Bankman-Fried accused of fraud by U.S. after Bahamas arrest

Bloomberg

Sam Bankman-Fried, the disgraced co-founder of digital-asset exchange FTX, was accused by U.S. authorities on Tuesday of perpetrating a massive fraud that funded his lavish lifestyle.

U.S. prosecutors in Manhattan revealed eight criminal counts against him and federal regulators said he committed a range of securities and derivatives law violations.

Bankman-Fried, who had been living in an expansive penthouse in the Bahamas, was arrested there on Monday evening.

The U.S. indictment detailing the charges follows weeks of speculation over the the 30-year-old’s fate after his company – once one of the biggest cryptocurrency exchanges in the world – plunged into bankruptcy last month.

He was scheduled to be arraigned in the Bahamas on Tuesday and faces extradition to the U.S.

“Mr. Bankman-Fried is reviewing the charges with his legal team and considering all of his legal options,” Mark Cohen, his attorney said in a statement.

The U.S. Securities and Exchange Commission on Tuesday alleged that FTX raised more than $1.8 billion, including $1.1 billion from about 90 U.S.-based investors, in an “orchestrated scheme to defraud equity investors,” who bought in based on the belief that FTX had appropriate controls.

Separately, the Commodity Futures Trading Commission alleged that Bankman-Fried took hundreds of millions of dollars in loans from Alameda Research, which he also founded, which were then used to buy real estate and make donations to politicians.

According to the SEC, Bankman-Fried misled investors, telling them that FTX had sophisticated risk controls and that their assets were secure.

Instead, the regulator alleged in its complaint, he was using their money as a “virtually unlimited line of credit” for trading firm Alameda while concealed risks and obscuring FTX’s relationship with the trading firm.

More than 100 FTX-related entities, including Alameda, filed for U.S. bankruptcy protections on Nov. 11.

In media interviews since FTX’s collapse, Bankman-Fried has admitted major managerial missteps, but has also claimed that he never tried to commit fraud or break the law.

In draft remarks prepared for the U.S. House hearing and obtained by Bloomberg News prior to his arrest, he offered a blunt assessment of his plight.

He draft testimony opened with him admitting he messed up.

He added that the company’s new managers, led by restructuring expert John J. Ray III, have repeatedly rebuffed his offers to help sift through the wreckage of the collapsed crypto empire.

Ray hasn’t responded to five of his emails, he said. Ray is still scheduled to testify at the hearing on Tuesday.

In remarks prepared for the House hearing, Ray blamed FTX’s collapse on the failures of its previous leaders.

“The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals.” Ray said in the written testimony released Monday in advance of the hearing.

The prior management “failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.”

Prior to the arrest and long before his empire collapsed into bankruptcy, federal prosecutors in Manhattan had already been looking into FTX as part of broader sweep of exchanges and potential anti-money laundering violations under the Bank Secrecy Act.

The investigation, led by the Complex Frauds and Cybercrime Unit, took a different trajectory after FTX’s catastrophic implosion.

Prosecutors were closely examining whether hundreds of millions of dollars were improperly transferred to the Bahamas around the time of FTX’s Nov. 11 bankruptcy filing in Delaware, according to a person familiar with the matter.

They were also digging into whether FTX broke the law by transferring funds to Alameda Research, the bankrupt investment firm also founded by Bankman-Fried, Bloomberg reported previously.

Last week, prosecutors, the FBI, Department of Justice officials and FTX’s new CEO and restructuring expert Ray met at SDNY’s headquarters in downtown Manhattan.

Potential charges were not discussed at that meeting, according to a person familiar with the conversation.