Sam Bankman-Fried, the former chief executive of cryptocurrency platform FTX, orchestrated a years-long fraud by diverting investors’ funds to his private hedge fund and using them to make venture investments, lavish property purchases and large political donations, the US Securities and Exchange Commission alleged on Tuesday.
Bankman-Fried was arrested on Monday in the Bahamas, where he has been living, after the US filed criminal charges that will be made public on Tuesday, said US attorney Damian Williams.
The SEC complaint is separate.
A spokesman for Bankman-Fried had no comment Monday. He has a right to contest his extradition, which could delay but probably not stop his transfer to the US.
Bankman-Fried was under criminal investigation by US and Bahamian authorities following the collapse last month of FTX, which filed for bankruptcy on November 11, when it ran out of money after the cryptocurrency equivalent of a bank run.
Bankman-Fried was one of the world’s wealthiest people on paper; at one point his net worth reached 26.5 billion dolklars (£21 billion), according to Forbes.
He was a prominent personality in Washington, donating millions of dollars to mostly left-leaning political causes and Democratic political campaigns, though he also gave money to Republicans.
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.
Customers moved to withdraw billions of dollars, but FTX could not meet all the requests because it apparently had used its customers’ deposits to fund investments at Bankman-Fried’s trading arm, Alameda Research.
“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.
A Statement from the Royal Bahamas Police Force on the arrest of Samual Benjamin Bankman-Fried.
Police wish to inform that 30-year-old SAMUEL BENJAMIN BANKMAN-FRIED of California, U.S.A, has been arrested. pic.twitter.com/Mr85S2fzcN— Latrae L. Rahming (DOC)🇧🇸 (@latraelrahming) December 13, 2022
The SEC complaint alleges that Bankman-Fried had raised more than 1.8 billion dollars (£1.4 billion) from equity 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.
“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.
Gurbir Grewal: We commend our law enforcement partners for securing the arrest of Sam Bankman-Fried on federal criminal charges. The SEC has authorized separate charges relating to his violations of securities laws, to be filed publicly tomorrow in SDNY. https://t.co/ON0LgY4mf4
— U.S. Securities and Exchange Commission (@SECGov) December 13, 2022
Bankman-Fried’s arrest came just a day before he was due to testify in front of the House Financial Services Committee.
That hearing, however, will be held Tuesday.
Bankman-Fried said recently that he did not “knowingly” misuse customers’ funds, and said he believes his millions of angry customers will eventually be made whole.
The SEC challenged that assertion Tuesday in its complaint.
“FTX operated behind a veneer of legitimacy Mr Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine’, and FTX’s adherence to specific investor protection principles and detailed terms of service.
“But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent,” said Gurbir Grewal, director of the SEC’s division of enforcement.
“FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike.”
