The U.S. Securities and Exchange Commission (SEC) has charged Sam Bankman-Fried, the former CEO of defunct crypto exchange FTX, for defrauding investors of his platform, according to a release on Tuesday.
Legal filings posted on Tuesday claims that Bankman-Fried inappropriately used customer funds to bail out the supposedly separate trading arm Alameda Research, and fund both Bankman-Fried's personal lifestyle and political donations.
“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.
Court documents filed by the SEC said Bankman-Fried “was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire.”
The document further alleges that Alameda was secretly granted special status with lines of credit and an exemption from liquidation protocols on the FTX exchange, in effect giving it the right to access customer funds.
Around May 2022, as crypto prices dropped, “Bankman-Fried directed Alameda to draw on its 'line of credit' from FTX. Billions of dollars of FTX customer funds were thus diverted to Alameda and used by Alameda to re-pay its third-party loan obligations,” the SEC document said.
"Bankman-Fried improperly diverted customer assets to his privately held crypto hedge fund, Alameda Research LLC (“Alameda”), and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations," it added.
Bankman-Fried continued to reassure investors of sound governance and a good financial condition as markets dropped, and has “knowingly or recklessly … employed devices, schemes, or artifices to defraud,” the SEC filing said.
FTX customers were directed to send billions in funds to an account actually controlled by Alameda, the SEC said. That created an extra $8 billion liability that was detailed, in a leaked balance sheet circulated to investors as part of a now infamous last-chance fundraise, as a “hidden, poorly labelled fiat@ account.”
It also meant that, rather than making an individually segregated deposit, clients may have been unwittingly contributing to what the SEC called the chief executive’s “personal piggy bank.” Two of the $1.338 billion in loans made from Alameda over a two-and-a-half year period had Bankman-Fried as both lender and borrower, the latter in his personal capacity.
Bankman-Fried has previously said he did not "knowingly commingle" customer funds. His lawyer could not immediately be reached for comment.
The charges come a day after Bankman-Fried was arrested in the Bahamas. The U.S. House of Representatives Financial Services Committee is due to probe the failure of FTX later Tuesday.
UPDATE (Dec 13, 11:40 UTC): Adds further details from the legal filing.
UPDATE (Dec 13, 12:50 UTC): Adds details of $8 billion fiat account and $1.338 billion loans. Adds attempt to contact Bankman-Fried's lawyer.
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