Samuel Bankman-Fried concealed his diversion of FTX customers’ funds to crypto trading firm Alameda Research while raising over $1.8 billion from investors
The Securities and Exchange Commission charged Samuel Bankman-Fried today with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the cryptocurrency trading platform he co-founded. Investigations into other alleged securities law violations, as well as other entities and individuals, are ongoing.
According to the SEC’s complaint, FTX, based in The Bahamas, has raised more than $1.8 billion from equity investors since at least May 2019, including approximately $1.1 billion from approximately 90 U.S.-based investors. Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform in his investor representations, emphasizing FTX’s sophisticated, automated risk measures to protect customer assets.
The complaint alleges that, in reality, Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors (1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund; and (2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Bankman-Fried is also accused of using commingled FTX customer funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.
“We allege that Sam Bankman-Fried built a house of cards on deception while telling investors it was one of the safest buildings in crypto,” said SEC Chair Gary Gensler. “Mr. Bankman-alleged Fried’s fraud serves as a wake-up call to crypto platforms that they must comply with our laws. With time-tested safeguards such as properly protecting customer funds and separating conflicting lines of business, compliance protects both those who invest on and those who invest in crypto platforms.
It also sheds light on trading platform behavior for both investors and regulators through disclosure and examination authority. The SEC’s Enforcement Division is prepared to take action against platforms that do not comply with our securities laws.”
“Mr. Bankman-Fried created a veneer of legitimacy for FTX by touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service. However, as we allege in our complaint, that veneer was not only thin, but also fraudulent “said Gurbir S. Grewal, Director of the Securities and Exchange Commission’s Division of Enforcement.
The demise of FTX highlights the very real risks that unregistered crypto asset trading platforms can pose to both investors and customers. While we continue to investigate FTX and other entities and individuals for potential violations of federal securities laws, as alleged in our complaint, we hold Mr. Bankman-Fried accountable today for fraudulently raising billions of dollars from FTX investors and misusing funds belonging to FTX’s trading customers.
The SEC’s complaint accuses Bankman-Fried of violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s complaint seeks injunctions against future securities law violations; an injunction prohibiting Bankman-Fried from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar.
In parallel actions, the United States Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission (CFTC) announced charges against Bankman-Fried today.
The SEC’s ongoing investigation is being led by Devlin N. Su, Ivan Snyder, and David S. Brown of the Crypto Assets and Cyber Unit, as well as Brian Huchro and Pasha Salimi. It is overseen by Amy Flaherty Hartman, Michael Brennan, Jorge Tenreiro, and David Hirsch. Amy Burkart and David D’Addio will lead the SEC’s litigation, which will be supervised by Ladan Stewart and Olivia Choe. Steven Buchholz, Erin Wilk, Serafima McTigue, William Connolly, and Howard Kaplan all contributed to the investigation.
The SEC thanks the U.S. Attorney’s Office for the Southern District of New York, the FBI, and the CFTC for their assistance.
To read more posts by NfoNews, click here.