Feds Accuse SBF of Plundering 'Billions' in Client Assets to Save Alameda

In an action that abruptly ended Sam Bankman-Fried’s apology tour, a federal grand jury accused the disgraced co-founder of FTX with conspiring to defraud investors and the U.S. government in an indictment unsealed Tuesday morning in New York.

Prosecutors charged Bankman-Fried with eight counts of securities fraud, wire fraud, and conspiracy charges. The 30-year-old crypto entrepreneur is being detained by law enforcement authorities in the Bahamas, where FTX is based, pending an extradition request by the U.S. Department of Justice.

Diverted Crypto Assets

The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission also sued Bankman-Fried on Tuesday for fraud in connection with the criminal complaint. They alleged what many investors have suspected for weeks — Bankman-Fried diverted crypto assets to his privately-held crypto hedge fund, Alameda Research.

It was this alleged co-mingling of assets that sank both firms, and allegedly constituted a criminal conspiracy.

In taking action on Tuesday, the authorities put the kibosh on Bankman-Fried’s scheduled appearance before the House Financial Services Committee, where he was expected to testify about what went wrong at FTX.

Other influential voices in crypto wasted no time in making the case that bankman-Fried’s actions should not tarnish the entire industry, especially DeFi.

“What happened at FTX is the failure of a centralized institution and the management of that institution not having proper values and care for customer funds,” said Kristin Smith, the executive director of the Blockchain Association, an industry lobbying group, on CNBC.

Often trading billions of dollars a day and valued at $32B following a fundraising round in January, FTX was was the No. 2 cryptocurrency exchange worldwide until it filed for bankruptcy on Nov. 11.

According to the SEC complaint, Bankman-Fried allegedly started his scheme to defraud equity investors in May 2019. The agency said the young CEO raised $1.8B from investors believing FTX had “appropriate controls and risk management measures.”

‘Utter Failure’

On Tuesday, John Ray, the court appointed CEO of FTX, testified to the House committee that FTX was “an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever.”

Coming little more than a month after FTX collapsed, the swiftness of Bankman-Fried’s indictment suggests there was ample evidence of wrongdoing at a company that had enjoyed a high-profile presence in the U.S. but was based in a Caribbean nation known as a tax haven.

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The Defiant

As the face of the crypto industry thanks to FTX’s television commercials and celebrity endorsements, Bankman-Fried has now become the ultimate cautionary tale in the young industry.

“Bankman-Fried portrayed himself as a responsible leader of the crypto community,” the SEC said in its 28-page complaint. ‘He touted the importance of regulation and accountability. He told the public, including investors, that FTX was both responsible and innovative. Customers around the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure.”

Known and Unknown

The criminal complaint did not name any other employees of FTX or Alameda. Even as U.S. prosecutors and their Bahamanian counterparts manage the extradition of Bankman-Fried, the focus may turn to the actions of his colleagues during the last two years. The indictment makes numerous mentions of “others known and unknown” who conspired with Bankman-Fried.

The downfall of FTX may have begun not in November but all the way back in May, according to the SEC complaint. The agency says FTX scrambled to weather the meltdown in the crypto market after the $60B failure of Terra and its stablecoin, UST. Alameda’s lenders demanded payment of billions of dollars in loans and it was unable to satisfy the calls.

Bankman-Fried directed FTX to divert billions in customer assets to Alameda to cover the shortfalls, the agency said.

“But Bankman-Fried didn’t stop there,” the SEC complaint said. “Even as it was increasingly clear Alameda and FTX couldn’t make customers whole, Bankman-Fried continued to misappropriate customer funds.”

‘Screwed Up’

The details cast Bankman-Fried as a far more hands-on manager of the legerdemain at FTX and Alameda than he’s described in numerous media interviews in the last few weeks. The crypto entrepreneur, who rarely wears anything other than a T-shirt and Bermuda shorts, has confessed he “screwed up” and suggested he simply made honest mistakes any inexperienced CEO might make.

The Feds weren’t having it, and neither was the grand jury that considered the evidence.