by NEW YORK, Dec 13 (Reuters) – Sam Bankman-Fried, founder and former CEO of cryptocurrency exchange FTX, was charged by US regulators on Tuesday with defrauding investors in what regulators called “a house of cards,” with further charges expected later on Tuesday.
Both the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) said Bankman-Fried committed fraud in lawsuits filed Tuesday. Criminal charges are also awaited from the US Department of Justice.
The 30-year-old Bankman-Fried was arrested Monday at his home in the Bahamas, where FTX was based, ahead of a possible extradition lawsuit to the United States.
“As he spent lavishly on office space and condominiums in the Bahamas, and sank billions of dollars of client funds into speculative venture investments, the Bankman-Fried house of cards began to crumble,” the filing said.
The CFTC sued Bankman-Fried, its hedge fund Alameda Research LLC and FTX on Tuesday, over alleged fraud involving digital commodity assets.
A spokesperson for FTX Debtors declined to comment.
More charges are expected to be announced Tuesday by the United States Attorney’s Office for the Southern District of New York.
Since at least May 2019, FTX has raised more than $1.8 billion from equity investors in a years-long “brazen, multi-year scheme” in which Bankman-Fried covered up that FTX was diverting client funds to its cryptocurrency hedge fund affiliate, Alameda Research LLC, the SEC said.
As the public believed Bankman-Fried’s “lies” and sent billions of dollars to FTX, he improperly diverted client funds to his hedge fund, the SEC said in a court filing. He continued to divert FTX client funds even as it was increasingly clear that Alameda and FTX could not make clients integer, the SEC said.
Representatives for Bankman-Fried declined to comment. Bankman-Fried apologized to clients and acknowledged FTX’s oversight deficiencies, but said he doesn’t personally believe he bears any criminal liability.
Bankman-Fried founded FTX in 2019 and rode a cryptocurrency boom to transform it into one of the largest digital token exchanges in the world. Forbes pegged his net worth a year ago at $26.5 billion, and he’s become a major donor to U.S. political campaigns, media and other causes.
A cryptocurrency exchange is a platform where investors can trade digital tokens such as bitcoin.
CRYPTO INVESTORS LOST BILLIONS
FTX filed for bankruptcy on Nov. 11, leaving an estimated 1 million customers and other investors facing billions of dollars in losses. The crash reverberated throughout the cryptocurrency world and sent bitcoin and other digital assets crashing.
The SEC said Bankman-Fried has exempted hedge fund Alameda from the risk mitigation measures it has publicly touted, giving the firm special treatment and a virtually unlimited “line of credit” funded by the platform’s clients.
The SEC said it was charging Bankman-Fried with violating the anti-fraud provisions of US securities laws and would seek the disqualification of the director and officer and a fine against Bankman-Fried. It would also seek to prevent Bankman-Fried from participating in future purchases, offers and sales of securities other than his personal account.
“We argue that Sam Bankman-Fried built a house of cards based on deception while telling investors it was one of the most secure buildings in crypto,” SEC Chairman Gary Gensler said in a statement.
Bankman-Fried was arrested Monday night in the Bahamas and was due to appear before a magistrate on Tuesday, marking his first public appearance in person since the stunning collapse of FTX, which filed for bankruptcy in November.
Police in the Bahamas, where FTX was based, said he was arrested Monday night in his upscale gated community called Albany in the capital, Nassau.
Damian Williams, the U.S. attorney for the Southern District of New York, said in a statement Monday evening that the arrest was at the request of the U.S. government and a charge against Bankman-Fried will be opened Tuesday.
The Bahamian attorney general’s office said it expects him to be extradited to the United States. Bahamian police said he was arrested for “various financial crimes against the laws of the United States, which are also felonies” in the Bahamas.
BATTLE FOR EXTRADITION?
It wasn’t immediately clear what would happen at the hearing or if Bankman-Fried would decide to fight extradition, potentially setting up a high-stakes battle.
The allegations come hours before Bankman-Fried was previously scheduled to testify before Congress about the exchange’s collapse.
FTX’s liquidity crisis came after Bankman-Fried secretly used $10 billion in client funds to support its proprietary trading firm, Alameda Research, Reuters reported. At least $1 billion in client funds had vanished, the people said.
Bankman-Fried resigned as chief executive officer of FTX on the same day as the bankruptcy filing.
Unlike other clients, Alameda was allowed to hold a negative account on FTX’s platform, the SEC said. Bankman-Fried ordered the code to be written that enabled it, the agency said.
The US attorney’s office in Manhattan, led by veteran securities fraud prosecutor Williams, began investigating in mid-November how FTX handled client funds, a source familiar with the investigation told Reuters.
Additional reporting from Luc Cohen in New York and Susan Heavey in Washington; Written by Nick Zieminski; Editing by Louise Heavens, Mark Potter and Anna Driver
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