FTX head accused of fraud, lies
U.S. says Bankman-Fried used deposits to fuel interests
Sam Bankman-Fried’s lies, prosecutors say, stretched back to the very beginning.
From the founding of his cryptocurrency exchange FTX in 2019, BankmanFried engaged in widespread fraud, the federal authorities charged Tuesday, and used his customers’ deposits to finance political activities, buy lavish real estate and invest in other companies.
A series of civil and criminal charges filed against Bankman-Fried in the Southern District of New York say he repeatedly lied to customers, investors and lenders, and misled them about the structure of his business empire and how he handled the billions of dollars in funds that crypto users deposited in his exchange.
In the 13-page criminal indictment, Bankman-Fried was charged with eight counts, including wire fraud on customers and lenders, and conspiracy to defraud the United States and violate campaign finance laws.
A parallel civil complaint filed by the Securities and Exchange Commission laid out a detailed narrative of FTX’s collapse, claiming that for years Bankman-Fried had illegally used customer deposits to fund his business and political activities.
As FTX collapsed, the SEC said, investors were kept in the dark. Federal prosecutors said lenders also were kept in the dark. And hundreds of thousands of FTX customers worldwide were kept in the dark, too — only to find out Bankman-Fried’s claims their money was safe were false.
Bankman-Fried was arrested Monday evening at his home in the Bahamas, where FTX was based. It was a stunning fall from grace for an executive who was once described as a modern-day John Pierpont Morgan and became a darling of big investors in Silicon Valley and a prolific Democratic Party donor.
On Tuesday, he appeared
in court in Nassau, the capital of the Bahamas, after being held overnight in a police station cell.
“Bankman-Fried was orchestrating a massive, yearslong fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire,” the SEC said in its civil complaint.
Bankman-Fried used customer funds to “make undisclosed venture investments, lavish real estate purchases, and large political donations,” the complaint said.
Federal prosecutors will need to extradite Bankman-Fried from the Bahamas, and that process can be drawn out if he is inclined to fight returning to the United States to face trial in federal court.
Mark Cohen, a lawyer for Bankman-Fried, said his client “is reviewing the charges with his legal team and considering all of his legal options.”
Just over a month ago, Bankman-Fried, 30, was widely viewed as one of the few reliable figures in a freewheeling, loosely regulated industry. He contributed $5.6 million to President Joe Biden’s 2020 election effort, and FTX spent lavishly on TV commercials with an array of celebrity endorsers such as basketball star Stephen Curry and NFL quarterback Tom Brady.
He was at the forefront of an industry-wide effort to bring crypto into the mainstream of American commerce. But strip away all the references to crypto in the SEC’s civil complaint, and a picture emerges of garden-variety lying to investors — falsehoods that go back to 2019, according to the filings.
Regulators say Bankman-Fried lied to dozens of big venture capital firms and wealthy family offices, saying that he raised nearly $2 billion since that time.
The SEC claims that Bankman-Fried misled them in reports about the financial health of FTX and its sister company, Alameda Research, a crypto trading platform that he had co-founded.
He also misled investors about the close ties between the two companies and how he had allowed his trading firm to routinely borrow money from FTX customers — borrowing that occurred despite claims that all customer money was safe.
The mixing of money allowed Alameda to make bigger trades and to make investments in other crypto companies and investments in Bahamas real estate.
This spring, when the crypto market began to crater, authorities said other crypto firms that were lenders to Alameda began to call in their loans, demanding repayment. And that forced Bankman-Fried and others at FTX to double down and take even more money from FTX customers to make Alameda whole.
The strategy of taking money from FTX to keep Alameda afloat imploded when customers of the crypto exchange started demanding their money this fall. The financial hole was $8 billion, so big that the whole enterprise collapsed.
SCRAMBLED HEARING
The Monday arrest of Bankman-Fried scrambled plans Tuesday on Capitol Hill for a long-scheduled hearing on the collapse of the company that was supposed to include testimony from the former CEO.
Rep. Maxine Waters, D-Calif., chair of the House Committee on Financial Services, said in her opening remarks that “unfortunately, the timing of his arrest denies the public” the opportunity to get answers.
“Rest assured, this committee will not stop until we uncover the full truth behind the collapse of FTX,” Waters said.
Rep. Patrick McHenry, RN.C., the top Republican on the committee, said that lawmakers had “an obligation to do everything in our power to ensure this never happens again.”
McHenry cautioned against shutting down crypto and digital asset marketplaces, stating lawmakers need to address bad actors by passing laws protecting consumers.
He noted, for example, that Congress approved laws addressing situations such as rising railroad costs in the 1800s, while allowing businesses to continue.
“We have to separate out the bad actions of an individual from the good created by an industry and an innovation,” McHenry said.
Rep. French Hill, R-Ark., cited McHenry’s comments while questioning John J. Ray III, a lawyer who took over FTX last month.
“There were frauds and fraudulent actors, but that didn’t mean that we didn’t want to invest in railroads in the United States for the history of the country,” the Little Rock congressman said.
“It didn’t mean we don’t need a vigorous single-family housing market and a secondary market in our country,” he added, referencing the 2008 housing crisis.
Hill has introduced legislation with Republican colleagues establishing definitions of digital assets and stable forms of currencies.
The proposal also clarifies regulations for overseeing these investments. Hill said Thursday the committee has a responsibility to understand the collapse of FTX and create “the appropriate regulatory environment.”
“Let’s not confuse the malfeasance and disgusting activity of FTX with the fact that we need proper, thoughtful regulatory oversight of digital assets,” he said.
In his opening statement, Ray blamed the collapse of FTX on “absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company entrusted with other people’s money or assets.”