FTX founder devised 'scheme' to defraud investors, U.S. government alleges

The U.S. government charged Samuel Bankman-Fried, the founder and former CEO of cryptocurrency exchange FTX, with a host of financial crimes on Tuesday, alleging he intentionally deceived customers and investors to enrich himself and others, while playing a central role in the company's multibillion-dollar collapse.

Federal prosecutors say that beginning in 2019,Bankman-Fried devised "a scheme and artifice to defraud" FTX's customers and investors. He diverted their money to cover expenses, debts and risky trades at his crypto hedge fund, Alameda Research, and to make lavish real estate purchases and large political donations.

Bankman-Fried was arrested Monday in the Bahamas at the request of the U.S. government, which charged him with eight criminal violations, ranging from wire fraud to money laundering to conspiracy to commit fraud. Bankman-Fried, one of the largest political donors this year, was also charged with making illegal campaign contributions.

The charges laid out in the 13-page indictment could land Bankman-Fried in jail for decades, carrying maximum penalties of 115 years, according to Nicholas Biase, a spokesperson for U.S. prosecutors.

Hard and fast fall

At anewsconference on Tuesday, U.S. Attorney Damian Williams called it "one of the biggest frauds in American history," and said the investigation is ongoing and fast-moving. He urged anyone who believes they have been victims of the scheme to contact his office.

Bankman-Fried has fallen hard and fast from the top of the cryptocurrency industry he helped to evangelize. FTX filed for bankruptcy on Nov. 11, when it ran out of money after the cryptocurrency equivalent of a bank run.

Before the bankruptcy, he was considered by many in Washington and on Wall Street as a wunderkind of digital currenciessomeone who could help take them mainstream, in part by working with policymakers to bring more oversight and trust to the industry.

He was worth tens of billions of dollars at least on paper and was able to attract celebrities like Tom Brady andformer politicians like Tony Blair and Bill Clinton to his conferences at luxury resorts in the Bahamas. He was the subject of fawning media profiles,was considered a prominent advocate for a type of charitable giving known as "effective altruism," and commanded millions of followers on Twitter.

WATCH | 'Absolutely amateur hour':

FTX was 'absolutely amateur hour,' says analyst

2 years ago

Duration 5:29

Cryptocurrency analyst David Gerard describes FTX as a 'clown financial institution' that held many 'imaginary assets.' FTX founder Sam Bankman-Fried has been charged with eight criminal offences after the collapse of the company.

But since FTX's implosion, Bankman-Fried and his company have been likened to other disgraced financiers and companies, such as Bernie Madoff and Enron.

The criminal indictment against Bankman-Fried and "others" at FTX is on top of civil charges announced Tuesday by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC alleges Bankman-Fried defrauded investors and illegally used their money to buy real estate on behalf of himself and his family.

U.S. authorities said they will try to claw back any of Bankman-Fried's financial gains from the alleged scheme.

Scathing testimony

A lawyer for Bankman-Fried, Mark S. Cohen, said Tuesday he is "reviewing the charges with his legal team and considering all of his legal options."

At a congressional hearing Tuesday that was scheduled before Bankman-Fried's arrest, the new CEO brought in to steer FTX through its bankruptcy proceedings levelled harsh criticism. He said there was scant oversight of customers' money and "very few rules" about how their funds could be used.

John Ray III told members of the U.S. House financial services committee that the collapse of FTX, resulting in the loss of more than $7 billion US, was the culmination of months, or even years, of bad decisions and poor financial controls.

WATCH | 'Grossly inexperienced'individuals:

New FTX CEO says company operations were 'just plain old embezzlement'

2 years ago

Duration 0:32

FTX CEO John J. Ray told Congress that FTX's collapse was caused by 'grossly inexperienced and unsophisticated individuals' who lacked oversight and control.

"This is not something that happened overnight or in acontext of a week," he said. "This is just plain, old-fashioned embezzlement, taking money from others and using it for your own purposes."

Before his arrest, Bankman-Fried had been holed up in his luxury compound in the Bahamas. U.S. authorities are expected to request his extradition to the U.S., although the timing of that request is unclear.

Wealthy on paper

At a court hearing in the Bahamas on Tuesday, Chief Magistrate JoyAnn Ferguson-Pratt denied the petition for Bankman-Fried to be released on bail, citing a "great" risk of flight and instead ordered he besent to the country's Department of Corrections until Feb. 8.

Bankman-Fried was previously one of the world's wealthiest people on paper; at one point his net worth reached $26.5 billion, according to Forbes.

He was a prominent personality in Washington, donating millions of dollars toward mostly left-leaning political causes and Democratic political campaigns, though he also gave money to Republicans.

Williams said Tuesday that Bankman-Fried made "tens of millions of dollars" in illegal campaign donations.

FTX grew to become the second-largest cryptocurrency exchange in the world.

That all unravelled quickly last month, when reports called into question the strength of FTX's balance sheet. As customers sought to withdraw billions of dollars, FTX could not satisfy the requests: their money was gone.

"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 Genslersaid.

The SEC complaint alleges that Bankman-Fried had raised more than $1.8 billion from investors since May 2019 by promoting FTX as a safe, responsible platform for trading crypto assets.

Instead, the complaint says, Bankman-Fried diverted customers' funds to Alameda Research without telling them.

'His personal piggy bank'

"He then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses," the complaint reads. "None of this was disclosed to FTX equity investors or to the platform's trading customers."

Alameda did not segregate FTX investor funds and Alameda investments, the SEC said, using that money to "indiscriminately fund its trading operations," as well as other ventures of Bankman-Fried.

Bankman-Fried said recently that he did not "knowingly" misuse customers' funds, and saidhe believes angry customers will eventually get their money back.

LISTEN | Climate change and FTX:

Day 65:50How climate change activists are capitalizing on the collapse of FTX to reign in crypto's carbon emissions

Yvonne Taylor helps run the Seneca Lake Guardian, an environmental group in the Finger Lakes region of New York State. She's been pushing for a state moratorium on new, fossil-fuel powered "proof of work" crypto mines in the state. She thinks the collapse of the crypto exchange FTX has shifted the political landscape.

At Tuesday's congressional hearing, the new FTX CEO bluntly disputed that: "We will never get all these assets back," Ray said.

Jack Sharman, a lawyerat Lightfoot, Franklin & White, said Bankman-Fried's recent comments to the media could be damaging, admissible evidence in court. "Those statements in that speaking tour were in no way helpful to his cause," Sharman said.

In its complaint, the SEC challenged Bankman-Fried's recent assertion that FTX and its customers were victims of a sudden market collapse that overwhelmed safeguards that had been in place.

"FTX operated behind a veneer of legitimacy," said Gurbir Grewal, director of the SEC's enforcement division. "That veneer wasn't just thin, it was fraudulent."

The collapse of FTX which followed other cryptocurrency debacles earlier this year is adding urgency to efforts to regulate the industry.

Yesha Yadav, a law professor at Vanderbilt University who specializes in financial and securities regulation, said U.S. lawmakers and regulators have been too slow to act, but that is likely to change.

"Lawmakers are clearly under pressure to do something, given that so many people have lost their money," she said.