On Tuesday, it was announced that Sam Bankman-Fried, former CEO of crypto exchange FTX, had been arrested and indicted. Various fraud and money laundering charges filed against him by three US authorities provide new insight into how he operated.
The Securities and Exchange Commission (SEC) states in its complaint: “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.”
Meanwhile, the Commodity and Futures Trading Commission (CFTC) says it siphoned customer funds for its own use. Over $8 billion in customer deposits are “now missing.” The SDNY has indicted Bankman-Fried on eight charges relating to wire fraud on customers and conspiracy to commit money laundering.
Top regulators hit Bankman-Fried with fraud charges
The SEC alleges that Bankman-Fried sold fraudulent securities. The 30-year-old hid the extent of FTX’s relationship with his crypto trading firm Alameda Research from investors. They say they were under the impression FTX had the right measures in place to protect customer funds. Alameda allegedly had unlimited ability to take positions, in the end misappropriating billions.
In May, it’s claimed multiple lenders called in loans that were extended to Alameda. It was unable to meet those loans. It had “already taken billions of dollars of FTX customer assets.” When these loans were called, “Bankman-Fried directed FTX to divert billions more in customer assets to Alameda,” the document read.
Hundreds of millions of dollars more are suspected to have been misappropriated from Bahamas-based FTX to fund Alameda’s continued investment and loans to executives. Bankman-Fried insists he wasn’t the decision maker, nor aware of its position. The SEC thinks otherwise; that the entire time he “directed” top decisions frequently to Alameda staff, and had “full access” to databases.
Funds were said to have been misappropriated to Alameda, by telling customers to deposit funds into bank accounts controlled by the firm and by allowing it to draw unlimited credit from FTX. The SEC believes:
- Alameda was exempted from liquidation,
- could draw tens of billions of dollars in credit,
- and could have a negative balance on FTX.
Alameda Research valued their assets in an inappropriate manner. The SEC confirms that “the collateral deposited by Alameda was not worth the value assigned to it.” Bankman-Fried told investors that FTX had no exposure to its native token FTT, despite Alameda being exempted from liquidation and using inappropriately valued FTT for collateral at the exchange.
The SEC believes many of the loans to executives or to purchase real estate weren’t on-the-record.
At the same time, the CFTC specifically alleges fraud and material omissions in violation of the Commodities Exchange Act. It reiterates many of the same accusations of failures in transparency, specifically challenging Bankman-Fried’s claims of a “Chinese Wall” between FTX and Alameda.
They say again that FTX used Alameda bank accounts. North Dimension, an Alameda subsidiary which was used for banking, “deliberately did not have a name that was readily-identifiable with Alameda.” It relied on what Bankman-Fried called “the weird Korean account” — said to be secretly controlled by Alameda. They also reiterate that the trading firm was exempted from risk management and was given right of way on FTX systems — allowing its orders to process faster than regular users.
The CFTC says Alameda would “make large exchanges of various stablecoins on behalf of FTX trading, using FTX Trading’s assets rather than its own.” Alameda Research was one of the largest customers of Tether. Bankman-Fried’s attempts to acquire other companies was rooted in a desire to “fill the hole in customer funds that had been created,” it stated.
The formerly known ‘billionaire’ also apparently discussed shutting down Alameda in September — two months before it declared bankruptcy — citing its failure to hedge and the rising cost of capital. FTX executives appear to have found a hole in the books of FTX US as well, and Alameda sent over assets to try to cover it.
The former chief exec of FTX is now surrounded on a fair few sides. It’s been a month since things fell apart, weathering the storm in his Bahamas penthouse. Stateside, the House and Senate are still meeting regularly to decide on a legislative and regulatory response to the collapse.