(Bloomberg) — U.S. authorities have alleged that fallen crypto expert Sam Bankman-Fried defrauded investors in his FTX empire and stole billions of dollars as part of a “massive, year-long fraud” for his own benefit.
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Civil charges filed by the Securities and Exchange Commission on Tuesday alleged that Bankman-Fried had been involved in a scheme to defraud investors in FTX and its companies since May 2019, and that the trial only ended last month when he resigned from his position as chief executive officer as part of FTX’s bankruptcy filing.
Bankman-Fried had raised more than $1.8 billion in that time from equity investors including SoftBank Group, Temasek, Tiger Global Management and Insight Partners. After calling in bankruptcy lawyers, the equity holdings of everyone who had supported FTX effectively dropped to zero.
The SEC alleged in a 28-page document detailing its claims against SBF (emphasis ours):
Unbeknownst to those investors (and to FTX’s trading clients), Bankman-Fried orchestrated a massive, year-long fraud, diverting billions of dollars from the trading platform’s client funds for his own personal gain and to grow his crypto empire.
During this period, Bankman-Fried portrayed himself as a responsible leader of the crypto community. He praised the importance of regulation and accountability. He told the public, including investors, that FTX was both innovative and responsible. Clients around the world believed his lies and sent billions of dollars to FTX, believing their assets were safe on the FTX trading platform. But from the start, Bankman-Fried improperly diverted client assets into its private crypto hedge fund, Alameda Research LLC (“Alameda”), then used those client funds to make covert venture investments, lavish real estate purchases and large political donations.
He told investors and potential investors that FTX had first-class, advanced automated risk controls to protect client assets, that those assets were safe, and that Alameda was just another platform client with no special privileges. These statements were false and misleading. In reality, Bankman-Fried had exempted Alameda from the risk mitigation measures and given Alameda significant special treatment on the FTX platform, including a virtually unlimited “line of credit” funded by the platform’s clients.
As he splurged lavishly on office space and condominiums in the Bahamas, and poured billions of dollars of client funds into speculative venture investments, the Bankman-Fried house of cards began to collapse.
As the broader crypto market fell in value in 2022, Alameda lenders began seeking repayment. Although FTX reportedly already gave Alameda billions of dollars in client funds, Bankman-Fried began giving Alameda even more money to cover those positions, the SEC said. Over the summer, he also began diverting money from FTX clients into venture investments and making loans to himself and other executives, the SEC added.
The filing detailed FTX’s origin story: from SBF founding Alameda with co-founder Gary Wang in 2017, to setting up FTX in 2019 and bringing others on board who would form the exchange’s internal clique of senior executives – Alameda co-CEOs Caroline Ellison and Sam Trabucco and Nishad Singh as co-founder of FTX. About $1.1 billion of the money raised came from U.S. investors, the SEC said.
It alleged that all statements Bankman-Fried made to investors during this period were misleading because he chose to omit information about Alameda’s special treatment, including its unique ability to carry a negative balance on FTX, and the exemption of a critical portion of the risk associated with FTX. management system, the automatic liquidation function.
From page 10 of the submission:
Bankman-Fried funneled FTX funds from customers to Alameda in essentially two ways: (1) by directing FTX customers to deposit fiat currency (e.g., U.S. dollars) into bank accounts controlled by Alameda; and (2) by enabling Alameda to raise funds from a virtually unlimited “line of credit” with FTX, which was funded by assets of FTX customers.
As a result, there was no meaningful distinction between FTX client funds and Alameda’s own funds. Bankman-Fried thus gave Alameda carte blanche to use the assets of FTX clients for its own trading activities and for any other purposes Bankman-Fried deemed necessary.
In addition, for a period after its formation, Bankman-Fried claimed that FTX was unable to secure its own bank accounts and thus was forced to use Alameda’s accounts to store assets. A balance sheet touted to potential investors by Bankman-Fried the week he was trying to avoid bankruptcy described a “hidden, poorly internally labeled ‘fiat@’ account” with a $8 billion negative balance.
After the SEC discovered bank accounts controlled by a secret Alameda subsidiary, North Dimension Inc.
Bankman-Fried instructed FTX to have customers send money to North Dimension in an attempt to hide the fact that the money was being sent to an account controlled by Alameda.
Alameda did not segregate these client funds, but instead mixed them with its other assets and used them indiscriminately to fund its trading activities and Bankman-Fried’s other ventures.
This multi-billion dollar liability was reflected in an internal account in the FTX database that was not linked to Alameda, but was instead named “firstname.lastname@example.org.” Characterizing the amount of customer money sent to Alameda as an FTX internal account had the effect of hiding Alameda’s liability in FTX’s internal systems.
And how the account was lost:
In 2022, FTX began attempting to separate the portion of Alameda’s liability in the “email@example.com” account from the portion attributable to FTX (i.e. to recover customer deposits sent to Alameda-controlled bank accounts , separate from deposits made to FTX-controlled bank accounts). Alameda’s portion — which amounted to more than $8 billion in FTX client assets deposited in Alameda-controlled bank accounts — was initially moved to another account in the FTX database.
However, because this change caused FTX’s internal systems to automatically charge Alameda interest on the debt in excess of $8 billion, Bankman-Fried ordered the Alameda debt moved to an account that does not charge interest would be brought. This account was linked to a person who had no apparent connection to Alameda. As a result, this change had the effect of further concealing Alameda’s liability in FTX’s internal systems.
When falling crypto prices meant it was time to actually liquidate Alameda’s holdings on FTX, Bankman-Fried said in media interviews that he was unaware of how illiquid Alameda’s collateral had become. This was despite FTX’s supposedly state-of-the-art risk engine, which Bankman-Fried promoted to regulators as an example of how crypto could avoid a 2008-style crisis if implemented at scale. Now, the SEC:
Bankman-Fried was well aware of the impact of Alameda’s positions on FTX’s risk profile. For example, on or about October 12, 2022, Bankman-Fried analyzed the manipulation of a digital asset on an unrelated crypto platform in a series of tweets. In explaining what happened, Bankman-Fried distinguished between an asset’s “current price” and its “fair price,” acknowledging that “large positions — especially in illiquid tokens — can have a lot of impact.”
Bankman-Fried claimed that FTX’s risk engine required clients to “fully secure a position” when the client’s position is “large and illiquid enough.” But Bankman-Fried knew, or was reckless in not knowing, that by failing to mitigate the impact of large and illiquid tokens placed as collateral by Alameda, FTX engaged in exactly the same behavior and created the same risk, that he warned against.
The SEC also alleged that Bankman-Fried told an investor in late 2021 that FTX had no exposure at all to its own FTT token, and that investor then put $30 million into the company.
Between March 2020 and September 2022, the SEC alleged that Bankman-Fried made more than $1 billion in loans from Alameda, at times to himself as a borrower and to himself as Alameda’s CEO. Singh and Wang also borrowed hundreds of millions of dollars each, with these loans being “poorly documented and sometimes not documented at all.”
As time went on, authorities claimed that Bankman-Fried continued to lie to the public, stating multiple times on Twitter that clients’ assets were safe on FTX and that FTX would always be able to accommodate withdrawal requests. The former CEO of FTX was arrested in the Bahamas on Monday.
–With help from Annie Massa.
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