SEC charges Bankman-Fried for alleged 'massive, years-long fraud'

The Securities and Exchange Commission announced they have brought charges against Samuel Bankman-Fried for allegedly violating the Securities Act and the Securities Exchange Act.

The complaint, filed Tuesday, accuses Bankman-Fried of carrying out "a scheme to defraud equity investors in FTX Trading Ltd," his cryptocurrency trading platform. The court filing describes the alleged operation as "a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire."

The SEC complaint details allegations that Bankman-Fried took funds from customers and diverted them to Alameda Research LLC, his crypto hedge fund, and used the money for personal purposes including buying real estate and making political contributions.

"Throughout this period, Bankman-Fried portrayed himself as a responsible leader of the crypto community," the complaint says. "He touted the importance of regulation and accountability. He told the public, including investors, that FTX was both innovative and responsible. Customers around the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform."

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The SEC alleges that Bankman-Fried diverted money from FTX to Alameda by having customers deposit funds into accounts controlled by Alameda and by giving Alameda "a virtually limitless ‘line of credit’ at FTX, which was funded by FTX customer assets."

After putting billions in customer funds in Alameda, the SEC claims Bankman-Fried used Alameda "as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses."

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The complaint describes how the operation ultimately crumbled after cryptocurrency prices dropped sharply earlier this year, and lenders who provided billions to Alameda wanted their money back. Lacking funds, Alameda took billions of dollars of FTX customer funds, the complaint says, and "Bankman-Fried—concerned that this enormous liability would alarm Alameda’s lenders—directed Alameda to hide this ‘line of credit’ in Alameda’s balance sheet."

All the while, the complaint says, Bankman-Fried made public statements that FTX and Alameda were separate entities.

Bankman-Fried ultimate resigned from FTX Nov. 11, and the company filed for Chapter 11 bankruptcy,

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"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 Chair Gary Gensler said in a 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. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action."

Bankman-Fried was arrested Monday in the Bahamas. He had been scheduled to testify before the House Financial Services Committee on Tuesday. Current FTX Group CEO John J. Ray III is currently scheduled to appear.