FTX founder Sam Bankman-Fried led yearslong fraud at company, SEC says

Sam Bankman-Fried diverted customer funds from the start of his cryptocurrency exchange to support his hedge fund, Alameda Research, and to make venture investments, real-estate purchases and political donations, SEC said (Photo: Reuters)
Sam Bankman-Fried diverted customer funds from the start of his cryptocurrency exchange to support his hedge fund, Alameda Research, and to make venture investments, real-estate purchases and political donations, SEC said (Photo: Reuters)

Summary

Founder diverted customer funds from start of crypto exchange to support his hedge fund, regulator says

FTX founder Sam Bankman-Fried diverted customer funds from the start of his cryptocurrency exchange to support his hedge fund, Alameda Research, and to make venture investments, real-estate purchases and political donations, the Securities and Exchange Commission alleged in a lawsuit filed Tuesday.

The SEC said those moves were concealed from investors who poured $1.8 billion into FTX. U.S. investors contributed $1.1 billion of that total. Mr. Bankman-Fried also failed to disclose special treatment that FTX gave to Alameda on its platform, and financial risks posed by the relationship between the exchange and the hedge fund, the SEC alleged in its civil fraud lawsuit.

“Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto," SEC Chair Gary Gensler said. “The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws."

Mr. Bankman-Fried was arrested on Monday in the Bahamas after the U.S. filed criminal charges against him, the authorities in the two countries said. The Commodity Futures Trading Commission also sued the FTX founder, according to the SEC’s press release.

The SEC’s lawsuit against Mr. Bankman-Fried, which is likely to proceed only after he faces criminal charges, seeks civil fines, disgorgement of any illegally earned profits, and a bar from serving as an officer and director of a public company. The SEC said its investigation continues, meaning it could accuse other individuals or companies of wrongdoing.

The exchange’s investors included Sequoia Capital, which gave more than $200 million to FTX and its U.S. affiliate, as well as other big names including Dan Loeb‘s Third Point LLC, Tiger Global Management, the Ontario Teachers’ Pension Plan, SoftBank Group Corp., and Singapore’s investment company Temasek Holdings.

Many of the crypto exchange’s executives and employees also plowed money into FTX, which was valued at $32 billion earlier this year. Some of the large institutions recently said they had conducted extensive due diligence on FTX before deciding to invest, and have since marked down the value of their investments to zero.

Unlike many of the SEC’s earlier enforcement actions against crypto companies, the SEC’s lawsuit doesn’t currently hinge on claims that Mr. Bankman-Fried or FTX issued digital assets that violated investor-protection laws. Instead, it alleges that Mr. Bankman-Fried hid FTX’s practices from investors who supported the company. The 30-year-old was FTX’s chief executive until he resigned last month.

Alameda had taken billions of dollars of FTX customer funds even before the hedge fund faced calls from lenders in May, according to the SEC’s lawsuit.

“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 SEC said.

During the summer, Mr. Bankman-Fried diverted hundreds of millions in customer funds to Alameda, which he used to make additional venture investments and loans to himself and other FTX executives, the complaint alleged.

Alameda also had a “virtually unlimited" line of credit with FTX, which Mr. Bankman-Fried didn’t disclose to investors, the SEC said.

A spokesman for Mr. Bankman-Fried didn’t immediately respond to a request for comment.

Mr. Bankman-Fried told The Wall Street Journal this month that he can’t explain what happened to billions of dollars that customers of his failed cryptocurrency exchange sent to Alameda’s bank accounts. He also said he couldn’t rule out the possibility that money deposited by FTX customers was in fact lent to Alameda.

Mr. Bankman-Fried has said in recent interviews that he no longer ran Alameda and had little insight into its workings even though he owned 90% of it. The SEC’s lawsuit says he remained Alameda’s main decision maker, even after two other executives, Caroline Ellison and Sam Trabucco, became co-chief executives of the firm in 2021.

He also used Alameda as a “piggy bank" to fund real-estate purchases, political contributions and make loans to himself and others, the SEC said. Between March 2020 and September 2022, he authorized over $1.3 billion in loans, including two instances in which he was personally listed as both the borrower and the lender, the SEC alleged.

In media interviews he did as FTX grew into a large, global exchange, Mr. Bankman-Fried maintained that Alameda and FTX were separate businesses and that his trading firm didn’t have any special privileges on the platform. But from the start, Alameda got treatment on FTX that no one else did, the SEC said.

The hedge fund was the only customer allowed to maintain a negative balance at FTX, the regulator said. Mr. Bankman-Fried directed the exchange’s programmers to write computer code that would allow that benefit for Alameda, according to the SEC. Alameda’s collateral at FTX consisted largely of “enormous positions" in illiquid digital assets such as FTT, the token issued by FTX.

Alameda was also able to access FTX customer funds. The SEC said FTX customers who opened accounts with the exchange from 2019 to 2021 actually wired funds to Alameda. In some cases, customers wired funds to an Alameda subsidiary, North Dimension Inc., which didn’t disclose its relationship with Alameda, the SEC said. In total, about $8 billion in customer funds were deposited into Alameda-controlled bank accounts, according to the SEC.

“Alameda did not segregate these customer funds, but instead commingled them with its other assets, and used them indiscriminately to fund its trading operations and Bankman-Fried’s other ventures," the SEC alleged in its lawsuit.

Mr. Bankman-Fried has said that customers routing funds through Alameda was a legacy of the exchange’s early days when FTX didn’t have its own bank account. He has also said that he didn’t realize the size of Alameda’s trades at FTX due to flawed internal systems.

FTX’s internal systems didn’t track the customer funds sent to Alameda as a loan, according to the SEC. The hedge fund also didn’t specify on its financial statements that the money was owed to FTX, the SEC said.

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