FTX founder Bankman-Fried in custody over fraud allegations, bail denied

By Jared Higgs, Luc Cohen and Chris Prentice

NASSAU, Bahamas/NEW YORK (Reuters) – A Bahamian judge denied FTX founder Sam Bankman-Fried bail on Tuesday, hours after US prosecutors charged the 30-year-old with embezzling billions of dollars and violating campaign laws in what has been described as a of America’s biggest financial frauds.

Dressed in a blue suit with no tie, the former CEO of the collapsed cryptocurrency exchange bowed his head and hugged his parents after the judge said his flight risk was too “great” and ordered that he be sent to a prison in the Bahamas until February 8th.

The events of the day saw a stunning fall from grace in recent weeks for Bankman-Fried, who amassed a fortune worth more than $20 billion while riding a cryptocurrency boom to build FTX into one of the world’s most the world’s largest stock exchanges before their abrupt collapse this year.

In an indictment unveiled Tuesday morning, US prosecutors said Bankman-Fried was involved in a scheme to defraud FTX’s customers by embezzling their deposits to pay expenses and debt and to make investments on behalf of its crypto hedge fund, Alameda Research LLC.

He also defrauded lenders to Alameda by providing false and misleading information about the condition of the hedge fund, and tried to disguise the money he made from wire fraud, prosecutors said.

They accused Bankman-Fried of using the stolen money to make “tens of millions of dollars in campaign contributions”.

US Attorney Damian Williams in New York said the investigation was “ongoing” and “moving fast”.

“While this is our first public announcement, it won’t be our last,” he said.

Williams described the collapse as one of the “biggest financial frauds in American history”.

‘SHORTS AND T-SHIRTS’

Prior to his arrest, Bankman-Fried, who founded FTX in 2019, was an unconventional figure who wore wild hair, T-shirts and shorts to panel appearances with statesmen such as former US President Bill Clinton. He became one of the largest Democratic donors, contributing $5.2 million to President Joe Biden’s 2020 campaign. Forbes estimated his wealth at $26.5 billion a year ago.

“You can commit fraud in shorts and t-shirts in the sun. You can,” lawyer Williams told reporters.

Bankman-Fried has previously apologized to clients and acknowledged oversight deficiencies at FTX, but said he personally does not believe he is criminally liable.

He faces up to 115 years in prison if convicted on all eight counts, prosecutors said, though each sentence depends on a number of factors.

Williams declined to say whether prosecutors would charge other FTX executives and whether FTX insiders were cooperating with the investigation.

Both the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) also filed suit Tuesday.

The CFTC sued Bankman-Fried, Alameda and FTX for alleged fraud involving digital commodities.

Since at least May 2019, FTX has raised more than $1.8 billion from equity investors in a years-long “brutal, multi-year scheme” in which Bankman-Fried hid that FTX was diverting client funds to Alameda Research, the SEC alleged.

Tuesday’s hearing in the Bahamas, where FTX is based and where Bankman-Fried was arrested in his gated community in the capital, marked his first face-to-face public appearance since the collapse of the cryptocurrency exchange.

Bankman-Fried seemed relaxed when he arrived at the heavily guarded court of the Bahamas. He told the court he could challenge extradition to the United States.

Bahamian prosecutors had asked that Bankman-Fried be denied bail if he challenges extradition.

“Mr. Bankman-Fried is discussing the allegations with his legal team and is considering all of his legal options,” his attorney, Mark S. Cohen, said in an earlier statement.

Bankman-Fried is expected to appear in court again in the Bahamas on February 8.

‘BRAZEN’ SCHEDULE

FTX filed for bankruptcy on Nov. 11, losing an estimated 1 million customers and other investors billions of dollars. The collapse reverberated in the crypto world and caused bitcoin and other digital assets to plummet.

Bankman-Fried resigned as CEO of FTX on the same day as the bankruptcy filing. FTX’s liquidity crisis came after it secretly used $10 billion in client funds to prop up its own trading firm Alameda, Reuters reports. At least $1 billion in customer assets had disappeared.

The collapse was one of a series of crypto industry bankruptcies this year as digital asset markets collapsed from their 2021 peaks. A crypto exchange is a platform for investors to trade digital tokens such as bitcoin.

FTX’s current CEO, John Ray, told lawmakers that FTX lost $8 billion in customer money, saying the company demonstrated “absolute concentration of control in the hands of a small group of extremely inexperienced, non-sophisticated individuals.”

As legal challenges mount, the US Congress is trying to legislate to rein in the loosely regulated industry.

FTX has shared findings with the SEC and US prosecutors and is investigating whether Bankman-Fried’s parents were involved in the operation.

(Additional reporting by Jack Queen in New York and Hannah Lang, Chris Prentice and Susan Heavey in Washington, written by Nick Zieminski and Deepa Babington, edited by Noeleen Walder, Megan Davies, Anna Driver, Matthew Lewis and Sam Holmes)

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