NEW YORK/NASSAU, Bahamas (Reuters) – US federal prosecutors on Tuesday alleged Sam Bankman-Fried committed fraud and violated campaign finance laws, and the founder and former CEO of FTX also faced additional charges by US regulators.
The 30-year-old Bankman-Fried was due to appear in a Bahamas court on Tuesday in his first in-person public appearance since the crypto currency exchange’s collapse. He faced a possible legal fight over whether he would be extradited to the United States.
In the indictment, prosecutors said Bankman-Fried had engaged in a scheme to defraud FTX’s customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.
A lawyer for Bankman-Fried did not immediately respond to a request for comment on the criminal charges
He also defrauded lenders to Alameda by providing them with false and misleading information about the hedge fund’s condition, and sought to disguise the money he had earned from committing wire fraud, prosecutors said.
Both the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) alleged Bankman-Fried committed fraud in lawsuits filed on Tuesday.
“While he spent lavishly on office space and condominiums in The Bahamas, and sank billions of dollars of customer funds into speculative venture investments, Bankman-Fried’s house of cards began to crumble,” the SEC filing said.
The CFTC sued Bankman-Fried, Alameda, and FTX on Tuesday, alleging fraud involving digital commodity assets.
FTX conducted “brazen, multi-year scheme”
Since at least May 2019, FTX raised more than $1.8 billion from equity investors in a years-long “brazen, multi-year scheme” in which Bankman-Fried concealed that FTX was diverting customer funds to its affiliated crypto hedge fund, Alameda Research LLC, the SEC alleged.
While the public believed Bankman-Fried’s “lies” and sent billions of dollars to FTX, he improperly diverted customer funds to his hedge fund, the SEC said in a court filing. He continued to divert FTX customer funds even as it was increasingly clear that Alameda and FTX could not make customers whole, the SEC said.
Representatives for Bankman-Fried declined comment. Bankman-Fried has apologized to customers and acknowledged oversight failings at FTX, but said he doesn’t personally think he has any criminal liability.
Bankman-Fried founded FTX in 2019 and rode a cryptocurrency boom to build it into one of the world’s largest exchanges of the digital tokens. Forbes pegged his net worth a year ago at $26.5 billion, and he became a substantial donor to US political campaigns, media outlets and other causes.
A crypto exchange is a platform on which 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 losses in the billions of dollars. The collapse reverberated across the crypto world and sent bitcoin and other digital assets plummeting.
A spokesperson for FTX Debtors declined to comment.
The SEC alleged Bankman-Fried exempted hedge fund Alameda from the risk mitigation measures he publicly touted, giving the firm special treatment and a “virtually unlimited ‘line of credit’ funded by the platform’s customers.”
The SEC said it was charging Bankman-Fried with violating anti-fraud provisions of US securities laws and would seek a director and officer bar and a penalty against Bankman-Fried. It would also seek to prevent Bankman-Fried from participating in future securities purchases, offers and sales except for his personal account.
“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 SEC Chair Gary Gensler in a statement.
Bankman-Fried was arrested Monday evening in the Bahamas and was expected to appear before a magistrate on Tuesday, marking his first in-person public appearance 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 evening at his luxury gated community called the Albany in the capital, Nassau.
Damian Williams, the US Attorney for the Southern District of New York, said in a statement on Monday evening the arrest came at the request of the U.S. government.
The Bahamas’ attorney general’s office said it expected him to be extradited to the United States. Bahamas Police said he was arrested due to “various Financial Offences against laws of the United States, which are also offences” in the Bahamas.
Extradition battle, maybe
It was not immediately clear what would take place at the hearing or whether Bankman-Fried would decide to fight extradition, potentially setting up a high-stakes battle.
The charges come hours before Bankman-Fried was previously scheduled to testify before Congress about the collapse of the exchange.
FTX’s liquidity crunch came after Bankman-Fried secretly used $10 billion in customer funds to support his proprietary trading firm, Alameda Research, Reuters has reported. At least $1 billion in customer funds had vanished, the people said.
Bankman-Fried resigned as FTX’s chief executive officer the same day as the bankruptcy filing.
Unlike other customers, Alameda was allowed to hold a negative account on FTX’s platform, the SEC said. Bankman-Fried directed code to be written that allowed this, the agency said.
The US Attorney’s Office in Manhattan, led by veteran securities fraud prosecutor Williams, in mid-November began investigating how FTX handled customer funds, a source with knowledge of the probe told Reuters.
(By Chris Prentice, Luc Cohen and Jared Higgs; Additional reporting by Luc Cohen in New York and Susan Heavey in DC; Writing by Nick Zieminski; Editing by Louise Heavens, Megan Davies, Mark Potter and Anna Driver)