FTX Files: US authorities outline sprawling case against cryptocurrency exchange

A year ago Sam Bankman-Fried ditched his business shorts and T-shirt for a suit and sat in front of the US House of Representatives as the accepted face of cryptocurrency. The legislators could not see that his shoelaces under the table were untied.

Bankman-Fried had much more than a dirty bandage to hide. On Tuesday, the man was set to testify again in Washington for his innovative regulatory vision, but this time to explain why his cryptocurrency exchange FTX, which was valued at just $32 billion in January, collapsed.

Now his public appearances in the coming months will be reserved for courtrooms. Hours before he was scheduled to testify, Bankman-Fried was arrested in the Bahamas and charged with fraud by three separate US authorities. The 30-year-old, once a golden boy, faces criminal and civil cases and a potential prison sentence of more than 100 years. This week, a US attorney general called it “one of the largest financial frauds in American history.”

Ironically, his words to Congress last December touting its “transparent,” “robust,” “consistent” controls on risk as a model for mainstream American financial markets now appear in the long list of accusations against him.

The SEC, which has filed civil charges along with a criminal indictment by the Department of Justice, alleges that this was one of many lies told by the founder of FTX as part of a years-long scam to enrich himself by funneling money to clients entrusted with FTX to His own trading company, Alameda Research.

“This guy was the poster child for stable exchanges. The idea was that he would bring a certain amount of sanity to the market,” said Charles Whitehead, a professor at Cornell Law School.

The ties between Alameda, which was founded in 2017, and FTX, the trading venue it launched in 2019, are crucial to the case against Bankman-Fried.

The SEC alleges: “From the outset, Bankman-Fried improperly transferred client assets to privately held cryptocurrency hedge fund Alameda Research and then used those client funds to make undisclosed investments, lavish real estate purchases, and large political donations.” “.

The charges, which were filed about a month after FTX’s bankruptcy, represent a swift move for retaliation by US authorities. But the watchdog has also been criticized for failing to spot alleged fraud before it collapses under its own weight. In hearings this week, Senator Kirsten Sinema said the Chargers were “reactive, not proactive and frankly that was the least the government could have done.”

The allegations now compiled against Bankman-Fried depict what Congressman Richie Torres this week called an “incestuous relationship” between Alameda and FTX.

The trading firm provided vital liquidity to start-up FTX exchange, and helped it catapult to the top of the digital asset world, processing $20 billion in daily transactions at its peak. Meanwhile, Alameda allegedly benefited from confidential private treatment, including faster transactions, the ability to run negative balances, exemption from liquidation on extended trades, and most importantly — the provision of nearly unlimited loans from the coffers of FTX clients, according to the SEC and The Commodity Futures Trading Commission.

The SEC said Alameda also accepted billions of dollars in cash deposits into its bank accounts from FTX clients, which it “spent on its own trading operations and to expand the Bankman Fried empire.”

Bankman Fried denied any willful wrongdoing and, in a series of media interviews prior to his arrest, attempted to paint the collapse of his companies as a result of severe mismanagement. Earlier this week, Bankman-Fried’s attorney said the FTX founder was “reviewing the charges with his legal team and considering all of his legal options.”

He claimed that the money leaked to Alameda in error, and that he was largely unaware of how the trading company was spending it. Although he owns the majority of both companies, he stepped down as CEO of Alameda after launching FTX.

The accusations assert that the public separation between Alameda and FTX was cosmetic. In its lawsuit against the exchange’s founder and the two companies, the CFTC said Bankman-Fried “maintained direct decision-making authority over all of Alameda’s major trading, investment, and financial decisions” and was in near constant contact with executives at the trading firm. The new management that runs FTX and Alameda is in bankruptcy declined to comment.

The former employees say they often saw Carolyn Ellison, CEO of Bankman Fried, and Alameda, who were sometimes romantic partners and roommates, walking for long stretches in the parking lot of the corporate office complex in Nassau, engaging in long conversations.

Bankman-Fried also acknowledged in an interview with the Financial Times earlier this month that he was involved in discussions about Alameda’s financial health in June, when cryptocurrency prices were crashing. The market crisis took a heavy toll on Alameda, which at the same time faced calls to repay large amounts of loans.

US agencies allege that Bankman-Fried personally directed a bailout of Alameda with clients’ money, covering up the massive sums appropriated from FTX. In the spring, he transferred Alameda’s $8 billion liability to an unnamed person’s FTX account, which Bankman-Fried called “our Korean friend’s account” and “the strange Korean account,” according to the CFTC.

The case against Sam Bankman Fried

Federal prosecutors in the Southern District of New York unsealed an indictment against Bankman-Fried on eight counts, including fraud and conspiracy to commit money laundering. Read the indictment.

The Securities and Exchange Commission, the Wall Street regulator, has filed civil fraud charges against the founder of FTX in a lawsuit. Read the complaint.

The CFTC also sued Bankman-Fried, FTX, and Alameda Research, alleging fraud. Read the complaint.

Bankman-Fried also stepped in to ensure his trading firm was exempt from paying interest on its FTX positions, as other clients would normally have to, the SEC claims.

By September, Bankman-Fried was considering closing the trading company. In an internal document, he wrote that Alameda’s bad deals “cost more in [expected value] More than all the money Alameda has ever made or will ever make,” according to the CFTC.

But he also thought about the deeply intertwined relationship between Alameda and FTX. “Given how much Alameda is doing, we can’t really close it down,” Bankman-Fried concluded.

In early November, a Coindesk report on Alameda’s financial health sent customers rushing to withdraw their FTX deposits. But the money was not there.

On Monday afternoon, Bankman-Fried said online that he “didn’t believe” he would be arrested if he set foot inside the United States. In a sense, he was right. But American justice has long arms. Hours later, police in the Bahamas knocked on his door.

Additional reporting by Nico Asgari

What happens to Sam Bankman Fried now?

Bankman-Fried appeared in court in the Bahamas on Tuesday. He was denied bail and faces jail time in Fox Hill, Nassau, which has been criticized in international reports for overcrowding and a lack of sanitation. A hearing on his extradition to the United States is scheduled for February.

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