Civil, Criminal Charges Filed After FTX Collapse

Both the Securities and Exchanges Commission (SEC) and the Department of Justice have filed civil and criminal suits respectively against Samuel Bankman-Fried (commonly known as SBF) for fraud in the wake of the collapse of cryptocurrency fund FTX. He faces two civil and eight criminal charges.

Specifically, the SEC complaint lists charges of violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. A grand jury convened in the Southern District of New York indicted him on counts of conspiracy to and committing wire fraud on both customers and lenders, conspiracy to commit securities and commodities fraud, conspiracy to commit money laundering, and conspiracy to violate campaign finance laws.

Per the complaint, in 2017, Bankman-Fried co-founded Alameda Research LLC, a cryptocurrency-focused hedge fund. While he was only CEO until 2021, he retained a 90% share in the company and remained the chief decision-maker.

In 2018, Bankman-Fried, along with other executives at Alameda, founded FTX, a platform on which customers could trade crypto assets. This platform allowed users to not only exchange fiat currency like U.S. dollars for crypto assets, but also to trade said assets with each other and to even short the various cryptocurrencies with the shorted assets being provided by other users. Throughout its entire lifespan, SBF remained the key decision-maker at FTX, court documents say.z

While Bankman-Fried touted FTX’s transparency and compliance with regulators, he was allegedly running a Ponzi scheme in which customer and lender deposits in FTX were routed to finance Alameda’s efforts and indirectly Bankman-Fried ’s personal purchases.

He organized this in two principal ways, according to court records. First, he allegedly gave Alameda’s account with FTX several privileges. The SEC claims that unlike all other users, Alameda was allowed to bypass FTX’s “sophisticated” automatic risk measures and was allowed to take out lines of credit and run a negative balance.

Second, Alameda and FTX’s principal liquidity was kept in FTX’s own affiliated cryptocurrencies. The SEC alleges that the vast majority of said currencies were owned by FTX and Alameda. This resulted in an extremely inflated value for these assets since the price would inevitably plummet should FTX and/or Alameda seek to liquidate them, the complaints say. As such, Alameda could continue taking out loans consisting of said cryptocurrencies from FTX to finance its own ventures, while betting on these currencies to plummet in value should time come to pay up.

While these dealings were going on, Bankman-Fried allegedly sought investors in FTX touting its legitimacy and safety. He even touted that the FTX’s automated risk engine would limit the platform’s exposure to any one exceedingly large customer, while Alameda was exactly the risk said engine sought to avoid, the agencies argue.

When crypto markets plummeted in 2022, the complaint describes how Bankman-Fried withdrew hundreds of millions of dollars from FTX to pay off Alameda’s liabilities, including propping up other crypto platforms. In November, it came to light the extent to which Alameda and FTX were intertwined and their complete lack of assets. Both companies, and all their affiliates, filed for bankruptcy; allegedly, throughout their entire lifespan, Bankman-Fried and other executives took out personal loans from Alameda, funded by FTX, to purchase properties and potentially other personal expenses; the SEC alleges the recordkeeping surrounding these loans was  poorly organized and documented.

For deceiving FTX customers and investors, as well as Alameda investors, the SEC filed its charges for securities fraud, and the Southern District of New York indicted Bankman-Fried on charges of conspiracy to and committing wire fraud, conspiracy to commit securities and commodities fraud, and conspiracy to commit money laundering. The final charge of conspiracy to commit campaign finance violations relates to Bankman-Fried allegedly aggregating and donating far more than the legal limit of $25,000 to various candidates for federal office, joint fundraising committees, and independent expenditure committees.