SEC complaint alleges Bankman-Fried orchestrated scheme to defraud investors of billions for speculative investments and to grow crypto empire

SEC complaint alleges Bankman-Fried orchestrated scheme to defraud investors of billions for speculative investments and  to grow crypto empire
FTX logo is seen in this illustration taken, November 8, 2022. REUTERS/Dado Ruvic/Illustration

NASSAU, BAHAMAS — The US Securities Exchange Commission (SEC) has charged disgraced former FTX CEO Sam Bankman-Fried with orchestrating a scheme to defraud investors of billions of dollars which he diverted to his Alameda Research crypto hedge fund for his own personal benefit and to help grow his crypto empire.

The regulator claims that since at least May 2019, FTX raised more than $1.8 billion from equity investors, including approximately $1.1 billion from approximately 90 US -based investors.

The SEC complaint alleges that Bankman-Fried touted FTX as a safe, responsible crypto asset trading platform, when in reality he orchestrated a years-long fraud. The SEC alleges that Bankman-Fried concealed the undisclosed diversion of FTX customers’ funds to Alameda Research, the risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens and used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.

The SEC in court filings claimed that Bankman-Fried “portrayed himself as a responsible leader of the crypto community.” 

“He touted the importance of regulation and accountability,” it read.

“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.  Bankman-Fried hid all of this from FTX’s equity investors, including US investors, from whom he sought to raise billions of dollars in additional funds,” the SEC has asserted.

According to the SEC, 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,” the regulator stated.

“When prices of crypto assets plummeted in May 2022, Alameda’s lenders demanded repayment on billions of dollars of loans. Despite the fact that Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations. 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,” the regulator stated in its court filings. 

According to the regulator, 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 fulfill, Bankman-Fried misled investors from whom he needed money to plug a multi-billion-dollar hole. His brazen, multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliated entities filed for bankruptcy on November 11, 2022.”

According to the regulator, “from its inception” FTX had poor controls and fundamentally deficient risk management procedures. “Assets and liabilities of all forms were generally treated as interchangeable, and there were insufficient distinctions between the assignment of debts and credits to Alameda, FTX, and executives, including Bankman-Fried, Wang, and Singh. This reality was a sharp contrast to the image of FTX that Bankman-Fried consistently portrayed to the public and to investors—a mature company that managed funds and risk in a conservative, rigorous manner.”

Bankman-Fried was arrested by police at his Albany apartment Monday evening. Attorney General Ryan Pinder confirmed the arrest followed the receipt of a formal request from the United States that it has filed criminal charges against Bankman-Fried and would likely request his extradition.

Bankman-Fried was remanded to prison yesterday after he was denied bail.