FTX chief charged in one of ‘biggest financial frauds’ in US history

Washington/New York: Sam Bankman-Fried has been accused of engineering “one of the biggest financial frauds in American history” as US prosecutors filed criminal charges against the founder of failed cryptocurrency exchange FTX.

In an indictment unsealed, the US Department of Justice charged Bankman-Fried with eight counts including conspiracy to commit wire fraud on customers and lenders, money laundering and violations of campaign finance laws. Bankman-Fried, who was arrested in the Bahamas on Monday, faces years in prison if convicted.

The charges pointed to a long-running scheme to misappropriate the deposits of exchange customers to pay debts and expenses of Bankman-Fried’s private trading firm Alameda Research and to make investments. The conspiracy ran from 2019 — the year he founded FTX — until its collapse last month, according to the indictment.

The failure of Bahamas-based FTX, once valued at $32bn, has resulted in billions of dollars of potential losses for millions of creditors, including retail investors, and sent shockwaves through the crypto industry.

Damian Williams, US attorney for the Southern District of New York, described the alleged crimes as “one of the biggest financial frauds in American history” at a news conference. Williams said he had approved the charges against Bankman-Fried last week.

The criminal case was unsealed as lawmakers in Washington conducted a hearing into the FTX bankruptcy. Bankman-Fried had been scheduled to testify to the US House financial services committee before he was arrested at his luxury penthouse by Bahamian police.

John Ray, FTX’s court-appointed new chief executive, told the hearing: “This isn’t sophisticated whatsoever, this is just plain old embezzlement.”

Bankman-Fried’s lawyer said he was “reviewing the charges with his legal team and considering all of his legal options”. FTX declined to comment.

A Bahamas judge denied Bankman-Fried’s bail application late on Tuesday, news agencies reported, saying that he represented a flight risk and should remain in jail. The judge scheduled a February 8 hearing on his possible extradition to face the US charges, Bloomberg reported.

In civil charges also filed against Bankman-Fried, the US Securities and Exchange Commission said he orchestrated a fraud that began the day FTX was launched and continued at his personal direction until November. Customer funds were diverted to make “undisclosed venture investments, lavish real estate purchases and large political donations”, the SEC 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,” said Gary Gensler, SEC chair.

The regulator accused him of defrauding venture capitalists and other equity investors who pumped $1.8bn into Bahamas-based FTX since May 2019. Before its failure FTX had won the backing of several of the world’s best-known investors including BlackRock, Sequoia Capital and the Ontario Teachers’ Pension Plan.

The Commodity Futures Trading Commission charged Bankman-Fried, FTX and Alameda with fraud and material misrepresentations. Computer code written by FTX provided an “effectively limitless line of credit that allowed Alameda to withdraw billions of dollars in customer assets from FTX”, the regulator said.

Bankman-Fried in recent weeks insisted he was unaware of the details of what Alameda was doing. He has also denied intentional wrongdoing and apologised for what he characterised as oversights and errors.

Ray said FTX was run by unsophisticated managers who used Slack messages to record expenses and QuickBooks software for accounting, which he called “a very nice tool, just not for a multibillion-dollar company”. He said it would take months to track down assets and “at the end of the day, we are not going to be able to recover all the losses here”.

The SEC alleged Bankman-Fried had full control and access to information at FTX and Alameda, and that he “directed investment and operational decisions” at the trading firm. The regulator claimed Bankman-Fried had taken steps this year to hide billions of dollars of FTX customer balances held at Alameda.

In draft testimony prepared for the US House committee hearing and obtained by The Wall Street Journal, Bankman-Fried said he began FTX’s international exchange in 2019 and “began transitioning away from an active role in Alameda Research then”. He added, “In particular, I was not running Alameda Research this past year.”

Bankman-Fried was a major US political donor who gave mainly but not exclusively to Democrats. Williams alleged the donations were funded with stolen customer assets.

“All of this dirty money was used in service of Bankman-Fried’s desire to buy bipartisan influence and impact the direction of public policy in Washington,” Williams said.