SEC and DOJ lay charges against Sam Bankman-Fried, alleging ‘biggest financial fraud in US history’

Charges against FTX founder include criminal conspiracy and violation of anti-fraud provisions.

The Securities and Exchange Commission (SEC) has laid formal charges against former FTX Trading Ltd CEO Sam Bankman-Fried. The announcement came on the same day the US Department of Justice (DOJ) unsealed an indictment charging Bankman-Fried with eight criminal counts. Prosecutor Damian Williams, US attorney for the southern district of New York, said the crypto entrepreneur had carried out “one of the biggest financial frauds in American history”.

The SEC charge alleges Bankman-Fried is responsible for “orchestrating a scheme to defraud equity investors in FTX Trading Ltd (FTX), the crypto trading platform of which he was the CEO and co-founder”. It is also investigating “other securities law violations” and looking into “other entities and persons relating to the alleged misconduct”.

The DOJ has charged Bankman-Fried with eight counts including conspiracy to commit wire fraud on customers and lenders, money laundering and violation of campaign finance laws. It alleges the conspiracy ran from 2019, when FTX was founded, until the company’s spectacular collapse last month.

“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.”

Gary Gensler, chair, SEC

Bankman-Fried was arrested by Bahamas police at his luxury penthouse on Monday. The country’s chief magistrate, Joy Ann Ferguson-Pratt, denied a petition for $250,000 bail, calling Bankman-Fried a flight risk, and instead ordered he be sent to the department of corrections. An extradition hearing has been set for February 8, 2023, and his legal team has said it will fight any attempt to extradite him to the US.

The SEC charges claim violation of the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. And it is “seeking injunctions against future securities law violations; an injunction that prohibits Bankman-Fried from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar”.

Risk measures

The regulator alleges that, since 2019, FTX raised more than $1.8bn from equity investors, including a sum of $1.1bn from approximately 90 investors based in the US. It says: “In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets.”

But in reality, alleges the SEC, “Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors;

  • the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund;
  • the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited ‘line of credit’ funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures;
  • undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.”

Bankman-Fried is further alleged to have “used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations”.

SEC chair Gary Gensler said: “”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. 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. And Gurbir S Grewal, the SEC’s director of enforcement, said: “FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike.”

Meanwhile, the Securities Commission of the Bahamas has accused John J Ray III, the new FTX CEO appointed by the courts, of making “key misstatements” about how he is handling the situation, and of attempting to ”advance questionable agendas”.

It issued a statement saying: “Mr. Ray has not once reached out to the Securities Commission to discuss any of his concerns before airing them publicly,” and said his comments “do not appear to be concerned with facts but rather appear intended only to make headlines”.

The Bahamas regulator says Ray has used redacted email correspondence between its officials and Bankman-Fried to “create a false impression of communications between Mr Bankman-Fried and the Commission”.

Ray, however, spoke plainly when he told a Washington hearing into the FTX bankruptcy on Tuesday “This isn’t sophisticated whatsoever, this is just plain old embezzlement”.

Bankman-Fried’s legal team say he is “considering all his legal options” and FTX is declining to comment.