Update: Feds Charge FTX's Bankman-Fried With Letting Alameda Run Away With Customers' Funds
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The SEC alleges FTX’s founder Sam Bankman-Fried had conducted multiple years of fraud by lying to investors about customer funds being funneled between his crypto exchange and Alameda Research.
As more evidence comes to light about the collapse of Sam Bankman-Fried’s darling two-headed child—one face being the crypto exchange FTX and the other the hedge fund Alameda Research—recent allegations about SBF’s multi-billion crypto empire makes it clear his baby had been force-fed a diet of user funds, all sinking into the bottom of a shared stomach.
On Tuesday, U.S. prosecutors from the Southern District of New York unsealed a criminal indictment against Bankman-Fried. Feds charged SBF with eight counts, including wire fraud regarding both FTX customers and investors in the exchange and Alameda. There were further conspiracy charges to commit securities fraud and money laundering, as well as conspiracy to defraud the U.S. and violate campaign finance laws.
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That last count is interesting considering how much money Bankman-Fried donated to elected officials across both parties. The full list of charges could be equal to decades in prison. Gizmodo reached out to the U.S. Attorney’s office to see if they had determined a max sentence based on the indictment, but we did not hear back.
U.S. Attorney Damian Williams said in a Tuesday afternoon press conference that the money used as part of his Washington lobbying campaigns had been “disguised to come from wealthy coconspirators” but was actually funded by Alameda using customer money. He declared that any politician who accepted money from Bankman-Fried should work with his office to disgorge those campaign funds.
Though Williams declined to state who is cooperating with the investigation, he added that this was just the start of criminal litigation against SBF and other co-conspirators, noting the case of FTX was “one of the biggest financial frauds in American history.”
These new charges come just one day after authorities in the Bahamas announced they arrested Bankman-Fried pending a full criminal indictment. Financial regulators have also brought civil charges against Bankman-Fried and his crypto exchange. On Tuesday, the Commodity Futures Trading Commission charged him and his company with two counts of violating antifraud statutes and allowing an “unlimited line of credit” with his firm Alameda. Those charges echo the SEC’s own, larger suit targeting the man in charge.
The SEC Charged SBF in a Civil Suit
On Tuesday, the U.S. Securities and Exchange Commission dropped new charges against the FTX and Alameda founder that detail years of financial corruption that would make even the folks behind the famed Enron scandal blush. The SEC’s complaint alleged that, “from the inception of FTX,” SBF had been moving customer funds from his crypto exchange FTX to Alameda Research, his crypto financing arm. He did so until the company finally crashed this past November, when reports revealed Alameda was lying on a bedrock of FTT, FTX’s native token. It soon became clear FTX was using customer funds to support Alameda, without any of those customers or the company’s investors knowing about it.
It’s been an utter rollercoaster since then, with the person now in charge of handling FTX’s bankruptcy calling the company “a complete failure of corporate controls.” The SEC announced it was investigating the company shortly after its fall.
Essentially, the SEC’s charges against Bankman-Fried are seeking financial penalties to repay his investors. Instead of seeking relief for the millions of people who used FTX’s services, it seeks to offer relief to FTX’s and Alameda’s investors, namely the “approximately” 90 U.S.-based investors that helped raise $1.1 billion for the company since May 2019, according to a SEC press release. The agency cites one instance in which SBF lied to an unnamed U.S. investor who handed over $35 million in fundraising after being told FTX was not exposed to Alameda.
SEC Chair Gary Gensler said in the release that SBF “built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.”
In May this year, as the SEC put it, “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.” Specifically, the crypto crash caused by the Terra/Luna fiasco caused Alameda’s lenders to ask for billions of dollars in loan repayments, which caused SBF to direct even more customer funds to Alameda. He continued this game all through the summer, even while he was propping up other failing crypto companies with loans and buyouts.
The SEC said that by 2022, Alameda had more than $8 billion in FTX customer assets “indiscriminately” mixed in with the funds under its control, holed up in its own bank accounts. This was allegedly done with FTX’s own systems. When FTX’s automatic systems tried to charge Alameda interest for the transfers, the SEC said Bankman-Fried “directed” that the Alameda funds be moved into an account that wouldn’t be charged interest. That account helped conceal Alameda’s liability and was connected to “an individual that had no apparent connection to Alameda.” The complaint does not reveal who that person was.
Though FTX had long maintained it was a distinct entity with no financial ties to Alameda, the SEC alleged that SBF directed the company to write software all the way back in August 2019 that allowed Alameda to keep a negative balance sheet, though no other account was allowed to maintain any negative balance. In just a few years, Alameda had an unofficial “limitless” line of credit with the funds deposited by FTX customers.
None of this is exactly new, but the SEC is essentially putting the allegations against FTX and Bankman-Fried into one place, helping to identify the scale of SBF’s shaky sand castle. Though the complaint only names the FTX founder, the SEC also alleged the 30-year-old and “other FTX executives” used customer funds to pay hundreds of millions of dollars in “loans” to themselves. SBF took $1.4 billion for himself, while FTX co-founder Zixiao “Gary” Wang and director of engineering Nishad Singh took out $544 million and $224.7 million, respectively, according to the complaint.
It will be interesting to see how the SEC’s investigation impacts criminal proceedings. Knowing that Caroline Ellison, the now ex-CEO of Alameda has hired a former top SEC official as her lawyer going forward, the agencies’ demand to be on top of crypto regulation may become more than window dressing if the matter finally comes to trial.
Update 12/13/22 at 11:50 a.m. ET: This post was updated to include information on the federal indictment and the CFTC’s charges.
Update 12/13/22 at 2:50 p.m. ET: This post was updated to include comments from the U.S. Attorneys’ Office.
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