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CNN
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FTX founder Sam Bankman-Fried has been indicted on eight criminal counts of wire fraud and conspiracy to misuse client funds, according to an indictment from the U.S. Attorney for the Southern District of New York.
Bankman-Fried, 30, was arrested at his home in the Bahamas on Monday and appeared in court in Nassau on Tuesday. He has not waived his right to an extradition hearing, according to a U.S. official.
Separately, on Tuesday, U.S. market regulators accused Bankman-Fried of defrauding investors and customers on its failed cryptocurrency exchange, FTX.
The SEC said Bankman-Fried “orchestrated a years-long fraud” to conceal from FTX investors the transfer of client funds to his cryptocurrency-trading hedge fund, Alameda Research.
“We allege that Sam Bankman-Fried built a house of cards based on deceit while telling investors it was one of the safest structures in cryptocurrency,” SEC Chairman Gary Gensler said in a statement.
The CFTC also joined the SEC in suing Bankman-Fried.
Regulators say it may be just the first of many charges. The SEC said it was investigating “other securities law violations” as well as other entities and individuals.
“Mr. Bankman-Fried is reviewing the allegations with his legal team and considering all of his legal options,” Bankman-Fried’s attorney, Mark S. Cohen, said in a statement.
Bankman-Fried, known as “SBF,” is a crypto celebrity who became a pariah overnight as his firm suffered a liquidity crisis and filed for bankruptcy last month, leaving at least a million savers without access to their funds.
The U.S. Attorney for the Southern District of New York unsealed an indictment Tuesday charging Bankman-Fried with wire fraud and multiple counts of conspiracy, including conspiracy to defraud investors, lenders and the United States, commodity and securities fraud and money laundering, and campaign violations. financial law.
Prosecutors accused Bankman-Fried of conspiring with others to carry out various schemes, including misusing customer deposits at FTX to pay for Alameda expenses. Bankman-Fried also allegedly defrauded Alameda’s lenders by providing them with misleading information about the hedge fund’s financial condition.
The 14-page indictment also charges Bankman-Fried with conspiring to violate federal election law by making political contributions in excess of federal legal limits to candidates and fundraising committees on behalf of others between 2020 and November 2022 .
Since launching in May 2019, FTX has achieved a valuation of $32 billion by raising more than $1.8 billion in funding, including seasoned investors such as BlackRock, Sequoia Capital, and the Ontario Teachers’ Pension Plan. Star athletes and celebrities who support FTX have also reportedly acquired stakes in the company, including Tom Brady and Gisele.
The SEC alleges that Bankman-Fried defrauded investors who supported FTX by promoting it as a “safe and responsible” cryptocurrency trading firm that used “sophisticated, automated” risk measures to protect client funds.
In fact, the SEC alleges that Bankman-Fried internally directed the software code to be written in a way that allowed Alameda to operate with negative balances on its FTX client accounts.
This allegedly happened in August 2019, roughly four months after FTX began operations.
This effectively provided Alameda with an unlimited line of credit funded by client assets, according to the SEC. That meant there was no meaningful distinction between FTX client funds and the Alameda funds that Bankman-Fried used as his “personal piggy bank,” the complaint said. According to the SEC, he concealed from investors and clients the fact that he used the funds to buy luxury condominiums, support political campaigns and make private investments.
In its report, the SEC said that between March 2020 and September 2022, Bankman-Fried executed loans from Alameda totaling more than $1.338 billion, including in his personal capacity as a borrower and as an Alameda Two Examples of Civil Complaints by CEO’s Lenders.
Bankman-Fried used funds from Alameda to purchase tens of millions of dollars worth of Bahamian real estate for himself, his parents and other FTX executives, according to filings.
According to the filing, Alameda co-founders Nishad Singh and Gary Wang also borrowed 100,000 in 2021 and 2022, respectively, through similar promissory notes with Alameda. $554 million and $224.7 million.
Singh and Wang have not been charged with any crime.
The loans to Bankman-Fried and others were “poorly documented, and sometimes not recorded at all,” the lawsuit said.
When crypto asset prices plummeted in May 2022, Bankman-Fried repaid Alameda’s demanding third-party lenders from its FTX “line of credit,” adding further billions in liabilities, which were then hidden in the Alameda balance sheet In order to avoid alarming investors, complaints abound.
The FTX CEO continued to use the companies for his personal gain, taking out a $136 million loan against himself in late July 2022 — a month after he extended a $250 million revolving line of credit to crypto financial services firm BlockFi , to alleviate its own liquidity problems. Meanwhile, the SEC alleges that he provided “false and misleading positive accounts” to investors over the summer despite the company’s “difficult financial condition.”
“FTX operates under a veneer of legality, Mr. Bankman-Fried’s founding, touting, among other things, its best-in-class controls, including a proprietary “risk engine,” and FTX’s adherence to specific investor protection principles and detailed terms of service,” SEC Division Chief Gurbir Grewal said in a statement. “But as we allege in our complaint, the camouflage was not just thin, it was fraudulent.”
In the four weeks since FTX filed for bankruptcy, Bankman-Fried has tried to cast himself as a somewhat hapless CEO, denying allegations that he defrauded FTX clients.
“I did not knowingly defraud,” he told the BBC at the weekend. “I don’t want that to happen. I’m certainly not as capable as I think I am.”
But Bankman-Fried, who previously acknowledged mistakes in leading FTX, resigned after FTX filed for bankruptcy last month.
“Look, I screwed up,” Bankman-Fried said during a virtual appearance at The New York Times’ DealBook Summit. “There are some things I’d do anything to get done.”
The speed with which Bankman-Fried was arrested took observers, including U.S. lawmakers, by surprise. Lawyers not involved in the case said the quick turnaround suggested former FTX employees may be helping prosecutors.
“Given Bankman-Fried’s apparent inability to stop talking, the former employees would have been wise to rush to become collaborators in exchange for more lenient treatment, and it should come as no surprise to learn that one or more of them have already done so,” the SEC former Attorney Howard A. Fischer said. “The fact that only one person has been charged so far also seems to suggest that,” he added.
Andrew Jennings, an assistant professor at Brooklyn Law School, also noted that the case “was handled very quickly for such a complex issue.”
“The SEC’s civil lawsuit … includes detailed behind-the-scenes allegations of what Bankman-Fried did and knew, demonstrating that the government has received high-value assistance from informants, including potential co-conspirators.”
– CNN’s Kara Scannell and Lauren Del Valle contributed to this report