FBI, SEC, DOJ & CFTC pile on charges against FTX crypto-crook SBF

Samuel Bankman-Fried is processed by the Royal Bahamas Police Force following his arrest.

Samuel Bankman-Fried—widely known as SBF—was the CEO at FTX Trading Ltd., but after the crypto currency exchange platform took a bath, he has found himself drowning in alphabet soup that includes the FBI, SEC, DOJ and CFTC.

The Securities and Exchange Commission charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX .

In a parallel, separate action, the United States Attorney for the Southern District of New York unsealed an indictment charging Bankman-Fried with wire fraud, commodities fraud, securities fraud, money laundering, plus conspiracy to defraud the Federal Election Commission and commit campaign finance violations.

Finally, the Commodity Futures Trading Commission (CFTC) also announced fraud and material misrepresentations charges against three defendants — Bankman-Fried and his two companies, FTX and Alameda Research LLC—in connection with the sale of digital commodities that caused the loss of over $8 billion in customer deposits.

Investigations as to other securities law violations and other crimes relating to the alleged misconduct are ongoing.

Bankman-Fried was arrested Monday in the Bahamas after federal prosecutors in New York filed criminal charges contained in a sealed indictment, according to the Royal Bahamas Police Force. He appeared in court in the Bahamas on Tuesday and was denied bail after a judge determined he was too much of a flight risk.

According to an announcement from the Bahamas Attorney General (AG) and Minister of Legal Affairs, Ryan Pinder, SBF was arrested by the Royal Bahamas police force following formal notification from the US government that criminal charges had been filed against him.

The arrest occurred on the eve of Bankman-Fried’s previously scheduled appearance at Tuesday morning’s House Financial Services Committee hearing on FTX’s disastrous collapse.

Financial Services Chair Maxine Waters said that she was disappointed he would not testify but that she remained committed to getting to the bottom of what happened at the company.

According to the SEC’s complaint, since at least May 2019, FTX, based in The Bahamas, raised more than $1.8 billion from equity investors, including approximately $1.1 billion from approximately 90 U.S.-based investors.

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.

The SEC complaint alleges that, in reality, Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors (1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund; (2) 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; and (3) undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.

The complaint further alleges that Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.

“Where was the SEC? What kind of oversight was there?” asked Rep. Josh Gottheimer, a crypto-friendly lawmaker from New Jersey, whose campaign accepted $11,600 from FTX. “What should the SEC be doing? What proposed regulations would he suggest?”

“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 Chair Gary Gensler. “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. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”

“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service. But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike. While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers.”

The SEC’s complaint charges Bankman-Fried with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s complaint seeks 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.

Damian Williams, the United States Attorney for the Southern District of New York, Merrick B. Garland, the United States Attorney General, and Michael J. Driscoll, the Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), unsealed an indictment charging Bankman-Fried with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission and commit campaign finance violations.

To conceal the fact that those contributions were paid for using money from a corporation and to evade contribution limits and reporting requirements, Bankman-Fried caused donations to be reported in the names of co-conspirators rather than identifying the business as the true source of the funds.

The CFTC complaint charges all three defendants with fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce. Further, the complaint asserts that defendants’ actions caused the loss of over $8 billion in FTX customer deposits.

“Digital commodity asset markets continue to present risks for investors due to the lack of basic protections,” said CFTC Chairman Rostin Behnam. “The CFTC continues to be fully committed to using all available enforcement tools and authorities to protect investors and root out those who seek to profit through fraud and misappropriation.”

“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. “We will work tirelessly to use the full scope of our enforcement authority to hold such fraudsters accountable.”

%d bloggers like this: