NEW YORK (Reuters) -FTX founder Sam Bankman-Fried was charged by the U.S. Securities and Exchange Commission (SEC) on Tuesday with defrauding investors in what regulators called “a house of cards,” hours before he was set to appear before a magistrate in the Bahamas.
Since at least May 2019, FTX raised more than $1.8 billion from equity investors in a years-long fraud in which Bankman-Fried concealed that FTX was diverting customer funds to its affiliated crypto hedge fund Alameda Research LLC, the SEC alleged in a statement.
Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, “lavish real estate purchases” and political donations, it said.
Separate charges would be announced by the U.S. Attorney’s Office for the Southern District for New York and the Commodity Futures Trading Commission later on Tuesday, the SEC said.
Representatives for Bankman-Fried did not respond immediately to requests for comment.
The SEC said it was charging Bankman-Fried with violating anti-fraud provisions of U.S. securities laws and would seek a director and officer bar and a penalty against Bankman-Fried. It would also seek to prevent Bankman-Fried from participating in future securities purchases, offers and sales except for his personal account.
“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 Chair Gary Gensler in a statement.
Bankman-Fried was arrested Monday evening in the Bahamas and was expected to appear before a magistrate on Tuesday, marking his first in-person public appearance since the stunning collapse of FTX, which filed for bankruptcy in November after struggling to raise money as traders rushed to withdraw $6 billion from the platform in just 72 hours.
Police in the Bahamas, where FTX was based, said the 30-year-old was arrested after 6 p.m. on Monday (2300 GMT) at his luxury gated community called the Albany in the capital, Nassau.
Damian Williams, the U.S. Attorney for the Southern District of New York, said in a statement on Monday evening the arrest came at the request of the U.S. government, and an indictment against Bankman-Fried would be unsealed on Tuesday.
The Bahamas’ attorney general’s office said it expected him to be extradited to the United States.
It was not immediately clear what would take place at the hearing or whether Bankman-Fried would decide to fight extradition, potentially setting up a high-stakes battle.
Police in the Bahamas said in a statement he was arrested due to “various Financial Offences against laws of the United States, which are also offences” in the Bahamas.
Bankman-Fried has apologized to customers and acknowledged oversight failings at FTX, but said he doesn’t personally think he has any criminal liability.
INVESTIGATIONS
The charges come just hours before Bankman-Fried was previously scheduled to testify before Congress about the collapse of the exchange.
He planned to say he was pressured into nominating John Ray as FTX’s new chief executive by the lawyers advising his firm at the time, according to a draft of his prepared remarks seen by Reuters.
Bankman-Fried founded FTX in 2019 and rode a cryptocurrency boom to build it into one of the world’s largest exchanges of the digital tokens. Forbes pegged his net worth a year ago at $26.5 billion, and he became a substantial funder of U.S. political campaigns, media outlets and other causes.
FTX’s liquidity crunch came after Bankman-Fried secretly used $10 billion in customer funds to support his proprietary trading firm, Alameda Research, Reuters has reported, citing two people familiar with the matter. At least $1 billion in customer funds had vanished, the people said.
Bankman-Fried resigned as FTX’s chief executive officer the same day as the bankruptcy filing.
“Bankman-Fried was well aware of the impact of Alameda’s positions on FTX’s risk profile,” the SEC alleged in a complaint filed in federal court in New York on Tuesday. Those risks were hidden from investors, the complaint said.
Unlike other customers, Alameda was allowed to hold a negative account on FTX’s platform, the SEC said. Bankman-Fried directed code to be written that allowed this, the agency said.
The U.S. Attorney’s Office in Manhattan, led by veteran securities fraud prosecutor Williams, in mid-November began investigating how FTX handled customer funds, a source with knowledge of the probe told Reuters.
Ray is expected to tell members of the U.S. House Financial Services Committee that the cryptocurrency exchange had “unacceptable management practices” including the commingling of assets and lack of internal controls, according to prepared remarks.
Source: Cryptocurrency - investing.com
