The U.S. government charged Sam Bankman-Fried, the founder and former CEO of cryptocurrency exchange FTX, with a host of financial crimes on Tuesday, alleging he intentionally deceived customers and investors to enrich himself and others, while playing a central role in the company’s multibillion-dollar collapse.
The 13-page indictment says that, beginning in 2019, Bankman-Fried devised “a scheme and artifice to defraud” FTX’s customers and investors, diverting their money to pay expenses and debts at his crypto hedge fund, Alameda Research, and to make lavish real estate purchases and large political donations.
Bahamian authorities took Bankman-Fried into custody Monday. This was at the request of U.S. officials. The eight charges against him range from wire fraud to money laundering and conspiracy to commit crime. Bankman-Fried was also charged with illegal campaign contributions. This is an important charge, as Bankman Fried was the biggest political donor this year.
According to Nicholas Biase (a spokesperson for U.S.prosecutors), the charges could land Bankman Fried in prison for decades with maximum penalties of 115 year.
This criminal indictment comes on top of the civil charges that were announced by the Securities and Exchange Commission earlier Tuesday. According to the SEC, Bankman-Fried is accused of defrauding investors and using their money illegally to purchase real estate for himself and his family.
U.S. authorities said they will try to claw back any of Bankman-Fried’s financial gains from the alleged scheme. They expect to request Bankman-Fried’s extradition to the U.S. but the timing is not clear.
A lawyer for Bankman-Fried, Mark S. Cohen, said Tuesday he is “reviewing the charges with his legal team and considering all of his legal options.”
FTX filed for bankruptcy in November 2011, when it ran out money following a cryptocurrency equivalent to a bank run.
Bankman-Fried, who was arrested after FTX collapsed, had been hiding in his Bahamian luxury home in Nassau since then. He was due to appear before a Bahamian Court Tuesday. He is not expected to appear in a Bahamian court Tuesday. The U.S. still hasn’t filed an extradition request for the Bahamas.
Bankman-Fried was one of the world’s wealthiest people on paper; at one point his net worth reached $26.5 billion, according to Forbes. He was also a prominent personality in WashingtonHe gave millions of dollars to Democratic campaigns and causes. However, he also donated money for Republicans. FTX grew rapidly to become the second largest cryptocurrency exchange in the globe.
That all unraveled quickly last monthReports are called into question the strength of FTX’s balance sheet. As customers sought to withdraw billions of dollars, FTX could not satisfy all the requests because it apparently had used its customers’ deposits to fund investments at Bankman-Fried’s trading arm, Alameda Research.
“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,” said SEC Chair Gary Gensler.
According to the SEC complaint, Bankman-Fried has raised more than $1.8 Billion from investors since May 2019. He promoted FTX as a safe and responsible platform for trading crypto assets.
Instead, the complaint says, Bankman-Fried diverted customers’ funds to Alameda Research without telling them.
“He then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses,” the complaint reads. “None of this was disclosed to FTX equity investors or to the platform’s trading customers.”
Alameda did not segregate FTX investor funds and Alameda investments, the SEC said, using that money to “indiscriminately fund its trading operations,” as well as other ventures of Bankman-Fried.
Bankman-Fried’s arrest came just a day before he was due to testify before the House Financial Services Committee. Rep. Maxine Waters, D-Calif., chairwoman of the committee, said she was “disappointed” that the American public, and FTX’s customers, would not get to see Bankman-Fried testify under oath.
That hearing went ahead, however, with FTX’s new CEO, John Ray III, providing withering testimony about the company’s practices.
Ray explained to Congress that the collapse in FTX, resulting from a loss of over $7 billion, was the result of months or even years of poor financial decisions and financial control.
“This is not something that happened overnight or in a context of a week,” he said.
He added: “This is just plain, old fashioned embezzlement, taking money from others and using it for your own purposes. This is not sophisticated at all.”
Bankman-Fried said recently that he did not “knowingly” misuse customers’ funds, and that he believes angry customers will eventually get their money back. Bankman-Fried stated that FTX was a victim a sudden market collapse and that customer deposits had been safe until then.
The SEC challenged Bankman-Fried’s assertion Tuesday in its complaint.
“FTX operated behind a veneer of legitimacy,” said Gurbir Grewal, director of the SEC’s Division of Enforcement. “But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent.”
The collapse of FTX — which followed other cryptocurrency debacles earlier this year — is adding urgency to efforts to regulate the industry.
Yesha Yadav, an Vanderbilt University law professor specializing in financial and securities regulations, stated that U.S. legislators and regulators have been slow to act but that this is likely change.
“Lawmakers are clearly under pressure to do something, given that so many people have lost their money,” she said.
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Fatima Hussein, Associated Press writer in Washington, contributed to this report.