The U.S. Securities regulator has charged Samuel Bankman-Fried, the founder and former CEO of troubled cryptocurrency exchange FTX, for scheming to defraud investors.
The decision comes after Bankman-Fried was arrested in Bahamas, where the crypto asset trading platform is based, at the request of the U.S. Government on federal criminal charges.
Separately, charges were recorded against Bankman-Fried by the U.S. Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission or CFTC.
Bankman-Fried’s testimony is also pending before the House Financial Services Committee on Tuesday.
In a statement, the Securities and Exchange Commission or SEC alleged that FTX, since at least May 2019, raised more than $1.8 billion from equity investors, including around $1.1 billion from approximately 90 U.S.-based investors.
The complaint says Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, but in reality, he orchestrated a years-long fraud to conceal from FTX’s investors. He allegedly covered the diversion of FTX customers’ funds to Alameda Research LLC, his privately held crypto hedge fund, among others.
Further, the special treatment afforded to Alameda on the FTX platform was undisclosed. Alameda was provided with a virtually unlimited “line of credit” funded by the platform’s customers and also exempted it from certain key FTX risk mitigation measures.
The complaint further alleges that Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.
Bankman-Fried and FTX’s issues started from November 6, when reports began circulating that FTX was facing significant liquidity concerns and that consumers would likely be affected. Following these reports, FTX customers withdrew approximately $5 billion from the exchange, its largest ever single-day withdrawal.
Though Bankman-Fried declared publicly that FTX had enough assets to cover clients’ holdings, the company paused customer withdrawals on November 8. On the same day, a deal was announced to sell FTX to rival cryptocurrency exchange Binance, which eventually pulled out of the deal next day.
Later, FTX, along with FTX US, Alameda Research, and around 130 other affiliated entities declared Chapter 11 bankruptcy and Bankman-Fried resigned as CEO.
In late November, he reportedly said he didn’t think he’s legally accountable.
The SEC now said its complaint charges Bankman-Fried with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.
Gurbir Grewal, Director of the SEC’s Division of Enforcement, said, “While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers.”
The regulator has sought injunctions against future securities law violations; one that prohibits Bankman-Fried from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; as well as an officer and director bar.
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