Fraud, fraud, fraud: Charges against Sam Bankman-Fried by CFTC, SEC, and New York

Rick Steves

Fraud charges were made by the United States Attorney, the CFTC, and the SEC.

Sam Bankman-Fried

The Commodity Futures Trading Commission, the Securities and Exchange Commission, and United States Attorney for the Southern District of New York have filed charges against Sam Bankman-Fried in the aftermath of the FTX collapse.

United States Attorney charged the former FTX chief executive with wire fraud, commodities fraud, securities fraud, and money laundering. The CFTC is suing three defendants (SBF, FTX, Alameda) for causing the loss of over $8 billion in FTX customer deposits. The SEC is focused on defending FTX’s equity investors defrauded by Sam Bankman-Fried.

CFTC says SBF, FTX, and Alameda harmed clients in $8 billion fraud

The Commodity Futures Trading Commission has filed a complaint in the U.S. District Court for the Southern District of New York against Samuel Bankman-Fried, FTX Trading Ltd. d/b/a FTX.com (FTX), and Alameda Research LLC (Alameda).

Defendants are charged with fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce, which caused the loss of over $8 billion in FTX customer deposits.

The complaint alleges that, although the centralized digital asset derivative platform FTX claimed that both fiat and digital assets of clients would be held in its custody and segregated from FTX’s own assets, the reality was that customer assets were routinely accepted and held by Alameda, a sister company that provided market making.

The regulator also alleged that Alameda, Bankman-Fried, and others appropriated customer funds for their own operations and activities, including luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.

In addition, the CFTC argues that, at Bankman-Fried’s direction, FTX employees created features in the FTX code that favored Alameda and allowed it to execute transactions even when it did not have sufficient funds available, including an “allow negative flag” and effectively limitless line of credit that allowed Alameda to withdraw billions of dollars in customer assets from FTX.

CFTC Chairman Rostin Behnam. “The CFTC continues to be fully committed to using all available enforcement tools authorities to protect investors and root out those who seek to profit through fraud and misappropriation.”

CFTC Acting Director of Enforcement Gretchen Lowe, said: “Digital commodity asset markets continue to present risks for investors due to the lack and of basic protections. As defendants touted and marketed FTX.com as a model digital commodity asset platform, defendants were committing fraud to the detriment of US investors and to the credibility of the digital asset markets. We will work tirelessly to use the full scope of our enforcement authority to hold such fraudsters accountable.”

SEC says Samuel Bankman-Fried defrauded equity investors in FTX Trading Ltd.

In a parallel, separate action, the Securities and Exchange Commission charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX) as the Bahamas-based firm raised over $1.8 billion, including about $1.1 billion from 90 U.S.-based investors.

The “years-long fraud” concealed from FTX’s investors that FTX customers’ funds were diverted to Alameda Research LLC, his privately-held crypto hedge fund. In addition, Alameda enjoyed undisclosed special treatment (including virtually unlimited “line of credit” and exemption from certain key FTX risk mitigation measures). FTX was exposed to undisclosed risk stemming from Alameda’s significant holdings of overvalued, illiquid assets such as FTT.

The complaint further alleged that Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.

SEC Chair Gary Gensler, said: “We allege that 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. 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. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, commented: “FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, 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. But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent. FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike. While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers.”

In another parallel, separate action, on December 13, 2022, the United States Attorney for the Southern District of New York unsealed an indictment charging Bankman-Fried with wire fraud, commodities fraud, securities fraud, and money laundering.

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