U.S. authorities have alleged that fallen crypto maven Sam Bankman-Fried defrauded investors in his FTX empire, stealing billions of dollars as part of a "massive, years-long fraud" for his own benefit.
Civil charges, filed by the Securities and Exchange Commission on Tuesday, claimed that Bankman-Fried had been engaged in a scheme to deceive investors in FTX and his companies since at least May 2019, and that the process only ended last month when he lost his position as chief executive officer as part of FTX filing for bankruptcy.
Bankman-Fried had raised more than $1.8 billion from equity investors over that time, including from the likes of SoftBank Group, Temasek, Tiger Global Management and Insight Partners. Upon engaging bankruptcy lawyers, the equity stakes of all who had backed FTX effectively fell to zero.
The SEC alleged in a 28-page filing detailing its claims against SBF (emphasis ours):
Unbeknownst to those investors (and to FTX's trading customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform's customer funds for his own personal benefit and to help grow his crypto empire.
Throughout this period, Bankman-Fried portrayed himself as a responsible leader of the crypto community. He touted the importance of regulation and accountability. He told the public, including investors, that FTX was both innovative and responsible.
Customers around the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform. But from the start, Bankman-Fried improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research LLC ("Alameda"), and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.
Here's more:
He told investors and prospective investors that FTX had top-notch, sophisticated automated risk measures in place to protect customer assets, that those assets were safe and secure, and that Alameda was just another platform customer with no special privileges. These statements were false and misleading. In truth, Bankman-Fried had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited "line of credit" funded by the platform's customers.
While he spent lavishly on office space and condominiums in The Bahamas, and sank billions of dollars of customer funds into speculative venture investments, Bankman-Fried's house of cards began to crumble.
As the broader crypto market declined in value throughout 2022, Alameda's lenders began to seek repayment. Even though FTX had allegedly already given Alameda billions of dollars in customer funds, Bankman-Fried began to give Alameda even more money to cover those positions, the SEC said. Over the summer, he also began to divert FTX customer funds for venture investments and to make loans to himself and other executives, the SEC added.
The filing described FTX's origin story: From SBF setting up Alameda with co-founder Gary Wang in 2017, to setting up FTX in 2019 and bringing on board others that would form the exchange's internal cabal of senior executives — Alameda co-CEOs Caroline Ellison and Sam Trabucco, and Nishad Singh as a co-founder of FTX. Approximately $1.1 billion of the funds raised were from US investors, the SEC said.
It alleged that all statements made by Bankman-Fried to investors during this time were misleading because he chose to omit information about Alameda's special treatment, including its unique ability to carry a negative balance on FTX, and its exemption from a crucial part of FTX's risk management system, its auto-liquidation feature.
From page 10 of the filing:
Bankman-Fried diverted FTX customer funds to Alameda in essentially two ways: (1) by directing FTX customers to deposit fiat currency (e.g., U.S. Dollars) into bank accounts controlled by Alameda; and (2) by enabling Alameda to draw down from a virtually limitless "line of credit" at FTX, which was funded by FTX customer assets.
As a result, there was no meaningful distinction between FTX customer funds and Alameda's own funds. Bankman-Fried thus gave Alameda carte blanche to use FTX customer assets for its own trading operations and for whatever other purposes Bankman-Fried saw fit.
