SEC charges Bankman-Fried of failed FTX on fraud allegations

Founder of failed cryptocurrency exchange FTX Sam Bankman-Fried has been charged by the US Securities and Exchange Commission on a series of fraud allegations.

Bankman-Fried resigned on 11 November as FTX filed for Chapter 11 bankruptcy in a Delaware court, after a last-ditch effort to raise £8billion in rescue funding failed and sent shockwaves across the crypto industry, as customers rushed to pull money.

Facing criminal investigation, he was arrested in the Bahamas on Monday at the request of the US government, and is expected to be ‘promptly’ extradited once the indictment is unsealed and US authorities make a formal request.

In a filing published on Tuesday, the SEC revealed a series of allegations of breaches of securities law, which it said Bankman-Fried would ‘continue to engage in’ if he is not ‘permanently restrained and enjoined’.

The SEC said Bankman-Fried, who prior to his arrest had been expected to testify to Congress on the demise of FTX, had ‘engaged in a scheme to defraud equity investors in the platform as well as its customers’.

It explained: ‘Bankman-Fried raised more than $1.8billion from investors, including US investors, who bought an equity stake in FTX believing that FTX had appropriate controls and risk management measures.

‘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.’

Prior to the collapse of FTX, Bankman-Fried had been touted as the crypto sector’s wunderkind and shared conference stages with the likes of Tony Blair and Bill Clinton.

He has since taken a number of opportunities via televised media interviews to claim his innocence against fraud charges, instead insisting he had simply ‘f***ed up’.

The SEC said: ‘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.’

However, according to the regulator, Bankman-Fried had ‘from the start… improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research’.

He is also said to have used those customer funds ‘to make undisclosed venture investments, lavish real estate purchases, and large political donations’.

A bankruptcy court heard last month that FTX was run as a ‘personal fiefdom’ of CEO Bankman-Fried, having spent £250million on property in the Bahamas.

The SEC continued: ‘Bankman-Fried hid all of this from FTX’s equity investors… from whom he sought to raise billions of dollars in additional funds.

‘He repeatedly cast FTX as an innovative and conservative trailblazer in the crypto markets. 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.’

The SEC also alleges that when prices of crypto assets fell in May, Alameda’s lenders demanded repayment on ‘billions of dollars’ of loans, and, despite having ‘already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations’.

It added: ‘Bankman-Fried directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors.

‘But Bankman-Fried did not stop there. Even as it was increasingly clear that Alameda and FTX could not make customers whole, Bankman-Fried continued to misappropriate FTX customer funds.

‘Through the summer of 2022, he directed hundreds of millions more in FTX customer funds to Alameda, which he then used for additional venture investments and for “loans” to himself and other FTX executives.

‘All the while, he continued to make misleading statements to investors about FTX’s financial condition and risk management. Even in November 2022, faced with billions of dollars in customer withdrawal demands that FTX could not fulfil, Bankman-Fried misled investors from whom he needed money to plug a multi-billion-dollar hole.’