Founder of FTX sued for defrauding crypto investors

NEW YORK (AP) — The U.S. government on Tuesday charged Samuel Bankman-Fried, the founder and former CEO of cryptocurrency exchange FTX, with a host of financial crimes, alleging that he deliberately misled clients and investors to protect himself and others. enrich while playing a pivotal role in the collapse of the multi-billion dollar company.

Federal prosecutors said that as of 2019, the year it was founded, Bankman-Fried “devised a scheme and artifice to defraud FTX’s customers and investors.” He illegally diverted their money to cover expenses, debts and high-risk transactions at the crypto hedge fund he founded in 2017, Alameda Research, and to make lavish real estate purchases and large political donations, prosecutors said in a 13 indictment. pages.

Bankman-Fried, 30, was arrested in the Bahamas on Monday at the request of the US government, which charged him with eight criminal offenses ranging from wire fraud to money laundering to conspiracy to commit fraud. If convicted on all charges, Bankman-Fried — referred to as “SBF” by crypto enthusiasts — could face decades in prison.

Speaking at a news conference on Tuesday, US Attorney Damian Williams called it “one of the greatest frauds in US history,” saying the investigation is ongoing and moving quickly.

Bankman-Fried has fallen hard and fast from the top of the cryptocurrency industry he helped evangelize. FTX filed for bankruptcy on November 11, when it ran out of money following the cryptocurrency equivalent of a bank run.

Before the bankruptcy, he was considered by many in Washington and on Wall Street to be a digital currency prodigy, someone who could help bring them mainstream, in part by working with policymakers to bring more oversight and confidence to the industry.

Bankman-Fried had been worth tens of billions of dollars – at least on paper – and managed to lure celebrities like Tom Brady or former politicians like Tony Blair and Bill Clinton to his conferences at luxury resorts in the Bahamas. A prominent Silicon Valley company, Sequoia Capital, invested hundreds of millions of dollars in FTX.

Sporting shorts and T-shirts to contrast himself with the buttoned-up world of Wall Street, he was the subject of rambling media profiles, an outspoken advocate for a type of charity known as “effective altruism,” and garnered millions of Twitter followers.

But since the implosion of FTX, Bankman-Fried and company have been compared to other disgraced financiers and companies, such as Bernie Madoff and Enron.

The criminal charges against Bankman-Fried and “others” at FTX are in addition to civil charges announced Tuesday by the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC alleges that Bankman-Fried defrauded FTX clients by making loans to himself and other FTX executives and illegally using investors’ money to purchase real estate for himself and his family.

No other FTX executives were named in the indictment, nor was Alameda Research CEO Caroline Ellison. Also not named in the indictment: Bankman-Fried’s father, Joseph Bankman, a law professor at Stanford University who was considered an advisor to his son.

US authorities said they will try to recover Bankman-Fried’s financial gains from the alleged plan.

A Bankman-Fried attorney, Mark S. Cohen, said Tuesday that he is “studying the allegations with his legal team and considering all of his legal options.”

During a congressional hearing on Tuesday, scheduled before Bankman-Fried’s arrest, the new CEO charged with guiding FTX through bankruptcy proceedings came under harsh criticism. He said there was little oversight of clients’ money and “very few rules” about how their money could be used.

John Ray III told members of the House Financial Services Committee that the collapse of FTX, resulting in the loss of more than $7 billion, was the culmination of months, if not years, of bad decisions and bad financial controls.

“This is not something that happened overnight or in a week,” he said.

He added: “This is just good old-fashioned embezzlement, taking money from others and using it for your own purposes.”

Before his arrest, Bankman-Fried was locked up in his luxury residence in the Bahamas. US authorities are expected to request his extradition to the US, although the timing of that request is unclear.

At a court hearing in the Bahamas on Tuesday, prosecutors argued that Bankman-Fried posed a flight risk and should be held without bail, according to Our News, a news outlet based there. His lawyers said he will likely request a formal extradition hearing.

Bankman-Fried’s was previously one of the world’s wealthiest people on paper; according to Forbes, his net worth reached $26.5 billion at one point. He was a prominent Washington personality and donated millions of dollars to Democrats and Republicans. U.S. attorney Williams said Tuesday that Bankman-Fried made “tens of millions of dollars” from illegal campaign donations.

His net worth quickly unraveled last month, when reports questioned the strength of FTX’s balance sheet. While customers tried to withdraw billions of dollars, FTX could not keep up with the requests: they had run out of money.

“We argue that Sam Bankman-Fried built a house of cards based on deception while telling investors it was one of the safest buildings in crypto,” SEC Chairman Gary Gensler said.

The SEC complaint alleges that since May 2019, Bankman-Fried had raised more than $1.8 billion from investors by promoting FTX as a safe, responsible platform for trading crypto assets.

Instead, the complaint says, Bankman-Fried diverted customer money to Alameda Research without telling them.

“He then used Alameda as his personal piggy bank to purchase luxury condominiums, support political campaigns, and make private investments, among other things,” the indictment reads.

In the weeks following FTX’s collapse, but before his arrest, Bankman-Fried gave interviews to various news organizations seeking ways to explain what had happened.

For example, Bankman-Fried said he has not “knowingly” misused customer money and that he believes angry customers will eventually get their money back.

At Tuesday’s congressional hearing, the new FTX CEO bluntly disputed these claims: “We’re never going to get all of these assets back,” Ray said.

Jack Sharman, an attorney at Lightfoot, Franklin & White, said Bankman-Fried’s recent comments to the media could be damaging and admissible evidence in court. “Those statements made during that speaking engagement were in no way helpful to his case,” Sharman said.

In its complaint, the SEC disputed Bankman-Fried’s recent statements that FTX and its clients were victims of a sudden market collapse that overturned existing safeguards.

“FTX was operating behind a veneer of legitimacy,” said Gurbir Grewal, director of the SEC’s enforcement division. “That layer was not only thin, it was also fraudulent.”

The collapse of FTX — which followed other cryptocurrency debacles earlier this year — adds urgency to efforts to regulate the industry.

Yesha Yadav, a law professor at Vanderbilt University who specializes in financial and securities regulation, said U.S. lawmakers and regulators have been too slow to act, but that is likely to change.

“Legislators are clearly under pressure to do something given that so many people have lost their money,” she said.

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Hussein contributed to this report from Washington.

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