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Financial Crime: Sam Bankman-Fried’s empire of deception laid bare in U.S. government charges alleging massive FTX fraud

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Sam Bankman-Fried fooled investors and customers by presenting himself as the J.P. Morgan of a new crypto world. But legal charges brought against him on Tuesday allege he was really more like Bernie Madoff all along.

Explosive filings from the Department of Justice, the Securities and Exchange Commission and the Commodity Futures Trading Commission painted a damning picture of a crypto baron run amok who allegedly viewed customer deposits as his own personal piggy bank.

When it all came crashing down with FTX’s bankruptcy filing last month, $8 billion of customer money was missing, the charges allege. Bankman-Fried now stands accused of eight counts of criminal securities, commodities and wire fraud charges, money laundering charges and conspiring to rip off his customers and investors.

The suits allege that Bankman-Fried’s FTX crypto currency exchange was a fraud right from the start when it was founded in 2019, with him raiding customer accounts to fund extremely risky trading moves by his hedge fund Alameda Research, essentially his family office. At its peak, FTX was handling as much as $20 billion in daily trading volume, the lawsuit filed by the CFTC stated.

Bankman-Fried was arrested Monday in the Bahamas, where FTX has headquartered, at the request of U.S. authorities. He now faces extradition proceedings back to the U.S.

In a statement, Bankman-Fried’s attorney, Mark Cohen, said his client “is reviewing the charges with his legal team and considering all of his legal options.”

The civil complaint filed by the SEC captured the crux of the allegations against the one-time boy wonder of crypto, arguing that Alameda was given a “virtually unlimited line of credit funded by the platform’s customers,” despite assurances to depositors that their money was safe and secure.

Bankman-Fried was also accused of lying to investors and the public by claiming to run a conservative investment business with sophisticated risk measures, which U.S. authorities said was patently untrue.

As the SEC lawsuit put it: “there was no meaningful distinction between FTX customer funds and Alameda’s own funds.”

“Bankman-Fried thus gave Alameda carte blanche to use FTX customer assets for its own trading operations and for whatever other purposes Bankman-Fried saw fit,” the suit continued.

Instead, authorities say Bankman-Fried spent lavishly on office space and luxury apartments in the Bahamas, as well as on speculative venture investments and political donations. 

“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created,” said Gurbir Grewal, director of the SEC’s division of enforcement. ”But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent,” 

The criminal case filed by federal prosecutors in Manhattan alleges Bankman-Fried and others at FTX conspired in a scheme to defraud FTX.com’s customers and misappropriate their money. The SEC focused solely on the money Bankman-Fried raised in venture funding rounds from purportedly sophisticated investors, saying he defrauded 90 of them out of $1.8 billion by lying about how he ran his company.

The SEC said that its investigation is ongoing and that further charges against Bankman-Fried and others involved in running FTX could later be filed. 

The various cases alleged that the fraudulent house of cards Bankman-Fried had built began to crumble in May when the price of many of the world’s key crypto currencies began plummeting. That led Alameda, which held most of its assets in crypto, into a major credit crunch with its lenders. 

“Despite the fact that Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations,” the SEC suit read. “Bankman-Fried directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors.”

In public statements since FTX’s collapse, Bankman-Fried has admitted mistakes were made, but has claimed they were the result of poor accounting practices and a lack of proper oversight. He has insisted he didn’t knowingly comingle customer funds of engage in fraud.

But the charges alleged that even with the walls coming down around him, Bankman-Fried continued to lie to his investors about the scope and nature of the problem FTX faced as he raced to secure more funding to plug the huge holes developing in the firm’s ledger book. On Nov. 11, FTX filed for Chapter 11 bankruptcy protection.

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