February 2, 2023

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FTX founder accused of defrauding crypto investors

The US government on Tuesday indicted Samuel Bankman-Fried, the founder and former CEO of cryptocurrency exchange FTX, with a series of financial crimes, alleging that he intentionally deceived clients and investors to enrich himself and others while playing a pivotal role in the company’s multi-billion dollar games collapse.

Federal prosecutors said Bankman-Fried “devised a scheme and ploy to defraud FTX’s clients and investors” beginning in 2019, the year it was founded. He illegally diverted their money to cover expenses, debt and risky trades at crypto hedge fund Alameda Research, which he founded in 2017, and to make lavish real estate purchases and large political donations, prosecutors said in a 13-page indictment.

Bankman-Fried, 30, was arrested Monday in the Bahamas at the request of the US government, which has charged him with eight felonies ranging from wire fraud to money laundering and conspiracy to commit fraud. If convicted on all charges, Bankman-Fried — dubbed “SBF” by crypto enthusiasts — could face decades in prison.

US Attorney Damian Williams called it “one of the largest fraud cases in American history” at a news conference on Tuesday and said the investigation was ongoing and advancing rapidly.

Bankman-Fried has fallen hard and fast from the top of the cryptocurrency industry he helped evangelize. FTX filed for bankruptcy on Nov. 11 when it ran out of money following the cryptocurrency equivalent of a bank run.

Before the bankruptcy, he was viewed by many in Washington and on Wall Street as a digital currency prodigy, someone who could help bring it mainstream, in part by working with policymakers to bring more oversight and trust into the to bring industry.

Worth tens of billions of dollars, at least on paper, Bankman-Fried was able to attract celebrities like Tom Brady or former politicians like Tony Blair and Bill Clinton to his conferences at luxury resorts in the Bahamas. A well-known Silicon Valley firm, Sequoia Capital, invested hundreds of millions of dollars in FTX.

Wearing shorts and T-shirts to stand out from the buttoned-up world of Wall Street, he’s been the subject of flattering media profiles, a vocal advocate of a style of charitable giving known as “effective altruism,” and garnered millions of Twitter followers .

But since the FTX implosion, Bankman-Fried and his company have been compared to other disgraced financiers and companies like Bernie Madoff and Enron.

The criminal charges against Bankman-Fried and “others” at FTX come in addition to civil charges announced Tuesday by the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC alleges that Bankman-Fried defrauded FTX clients by making loans to himself and other FTX executives and illegally using investors’ money to buy real estate for himself and his family.

No other FTX executives were named in the indictment, nor was Alameda Research CEO Caroline Ellison. Also not named in the indictment: Bankman-Fried’s father, Joseph Bankman, a law professor at Stanford University who was believed to be his son’s advisor.

US authorities said they would seek to recover any financial gains Bankman-Fried made from the alleged scheme.

An attorney for Bankman-Fried, Mark S. Cohen, said Tuesday he was “reviewing the charges with his legal team and considering all of his legal options.”

At a congressional hearing Tuesday, scheduled ahead of Bankman-Fried’s arrest, the new CEO, brought in to help guide FTX through the bankruptcy process, lashed out. He said there was little control over customers’ money and “very few rules” about how their funds could be used.

John Ray III told members of the House Financial Services Committee that FTX’s collapse, which resulted in a loss of more than $7 billion, was the culmination of months or even years of bad decisions and poor financial controls.

“This is not something that happened overnight or in the context of a week,” he said.

He added: “It’s just old-fashioned embezzlement, taking money from others and using it for your own purposes.”

Before his arrest, Bankman-Fried was holed up in his luxury home in the Bahamas. US authorities are expected to request his extradition to the US, although the timing of that request is unclear.

At a court hearing in the Bahamas on Tuesday, prosecutors argued that Bankman-Fried was a flight risk and should be held without bail, according to Our News, a local news outlet. His attorneys said he will likely request a formal extradition hearing.

Bankman-Fried’s was previously one of the richest people in the world on paper; At one point, his net worth reached $26.5 billion, according to Forbes. He was a prominent figure in Washington and donated millions of dollars to both Democrats and Republicans. US Attorney Williams said Tuesday that Bankman-Fried made “tens of millions of dollars” in illegal campaign contributions.

His fortune quickly dissolved last month as reports questioned the strength of FTX’s balance sheet. When customers tried to withdraw billions of dollars, FTX couldn’t fulfill the requests: their money was gone.

“We contend that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors it was one of the most secure buildings in crypto,” said SEC Chairman Gary Gensler.

The SEC complaint alleges that Bankman-Fried has raised more than $1.8 billion from investors since May 2019 by promoting FTX as a safe, responsible platform for trading crypto assets.

Instead, according to the complaint, Bankman-Fried diverted client funds to Alameda Research without telling them.

“He then used Alameda as his personal piggy bank to buy luxury condos, support political campaigns, and make private investments, among other things,” the complaint reads.

In the weeks following FTX’s collapse but before his arrest, Bankman-Fried gave interviews to several news organizations looking for ways to explain what had happened.

For example, Bankman-Fried said he didn’t “knowingly” misappropriate clients’ funds and that he believed disgruntled clients would eventually get their money back.

At Tuesday’s congressional hearing, the new FTX CEO bluntly denied those claims: “We’re never going to get all these assets back,” Ray said.

Jack Sharman, attorney at Lightfoot, Franklin & White, said Bankman-Fried’s recent statements to the media could be damaging admissible evidence in court. “These statements on this speaking tour were in no way helpful to his cause,” Sharman said.

In its complaint, the SEC challenged Bankman-Fried’s recent statements that FTX and its clients were victims of a sudden market crash that overwhelmed existing protections.

“FTX operated behind a cloak of legitimacy,” said Gurbir Grewal, director of the SEC’s Enforcement Division. “Not only was this veneer thin, it was fraudulent.”

The collapse of FTX — which followed other cryptocurrency debacles earlier this year — adds urgency to efforts to regulate the industry.

Yesha Yadav, a law professor at Vanderbilt University who specializes in financial and securities regulation, said US lawmakers and regulators are too slow to act, but that’s likely to change.

“The lawmakers are clearly under pressure to do something since so many people have lost their money,” she said.

Photo credit: Stanislav Shahurin | Dreamstime.com