January 28, 2023

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Sam Bankman Fred is accused of fraud and money laundering

Sam Bankman Fred is accused of fraud and money laundering

About 12 hours after we learned that authorities in the Bahamas had arrested Sam Bankman-Fried (SBF) co-founder and former CEO of FTX, the US Securities and Exchange Commission (SEC) open The first of several sets of shipments he will encounter. Another civil suit brought by the CFTC soon followed, and finally, criminal charges filed by the US Attorney’s Office for the Southern District of New York.

The criminal charges It was lifted last Friday and its seal opened today. They include eight counts covering allegations of wire fraud against clients and those who lent money to his companies, securities fraud, and money laundering.

The SEC complaint accuses Bankman-Fried of carrying out a “year-long fraud” while transferring customer funds from FTX to his cryptocurrency trading firm Alameda Research. This charge cites more than $1.8 billion that FTX has received from equity investors since 2019, including $1.1 billion from investors in the United States — key to establishing the jurisdiction of the SEC since the main FTX exchange was not allowed to operate in the United States.

The CFTC complaint details SBF’s contacts within FTX and Alameda, accusing him of committing commodity fraud through omissions and misrepresentations.

The SEC alleges that Bankman-Fried’s multi-year scam diverted billions in customer funds to grow his crypto empire

According to the SEC’s complaint (which is listed in full below), FTX was a fraud from the start: “From the inception of FTX, Bankman-Fried transferred FTX clients’ funds to Alameda, and continued to do so until FTX’s collapse in November 2022.” The SBF has ordered more than $1.338 billion to borrow from Alameda personally, using client funds for investments, real estate, and political donations. It also says that Nishad Singh and Gary Wang, co-founders of FTX, borrowed $554 million and $224.7 million, respectively.

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The allegations against SBF also center on his statements to investors that FTX was a safe place to invest because of an automated “risk engine” that would sell client assets to make sure their collateral remained at required levels.

What he didn’t tell investors or clients, according to the SEC, was that Alameda Research had exclusive access to FTX funds, bypassing any “auto-liquidation” rules that apply to others and the ability to maintain an unlimited negative balance with FTX so he could use Customer funds deposited in trading.

That unlimited negative balance didn’t shake things up until crypto prices plummeted earlier this year, prompting lenders to demand repayments from Alameda. The SEC alleges that SBF directed the company to pay them using funds from FTX while hiding billions of dollars now owed to Alameda to FTX in exchange for a “line of credit” and continuing to siphon hundreds of millions of dollars for himself and other executives.

From there, we know what happened – in the end, CoinDesk I reported on how closely linked Alameda and FTX are, with FTX’s native FTT token making up the majority of Alameda’s balance sheet. Changpeng “CZ” Zhao, owner of rival cryptocurrency exchange Binance, announced plans to divest his company’s FTT holdings, which led to a rush of withdrawals from FTX, and quickly collapsed once he could not pay off customers.

The complaint alleges that, in fact, Bankman-Fried orchestrated a years-long fraud to conceal from FTX investors (1) the undisclosed transfer of FTX clients’ funds to Alameda Research LLC, his cryptocurrency hedge fund; (ii) the undisclosed special treatment granted to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “credit line” with funding from the platform’s customers and relieving Alameda of certain key FTX risk mitigation measures; and (iii) undisclosed risk arising from FTX’s exposure to Alameda’s large holdings of illiquid and overvalued assets such as FTX’s affiliate tokens.

SEC Chairman Gary Gensler was quoted in the statement as saying, “We argue 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.”

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SBF will appear in court on Tuesday in the Bahamas, which has served as its and FTX’s base of operations.

Prior to his arrest, the SBF had conducted an ongoing post-bankruptcy media tour of Twitter Spaces and Zoom calls, with at least two appearances on Monday. He was expected to appear remotely today to testify before the House Financial Services Committee. This hearing will continue and is scheduled to begin at 10 a.m. ET, with testimony from FTX’s new CEO, John J. Ray III.

Correction Dec. 13 at 10:21 a.m. ET: An earlier version of this story stated that SBF is facing criminal charges brought by the SEC. In fact, the SEC has, so far, only filed civil charges. He faces criminal charges filed by the US Attorney’s Office for the Southern District of New York. We are sorry for the error.

Update Dec. 13 10:21 a.m. ET: Added fees from the CFTC and US Attorney’s Office for the Southern District of New York.