DOJ, SEC charge FTX founder Bankman-Fried with fraud, conspiracy: ‘A house of cards’

Following his arrest in the Bahamas on Monday night, disgraced cryptocurrency entrepreneur Sam Bankman-Fried was charged Tuesday by the Department of Justice with eight crimes including wire fraud, securities fraud and commodities fraud, as well as conspiracy to violate campaign finance laws following the collapse of his crypto platform FTX in November.

The criminal charges come amid a whirlwind of legal and governmental activity directed at Bankman-Friedman this week that encompass a civil complaint filed by the Securities and Exchange Commission (SEC) as well as demands for Bankman-Fried to testify before both chambers of Congress.

The unsealed indictment signed by U.S. Attorney Damian Williams and filed in the Southern District of New York alleges that Bankman-Fried used customer deposits at FTX to pay his own hedge fund, a privately held company called Alameda Research.

Bankman-Fried knowingly devised a scheme “to defraud customers of FTX.com by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research, Bankman-Fried’s proprietary crypto hedge fund, and to make investments,” the indictment says.

The Justice Department also alleges that Bankman-Fried violated federal election laws, saying in the indictment that he made contributions to candidates that were reported in the name of another person.

SEC alleges ‘foundation of deception’

The SEC filed a civil complaint against Bankman-Fried on Tuesday on similar charges.

“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,” SEC Chairman Gary Gensler said in a statement.

The SEC’s complaint alleges that FTX defrauded investors of $1.8 billion, $1.1 billion of which belonged to investors from the U.S., and also centers on the relationship between FTX and Alameda.

“Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors … the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund [and] the undisclosed special treatment afforded to Alameda on the FTX platform,” the SEC said in a statement. 

Alameda was provided with a “virtually unlimited ‘line of credit’ funded by the platform’s customers,” the SEC alleged. “He spent lavishly on office space and condominiums in The Bahamas, and sank billions of dollars of customer funds into speculative venture investments.”

Bankman-Fried, who has made himself widely available to the media even while being under investigation, has echoed some of these sentiments himself during his various appearances.

“I unknowingly co-mingled funds,” he told an audience in New York City in November, speaking via video teleconference from the Bahamas, adding that he “didn’t ever try to commit fraud on anyone.”

Bankman-Fried said in November he was “nervous about the conflict of interest” between Alameda and FTX and that he “didn’t really know what was going on.” But speaking on the “Unusual Whales” podcast about the positions of Alameda relative to FTX this week, Bankman-Fried suggested that he did have some knowledge of the financial relationship between Alameda and FTX. 

“I like kind of vaguely knew, kind of, sort of maybe, um, at a qualitative level what was going on,” he said.

Bankman-Fried is expected to be extradited to the United States by Bahamian authorities.

Arrest surprised lawmakers

Bankman-Fried was supposed to testify Tuesday through video teleconference at a hearing of the House Financial Services Committee, an appearance made impossible by his arrest in the Bahamas, which caught lawmakers off guard.

“I am surprised to hear that Sam Bankman-Fried was arrested in the Bahamas at the direction of the United States Attorney for the Southern District of New York,” House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) said in a statement Tuesday evening.

“As the public knows, my staff and I have been working diligently for the past month to secure Mr. Bankman-Fried’s testimony before our Committee tomorrow morning. We received confirmation this afternoon from Mr. Bankman-Fried and his lawyers that he was still planning to appear before the Committee tomorrow, but then he was arrested,” she added.

Bankman-Fried had agreed to testify in the House but declined to appear before the Senate in a precedent-breaking decision that angered senators on the Banking, Housing and Urban Affairs Committee.

“[Bankman-Fried] has declined in an unprecedented abdication of accountability,” committee Chairman Sherrod Brown (D-Ohio) and ranking member Pat Toomey (R-Pa.) said in a joint statement Tuesday, adding that Bankman-Fried’s lawyers were unwilling to accept a subpoena to get him before the committee.

“Virtually every CEO, financial regulator, and administration official for Republicans and Democrats has agreed to testify in front of both the Senate and House when called upon — that is how congressional oversight works,” they said.