(Bloomberg) — US authorities said cryptocurrency expert 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.
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The civil charges, filed Tuesday by the Securities and Exchange Commission, said Bankman-Fried had been involved in a scheme to deceive investors in FTX and its companies since at least May 2019 and that the trial ended just last month when he lost his position as chief executive officer as part of FTX’s bankruptcy filing.
Bankman-Fried had raised more than $1.8 billion from equity investors in that time, including the likes of SoftBank Group, Temasek, Tiger Global Management and Insight Partners. After hiring bankruptcy attorneys, the equity shares of everyone who had backed FTX effectively dropped to zero.
The SEC said in a 28-page filing detailing its claims against SBF (emphasis ours):
Unbeknownst to those investors (and FTX’s trading clients), Bankman-Fried was orchestrating a massive years-long fraud, diverting billions of dollars of the trading platform’s clients’ funds for his own personal benefit and to help grow his crypto empire.
During this time, 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. Clients from all over the world believed his lies and sent billions of dollars to FTX, believing their assets were safe on the FTX trading platform. But from the outset, Bankman-Fried improperly diverted client assets to his privately held cryptocurrency hedge fund, Alameda Research LLC (“Alameda”), and then used those client funds to make non-venture investments. disclosed, lavish real estate purchases and big political business donations.
He told investors and prospective investors that FTX had sophisticated, world-class automated risk measures in place to protect client assets, that those assets were safe and secure, and that Alameda was just another platform client with no special privileges. These claims were false and misleading. In truth, Bankman-Fried had exempted Alameda from risk mitigation measures and provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited “credit line” funded by the platform’s customers.
As he spent lavishly on offices and condominiums in the Bahamas and invested billions of dollars of client funds in speculative venture investments, the Bankman-Fried house of cards began to unravel.
As the value of the cryptocurrency market declined throughout 2022, lenders in Alameda began calling for repayment. Even though FTX has reportedly already given Alameda billions of dollars in client funds, Bankman-Fried has begun giving Alameda even more money to cover those positions, the SEC said. Over the summer, he also began diverting FTX client funds for venture investments and making loans to himself and other executives, the SEC added.
The filing detailed the origin story of FTX: from the creation of SBF of Alameda with co-founder Gary Wang in 2017, to the creation of FTX in 2019, and the involvement of others who would form the internal cabal of the senior executive exchange: the Alameda co-CEO Caroline Ellison and Sam Trabucco and Nishad Singh as co-founder of FTX. About $1.1 billion of the funds raised came from U.S. investors, the SEC said.
It claimed that all statements made by Bankman-Fried to investors during this period were misleading because it had chosen 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 FTX’s risk management system, its self-liquidation function.
From page 10 of the deposit:
Bankman-Fried diverted FTX customers’ funds to Alameda in essentially two ways: (1) directing FTX customers to deposit fiat currency (eg, US dollars) into Alameda-controlled bank accounts; and (2) allowing Alameda to draw on a virtually unlimited “line of credit” at FTX, funded by the resources of FTX customers.
As a result, there was no meaningful distinction between FTX client funds and Alameda’s own funds. Bankman-Fried then gave Alameda carte blanche to use the assets of FTX clients for its own trading operations and for any other purpose that Bankman-Fried deems appropriate.
Additionally, for a period of time following its founding, Bankman-Fried claimed that FTX was unable to secure its bank accounts and thus was forced to use Alameda accounts to hold assets. A balance sheet Bankman-Fried advertised to potential investors the week it was trying to avoid bankruptcy described a “hidden, mislabeled internally ‘fiat@’ account” with a negative balance of $8 billion.
After uncovering bank accounts operated by an undisclosed Alameda subsidiary called North Dimension Inc., the SEC said it discovered exactly what that fiat@ account was up to:
Bankman-Fried directed FTX to ask customers to 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 client funds, but instead blended them with its other businesses and used them indiscriminately to fund its business operations and other Bankman-Fried ventures.
This multi-billion dollar liability was reflected in an internal account in the FTX database which was not tied to Alameda but was instead named “firstname.lastname@example.org”. Characterizing the amount of client funds sent to Alameda as an FTX internal account had the effect of hiding Alameda’s liability in FTX’s internal systems.
And how you lost your account:
In 2022, FTX began seeking to separate the portion of Alameda’s liability in the “email@example.com” account from the portion that was attributable to FTX (i.e., to separate customer deposits sent to Alameda-controlled bank accounts from deposits sent to FTX controlled bank accounts). Alameda’s portion of more than $8 billion in FTX customer assets that had been held in 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 ordered that Alameda’s liability be moved to an account that would receive no interest. This account was associated with an individual who had no apparent connection to Alameda. As a result, this change had the effect of further hiding Alameda’s liability within FTX’s internal systems.
When falling cryptocurrency prices meant it was time to actually start liquidating Alameda’s FTX positions, Bankman-Fried said in media interviews that he was unaware of how illiquid Alameda’s collateral had become. . This is despite FTX’s alleged state-of-the-art risk engine, which Bankman-Fried promoted to regulators as an example of how cryptocurrencies could avoid a 2008-style crisis if implemented broadly. Now, the SEC:
Bankman-Fried was well aware of the impact of Alameda’s positions on FTX’s risk profile. Around 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 happened, Bankman-Fried distinguished between an asset’s “current price” and its “fair price” and acknowledged that “large positions, especially in illiquid tokens, can have a big impact.”
Bankman-Fried said FTX’s risk engine required clients to “fully guarantee a position” when the client’s position is “large enough and illiquid.” But Bankman-Fried knew, or was reckless in not knowing, that by not mitigating the impact of large, illiquid tokens sent as collateral by Alameda, FTX was engaging in exactly the same behavior and creating the same risk, which it was warning against.
The SEC also said that Bankman-Fried told an investor in late 2021 that FTX had no exposure to its FTT token and that the investor subsequently invested $30 million in the company.
Between March 2020 and September 2022, the SEC said Bankman-Fried executed more than $1 billion in loans from Alameda, sometimes to himself as a borrower and from himself as Alameda CEO. Singh and Wang also borrowed hundreds of millions of dollars each, with these loans being “poorly documented and sometimes not documented at all”.
As time went on, authorities said Bankman-Fried continued to lie to the public, stating multiple times on Twitter that clients’ assets were safe at FTX and that FTX would always be able to fulfill withdrawal requests. The former FTX CEO was arrested in the Bahamas on Monday.
–With assistance from Annie Massa.
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