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HomeMarketFTX's Sam Bankman-Fried Faces Charges. What the Government Is Saying.

FTX’s Sam Bankman-Fried Faces Charges. What the Government Is Saying.

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FTX founder and former CEO Sam Bankman-Fried had built a “house of cards” at the defunct cryptocurrency exchange, where he used customer funds as his “personal piggy bank,” the Securities and Exchange Commission said Tuesday, as regulators and federal prosecutors unveiled a raft of charges.

Bankman-Fried put FTX customer money into an affiliated trading firm Alameda Research and then used the money to buy luxury real estate, use private airplanes, donate to political campaigns and make private investments, regulators and prosecutors said.

Federal prosecutors in New York charged Bankman-Fried with eight criminal counts including wire fraud and conspiracy to commit wire fraud and violations of campaign finance laws. Bankman-Fried was arrested by Bahamian authorities on Monday.

A lawyer for Bankman-Fried said in an emailed statement to Barron’s that his client “is reviewing the charges with his legal team and considering all of his legal options.”

Regulators and prosecutors outlined four main areas of misconduct, including defrauding FTX’s customers, Alameda’s lenders, and FTX investors. The fourth area concerns campaign finance laws. The SEC and other regulators and the Justice Department date the behavior back to 2019, the year FTX was founded.

Here are five things to know about the charges filed against him:

  1. “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,” said SEC Chairman Gary Gensler.

The SEC’s case says Bankman-Fried told customers their money was safe on the platform, when instead he was using customer funds for his own benefit. The cryptocurrency exchange gave Alameda an exemption to the rules on its platform, providing it with a virtually unlimited “line of credit” funded by the platform’s customers, the SEC said.

Bankman-Fried’s statements concerning the separation of FTX and Alameda were misleading, the SEC said, because he didn’t disclose the special treatment Alameda was given on FTX, including its ability to carry a negative balance in its FTX customer account and its exemption from an automated system that would have sold Alameda assets if it was losing too much borrowed money. No other customer had those benefits, the SEC said.

2. The Commodity Futures Trading Commission said Bankman-Fried and at least one executive of Alameda used FTX money, including customer funds to trade on other digital asset exchanges and fund high-risk digital industry investments.

The CFTC also said FTX and Alameda executives and employees were aware that it was important to present a public impression that there was a strong separation between the two entities. In reality, the two entities shared office space in California, Hong Kong and the Bahamas and key personnel, technology and other resources.

3. At Bankman-Fried’s direction, Alameda used FTX capital including customer funds, to undertake “significant illiquid investments and transactions” including several billion dollars in long-term equity holdings, the CFTC said. Alameda relied on loans to do this, and when the cypto market took a downturn, it couldn’t meet its debt obligations. Its use of FTX customer funds “greatly increased” to meet those obligations, the CFTC said.

In September, two months before FTX’s bankruptcy filing, Bankman-Fried drafted and shared a document questioning whether Alameda should be permanently shut down, the CFTC said.

Customer funds were also used for promotional expenses in the U.S., the CFTC case said, including a Super Bowl ad and the sponsorship of a sports stadium in Miami. Some of these promotional activities were paid for or guaranteed by FTX Trading entities, the CFTC said.

4. The U.S. Attorney for the Southern District of New York said Bankman-Fried gave false information to investors in FTX related to its financial condition this fall, including sending an email to an FTX investor in New York on Sept. 18, 2022, that included false and misleading information.

5. The prosecutor also said Bankman-Fried violated campaign finance laws by seeking to sidestep contribution limits.

Damian Williams, the U.S. Attorney for the Southern District of New York, said Bankman-Fried and co-conspirators used stolen customer money to make political contributions to both parties, and disguised the contributions to look like they were coming from wealthy donors, rather than Alameda Research.

“All of this dirty money was used in service of Bankman-Fried’s desire to buy bipartisan influence and impact the direction of public policy in Washington,” Williams said. On Tuesday, he asked people, entities, and political campaigns that received stolen customer money to work with his office to return the funds to victims.

Current FTX CEO John Ray, the lawyer known for managing Enron after its collapse 20 years ago, testified to House lawmakers today, at one point calling the situation at FTX an “old-fashioned embezzlement.”

FTX’s bankruptcy has stranded billions of dollars in customer deposits and leaves in its wake potentially more than one million creditors. Ray raised doubts that customers who lost money in its collapse will be able to get their money back.

In recent interviews with media outlets, Bankman-Fried said “I screwed up,” adding that he “didn’t ever try to commit fraud” and “wasn’t trying to commingle funds” between his exchange and the affiliated trading firm.

Write to Janet H. Cho at janet.cho@dowjones.com

Credit: marketwatch.com

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