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The U.S. Securities and Exchange Commission has charged FTX founder Sam Bankman-Fried with fraud. Bankman-Fried is currently in police custody after he was arrested in the Bahamas on Monday.
FTX is based in The Bahamas. On Tuesday, the Department of Justice (DoJ) indicted him for fraud, money laundering, and “campaign finance offenses.”
“The Justice Department has filed charges alleging that Samuel Bankman-Fried perpetrated a range of offenses in a global scheme to deceive and defraud customers and lenders of FTX and Alameda, the defendant’s crypto hedge fund, as well as a conspiracy to defraud the United States government,” said Attorney General Merrick B. Garland on the DoJ statement.
According to the DoJ, Bankman-Fried “conspired to defraud customers” by misappropriating their deposits.
Cheat code, money laundering, and cryptocurrency
Two years ago, FTX’s chief engineer secretly altered the cryptocurrency exchange’s software, which exempted Bankman-Fried’s hedge fund Alameda Research from borrowing restrictions, reported Reuters. This allowed Alameda continuous loans from FTX above and beyond the value of the collateral offered, the report said.
According to the SEC chargesheet, this tweak helped Bankman-Fried orchestrate a years-long fraud that hid the undisclosed diversion of FTX customers’ funds to Alameda Research, providing the hedge fund with a “virtually unlimited line of credit” funded by the platform’s customers.
Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations, said the SEC statement.
The crypto exchange was nothing more than 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 the statement. The alleged fraud committed by Mr Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws,” Gensler said.
“To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action,” he added.
Rise and fall of FTX
FTX started appearing on cybersecurity news in November 2019, when Changpeng Zhao of Binance purchased a 20% stake in FTX for approximately $100 million, six months after the company was founded. Then, company made its first big-ticket acquisition in August 2020, when it acquired Blockfolio, a cryptocurrency portfolio tracking app, for $150 million.
In July 2021, the venture raised $900 million at an $18 billion valuation from over 60 investors, including Softbank, Sequoia Capital, and other firms. Within two months, the company moved its headquarters from Hong Kong to The Bahamas.
In August 2022, the Federal Deposit Insurance Corporation (FDIC) issued a cease-and-desist order to five cryptocurrency exchanges including FTX for making “false and misleading representations” about deposits being covered by FDIC insurance. The action came after a tweet by FTX president Brett Harrison. Although Harrison deleted the tweet and Bankman-Fried clarified, this opened further scrutiny on the company’s actions. Harrison stepped down from the post after a month.
A leaked financial statement revealed Alameda Research, Bankman-Fried’s trading company, was significantly dependent on FTX’s native token, FTT, reported cryptocurrency news website CoinDesk on November 2.
The market tremors started on November 6, when Binance CEO Changpeng Zhao announced the plan to liquidate the company’s holdings of FTT, citing unspecified “recent revelations”. Bankman-Fried promptly announced an assurance, saying “FTX is fine. Assets are fine”.
Binance announced on November 8, its plan to acquire FTX, only to withdraw it a day later. As if on cue, FTX suspended getting new clients and withdrawals. This triggered an investor run that snowballed into regulatory intervention, Bankman-Fried’s resignation, and his eventual arrest.
