FTX founder Sam Bankman-Fried oversaw one of the biggest financial frauds in American history, a top federal prosecutor said in charging that the former chief executive stole billions of dollars from the crypto exchange’s customers while misleading investors and lenders.
An indictment by the US attorney’s office for the Southern District of New York, unsealed on 13 December, charges Bankman-Fried with eight counts of fraud. Prosecutors allege that he took FTX.com customers’ money to pay the expenses and debts of Alameda Research, an affiliated trading firm. Bankman-Fried is charged as well with conspiring to defraud the US and violate campaign-finance rules by making illegal political contributions.
Damian Williams, the US attorney for the Southern District of New York, said he authorised the charges against Bankman-Fried last on 7 December and a grand jury voted on the indictment on 9 December.
“This investigation is very much ongoing, and it is moving very quickly,” Williams said at a press conference in Manhattan on 13 December. “While this is our first public announcement, it will not be our last.”
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Separately, John J. Ray III, the new chief executive of FTX, said at a congressional hearing on 13 December that FTX incurred losses in excess of $7bn. Ray, who oversaw the Enron Corp. bankruptcy early in the 2000s decade, said funds were taken from FTX and Alameda, an affiliated trading firm that incurred trading losses.
Ray described Enron as having been brought down by sophisticated people whose machinations aimed to keep transactions secret. FTX presents as “old-fashioned embezzlement”, Ray said. “It’s taking money from customers and using it for your own purpose.”
Also on 13 December, the Securities and Exchange Commission alleged in a civil lawsuit that Bankman-Fried diverted customer funds from the start of FTX to support Alameda and to make venture investments, real-estate purchases and political donations. The Commodity Futures Trading Commission filed a lawsuit on 13 December linking his allegedly fraudulent conduct at Alameda and FTX to markets that the CFTC regulates.
“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,” SEC Chair Gary Gensler said.
The charges are the latest twist in a saga that has rattled the world of cryptocurrencies, a largely unregulated market that boomed during the pandemic but has been hammered this year by rising interest rates and the failure of several significant industry players.
FTX, one of the largest crypto exchanges in the world, filed for bankruptcy last month after the firm ran out of cash and a merger with rival Binance collapsed. The firm’s failure marked a sudden fall from grace for Bankman-Fried, who portrayed FTX as a safer crypto exchange to use and cast himself as an ally of regulation.
In interviews since the filing, Bankman-Fried said he bore responsibility for FTX’s collapse but denied he committed any fraud. Mark Cohen, a lawyer for Bankman-Fried, said on 13 December that his client “is reviewing the charges with his legal team and considering all of his legal options.”
Bankman-Fried, 30 years old, was arrested on 12 December in the Bahamas. He appeared in court on 13 December in Nassau. He was denied bail and has been remanded to jail until Feb. 8, according to a person familiar with the matter.
A US court official said that while the case had been assigned to a federal judge in Manhattan, there was no timing yet for Bankman-Fried’s extradition.
The tales of Bankman-Fried’s alleged misdeeds resonated with crypto customers around the world, even those who haven’t suffered significant losses as various firms by turns suspended withdrawals and collapsed.
Vasco Tagachi, a 42-year-old Portuguese-Sri Lankan trader based in China, said he felt a sigh of relief after learning of Bankman-Fried’s arrest. He said he had $57,423 in an FTX account this fall but was able to withdraw almost all of it just before the firm stopped honouring withdrawal requests.
“I had a little bit of tears in my eyes hearing that,” he said.
Prosecutors allege that from 2019 through November 2022, Bankman-Fried conspired with unnamed individuals to defraud customers and lenders. He provided false and misleading information to lenders on the financial condition of Alameda, according to the indictment.
While the 14-page indictment was light on detailed allegations, it says that on Sept. 18, 2022, Bankman-Fried caused an email to be sent to an FTX investor in New York that contained false information about FTX’s financial condition. In June 2022, the indictment says, Bankman-Fried and others misappropriated FTX.com customer deposits to satisfy the loan obligations of Alameda.
Bankman-Fried is also accused of defrauding the Federal Election Commission starting in 2020 by conspiring with others to make illegal contributions to candidates and political committees in the names of other people.
He and his associates contributed more than $70m to election campaigns in recent years, The Wall Street Journal previously reported. He personally made $40m in donations ahead of the 2022 midterm elections, most of which went to Democrats and liberal-leaning groups.
Ray, the FTX CEO, said FTX is investigating whether any loans taken by FTX executives were improperly used for campaign contributions.
Ray added that tracing fund flows from FTX to executives and third parties was difficult because of the lack of a paper trail for many corporate transactions at FTX.
“We’re dealing with a paperless bankruptcy,” he said. “It makes it very difficult to trace and track assets.”
The CFTC’s complaint contains a detailed discussion of events at Alameda and FTX and argues that the agency, generally less visible to the public than the SEC, also has jurisdiction over the case. While the CFTC regulates US derivatives markets, it can go after fraud that affects some commodity markets.
Besides giving Alameda access to its customer deposits, FTX granted the crypto hedge fund controlled by Bankman-Fried a series of trading-execution privileges that provided it an edge against other traders on the platform, the CFTC lawsuit alleges.
The CFTC said that while institutional customers had their orders routed through the FTX system, Alameda was able “to bypass certain portions of the system and gain faster access.” It resulted in Alameda’s orders being received by FTX several milliseconds faster than those of other institutional clients.
The lawsuit also alleges that Alameda wasn’t subject to certain automated verification processes, including on whether it had available funds before executing a transaction, giving it further advantage on the speed of its trades.
The edge wasn’t enough to keep Bankman-Fried from thinking about shutting down Alameda in September, according to the CFTC complaint.
In a document titled “We came, we saw, we researched,” Bankman-Fried laid out reasons for shutting down Alameda, according to the CFTC lawsuit. Chief among them: Alameda wasn’t making enough money to justify its existence, he wrote.
The CFTC said the statements contradicted what Bankman-Fried and Alameda were saying publicly at the time.
The 13 December congressional hearing was the first public appearance for Ray on FTX’s bankruptcy. Bankman-Fried had been scheduled to appear virtually at the same hearing, before he was arrested in the Bahamas at the request of the US government. Bahamian police have said that they would keep him in custody and that they are awaiting an extradition order from US authorities.
“The operation of Alameda really depended, based on the way it was operated, on the use of customer funds,” Ray said, responding to questions from members of Congress at the hearing. “There were virtually no internal controls…whatsoever.”
He described numerous loans totalling billions of dollars taken out by Bankman-Fried from Alameda.
“We have no information at this time as to what purpose or use of those funds were,” Ray added. He said Bankman-Fried had signed as the issuer and recipient for some of the loans.
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Ray pushed back against recent statements made by Bankman-Fried that he had little to no involvement in the management of Alameda after passing control of the company to Caroline Ellison and Sam Trabucco, as well as Bankman-Fried’s statements that customer funds were passed to Alameda because of an accounting error.
“I don’t find those statements to be credible,” Ray said.
The Justice Department’s indictment of Bankman-Fried includes an array of charges with few supporting details, a tactic that could give federal prosecutors flexibility in navigating the rules involving extradition.
The charges against Bankman-Fried run the gamut from wire fraud to securities fraud conspiracy to conspiring to launder money and conspiring to break campaign-finance laws.
The statutes charged, with the exception of the campaign-finance offence, are enormously broad, said Rebecca Mermelstein, a former federal prosecutor who is now at O’Melveny & Myers.
“By not being super-specific, you protect yourself later against an argument that charges relating to different criminal conduct are being added,” she said.
The arrest of Bankman-Fried is the latest case to highlight prosecutors’ push to bring white-collar cases to justice faster.
Deputy US Attorney General Lisa Monaco said in a September speech that making prosecutors and companies feel that they were “on the clock” in these cases was a key priority for the department.
“We need to do more and move faster,” she said. “In individual prosecutions, speed is of the essence.”
Former federal prosecutors say that high-profile financial cases with lots of victims can increase the pressure on authorities to bring cases more quickly.
“Appearances matter when it comes to criminal justice,” said Mark Chutkow, a former federal prosecutor who is currently head of government investigations and corporate compliance at Dykema Gossett.
If Bankman-Fried remains in the Bahamas while the details of his potential extradition to the US are worked out, there is only one prison there: the Bahamas Department of Correctional Services, commonly known as Fox Hill Prison.
Prison inmates reported removing human waste by buckets and developing bed sores from lying on the bare ground, according to a 2021 human-rights report on the Bahamas by the US State Department. Cells were infested with rats, maggots and insects, the report said.
Inmates are supposed to get an hour every day outside for exercise. Because of staff shortages and overcrowding, there are times when inmates will only get 30 minutes a week, said Romona Farquharson, an attorney in the Bahamas.
The prison has different sections that separate those serving terms for violent crimes, for instance, from those who aren’t. Because of overcrowding, there have been instances in which inmates awaiting trial for minor crimes have been sent to the maximum-security facility, said Farquharson.
“I think they’ve got to be careful not to have him in really rough areas in the prison,” she said.
Angel Au-Yeung, Ben Foldy and Hannah Miao contributed to this article.
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This article was published by The Wall Street Journal, part of Dow Jones
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