Waters. “The public has been waiting eagerly to get these answers under oath before Congress, and the timing of this arrest denies the public this opportunity.”
Open up, it’s the IRS. We’re here about the crypto tax you dodged
Speaking at the hearing via video, US Democratic Representative from Illinois Jesús “Chuy” García (IL-04) said, “FTX isn’t an anomaly. Its collapse isn’t just a case of one corrupt guy stealing money. It’s about an entire industry that refuses to comply with existing regulation, that thinks it’s above the law.”
In prepared but not delivered remarks, obtained by Forbes, SBF challenges claims that have been made about what happened with FTX and the financial status of specific subsidiaries, while at the same time stating that he can’t help more because he no longer has access to company information. He opens, “I fucked up,” and proceeds to share the blame with law firms and executives overseeing the bankruptcy process.
On Wednesday, the Senate Committee on Banking, Housing, and Urban Affairs is planning to hold a hearing titled “Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers.”
Among the scheduled speakers, Professor Hilary Allen, American University Washington College of Law, in prepared testimony [PDF] urges regulators to keep cryptocurrency outside the banking system as a matter of safety and argues the CFTC should not be the primary regulatory for crypto due to its lack of any investor protection mandate and its self-certification regime.
“A ban on crypto would be the most straight-forward way of protecting both investors and the financial system: it would end the uncontrolled creation of cryptoassets and also ensure that cryptoassets never require a bail-out,” Allen’s transcript says. “If policymakers don’t wish to proceed with a ban, then they will need to be careful to ensure that any laws they do adopt don’t inadvertently encourage the proliferation of cryptoassets or bring those cryptoassets closer to the core of our financial system.” ®