FTX Founder Arrested In Bahamas; US Files Charges

Tom Burroughes Group Editor London 14 December 2022

FTX Founder Arrested In Bahamas; US Files Charges

The stunning demise of FTX has come in what has been a difficult year for the wider cryptocurrency sector, as seen by the wipe-out of some so-called "stablecoins" and the broader fall in technology stocks as interest rates have risen.

Sam Bankman-Fried, founder of the collapsed cryptocurrency exchange FTX, has been arrested in The Bahamas.

The 30-year-old has been arrested for “financial offences” against laws in the US and Bahamas, the BBC and other media outlets reported today. He is scheduled to appear in a magistrates' court in Nassau on Tuesday.

This news service attempted to contact the Office of the Attorney General & Ministry of Legal Affairs; the organisation’s website appeared not to be functioning at the time of going to press. FWR has emailed the organisation for comment, and may update in due course.

Separately, the Securities and Exchange Commission yesterday charged Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder. Investigations as to other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing."

FTX filed for bankruptcy in the US in November. A court filing said that FTX owed its 50 largest creditors almost $3.1 billion. 

The demise of the exchange has added to a torrid year for cryptocurrency investors in entities such as bitcoin, already hit by the slump in tech stocks since January as global interest rates started to rise. Commentators have warned that depending on what is found, the FTX saga is likely to trigger more regulation of this still-nascent field. Earlier this year, falls in so-called "stablecoins" (some were completely wiped out) prompted calls for more oversight. The story has also thrown the Bahamas - an offshore jurisdiction – into the limelight. Its government has defended its actions around FTX.

Bankman-Fried is accused of using customer funds to prop up his investment trading company, Alameda. He denies claims that he knew FTX customer money was used for risky financial bets. A report by the BBC quoted him as saying: “I didn't knowingly commit fraud, I don't think I committed fraud, I didn't want any of this to happen. I was certainly not nearly as competent as I thought I was.” He also denied allegations that he must have been aware that Alameda was using FTX customer funds.

The story, while still developing, will cast a shade over the wealth management industry’s embrace of digital assets, and is likely lead to calls for more controls. It also highlights how the “G” in ESG – “governance” – is and arguably ought to be a top concern.

SEC statement on charges
"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. "The alleged fraud committed by Mr Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action."

"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," Gurbir S Grewal, Director of the SEC’s Division of Enforcement, said. "FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike. 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."

According to the SEC’s complaint, since at least May 2019, FTX, based in The Bahamas, raised more than $1.8 billion from equity investors, including about $1.1 billion from approximately 90 US-based investors. The regulator alleged that Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors (1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund; (2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures; and (3) undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.

The SEC's 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. 

"Although this is a predictable next step, Bankman-Fried's arrest represents a remarkable fall from grace. In taking this action, the US has asserted its primacy in the FTX saga in the old fashioned way they know best," Richard Cannon, partner at Stokoe Partnership Solicitors, said. 

"The charges relate to wire fraud, securities fraud and money laundering, and the SEC are themselves reportedly ready with charges of their own. Bankman-Fried's arrest suggests that authorities have found evidence of serious criminal wrongdoing within FTX.
"In time, details will undoubtedly emerge regarding the period the alleged misconduct covers, as well as whether others are implicated,” Cannon said.

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