(Bloomberg) -- US authorities have alleged that fallen crypto maven Sam Bankman-Fried defrauded investors in his FTX empire, stealing billions of dollars as part of a “massive, years-long fraud” for his own benefit.
Civil charges, filed by the Securities and Exchange Commission on Tuesday, claimed that Bankman-Fried had been engaged in a scheme to deceive investors in FTX and his companies since at least May 2019, and that the process only ended last month when he lost his position as chief executive officer as part of FTX filing for bankruptcy.
Bankman-Fried had raised more than $1.8 billion from equity investors over that time, including from the likes of SoftBank Group, Temasek, Tiger Global Management and Insight Partners. Upon engaging bankruptcy lawyers, the equity stakes of all who had backed FTX effectively fell to zero.
The SEC alleged in a 28-page filing detailing its claims against SBF (emphasis ours):
Unbeknownst to those investors (and to FTX’s trading customers), Bankman-Fried was orchestrating 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.
Throughout this period, Bankman-Fried portrayed himself as a responsible leader of the crypto community. 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. But from the start, Bankman-Fried improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research LLC (“Alameda”), and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.
Here’s more:
He told investors and prospective investors that FTX had top-notch, sophisticated automated risk measures in place to protect customer assets, that those assets were safe and secure, and that Alameda was just another platform customer with no special privileges. These statements were false and misleading. In truth, Bankman-Fried had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited “line of credit” funded by the platform’s customers.
While 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’s house of cards began to crumble.
As the broader crypto market declined in value throughout 2022, Alameda’s lenders began to seek repayment. Even though FTX had allegedly already given Alameda billions of dollars in customer funds, Bankman-Fried began to give Alameda even more money to cover those positions, the SEC said. Over the summer, he also began to divert FTX customer funds for venture investments and to make loans to himself and other executives, the SEC added.
The filing described FTX’s origin story: From SBF setting up Alameda with co-founder Gary Wang in 2017, to setting up FTX in 2019 and bringing on board others that would form the exchange’s internal cabal of senior executives — Alameda co-CEOs Caroline Ellison and Sam Trabucco, and Nishad Singh as a co-founder of FTX. Approximately $1.1 billion of the funds raised were from US investors, the SEC said.
It alleged that all statements made by Bankman-Fried to investors during this time were misleading because he chose to omit information about Alameda’s special treatment, including its unique ability to carry a negative balance on FTX, and its exemption from a crucial part of FTX’s risk management system, its auto-liquidation feature.
From page 10 of the filing:
Bankman-Fried diverted FTX customer funds to Alameda in essentially two ways: (1) by directing FTX customers to deposit fiat currency (e.g., U.S. Dollars) into bank accounts controlled by Alameda; and (2) by enabling Alameda to draw down from a virtually limitless “line of credit” at FTX, which was funded by FTX customer assets.
As a result, there was no meaningful distinction between FTX customer funds and Alameda’s own funds. Bankman-Fried thus gave Alameda carte blanche to use FTX customer assets for its own trading operations and for whatever other purposes Bankman-Fried saw fit.
Moreover, for a period of time after its founding, Bankman-Fried claimed FTX was unable to secure its own bank accounts and so was forced to use Alameda’s accounts to store assets. A balance sheet touted by Bankman-Fried to potential investors in the week when he was trying to avoid bankruptcy described a “hidden, poorly internally labeled ‘fiat@’ account” with a negative $8 billion balance.
Having uncovered bank accounts operated by a secretive Alameda subsidiary called North Dimension Inc., the SEC said it found out exactly what that fiat@ account was up to:
Bankman-Fried directed FTX to have customers send funds to North Dimension in an effort to hide the fact that the funds were being sent to an account controlled by Alameda.
Alameda did not segregate these customer funds, but instead commingled them with its other assets, and used them indiscriminately to fund its trading operations and Bankman-Fried’s other ventures.
This multi-billion-dollar liability was reflected in an internal account in the FTX database that was not tied to Alameda but was instead called “[email protected].” Characterizing the amount of customer funds sent to Alameda as an internal FTX account had the effect of concealing Alameda’s liability in FTX’s internal systems.
And how the account got lost:
In 2022, FTX began trying to separate Alameda’s portion of the liability in the “[email protected]” account from the portion that was attributable to FTX (i.e., to separate out customer deposits sent to Alameda-controlled bank accounts from deposits sent to FTX-controlled bank accounts). Alameda’s portion — which amounted to more than $8 billion in FTX customer assets that had been deposited into Alameda-controlled bank accounts — was initially moved to a different account in the FTX database.
However, because this change caused FTX’s internal systems to automatically charge Alameda interest on the more than $8 billion liability, Bankman-Fried directed that the Alameda liability be moved to an account that would not be charged interest. This account was associated with an individual that had no apparent connection to Alameda. As a result, this change had the effect of further concealing Alameda’s liability in FTX’s internal systems.
When falling crypto prices meant the time came to start actually liquidating Alameda’s positions on FTX, Bankman-Fried said in interviews with media that he wasn’t aware of just how illiquid Alameda’s collateral had become. This was despite FTX’s supposed state-of-the-art risk engine, which Bankman-Fried promoted to regulators as an example of how crypto could avoid a 2008-style crisis if implemented at large. Now, the SEC:
Bankman-Fried was well aware of the impact of Alameda’s positions on FTX’s risk profile. On or about October 12, 2022, for example, Bankman-Fried, in a series of tweets, analyzed the manipulation of a digital asset on an unrelated crypto platform. In explaining what occurred, Bankman-Fried distinguished between an asset’s “current price” and its “fair price,” and recognized that “large positions – especially in illiquid tokens – can have a lot of impact.”
Bankman-Fried asserted that FTX’s risk engine required customers to “fully collateralize a position” when the customer’s position is “large and illiquid enough.” But Bankman-Fried knew, or was reckless in not knowing, that by not mitigating for the impact of large and illiquid tokens posted as collateral by Alameda, FTX was engaging in precisely the same conduct, and creating the same risk, that he was warning against.
The SEC also alleged Bankman-Fried told one investor in late 2021 that FTX had no exposure to its own FTT token at all, and that investor subsequently put $30 million into the company.
Between March 2020 and September 2022, the SEC claimed Bankman-Fried executed more than $1 billion in loans from Alameda, sometimes to himself as the borrower and from himself as Alameda’s CEO. Singh and Wang also borrowed hundreds of millions of dollars each, with these loans being “poorly documented, and at times not documented at all.”
As time went on, the authorities alleged that Bankman-Fried continued to lie to the public, stating multiple times on Twitter that customer assets were safe on FTX and that FTX would always be able to meet withdrawal requests. The former FTX CEO was arrested in the Bahamas on Monday.
--With assistance from Annie Massa.
