Two major US regulators, the Commodity and Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), filed simultaneous complaints against disgraced crypto exchange FTX founder Sam Bankman-Fried on Tuesday, alleging a number of crimes related to his handling of FTX’s accounting and public representations.
The seemingly coordinated complaints shed new light on a number of malpractices that led to the exchange’s multibillion-dollar collapse last month, including the special access allegedly granted by Bankman-Fried to his own prop trading firm, Alameda Research, in its trades on FTX.
The filings come just one day after the former exchange boss was arrested and taken into custody by authorities in the Bahamas, where he had been living, and follow weeks of speculation over when, and indeed whether, US authorities would eventually step in.
The SEC, for its part, alleged that Bankman-Fried had “orchestrated a years-long fraud against investors.” The agency said Bankman-Fried violated anti-fraud provisions by misrepresenting FTX’s automated risk measure, commingling funds with Bankman-Fried’s trading firm Alameda Research, failing to disclose special treatment afforded to Alameda, and misusing client funds for venture investments, political donations, and real estate purchases.
“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 said in a statement. “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.”
The CFTC’s complaint, filed in a Manhattan federal court, alleged that high-level FTX executives took out hundreds of millions of dollars of unauthorized loans from Alameda without proper authorization, and claimed Bankman-Fried’s “aggressive acquisition spree” in 2021, in which he bailed out and acquired a number of crypto firms, some of them insolvent, was intended to access more capital and “fill the hole in customer funds that had been created.”
What’s more, contrary to previous reports, the agency says the FTX exchange had its own bank account, despite wiring deposits to Alameda.
Most damningly, the agency said Bankman-Fried violated federal commodities laws by directing FTX executives to write code giving his proprietary trading firm, Alameda Research, an unfair advantage that included exemption from the platform’s “auto-liquidation” feature.
Bankman-Fried has long maintained ignorance over the colossal, ultimately explosive uncollateralized loans Alameda built up on FTX, denying that there was any “special access” that allowed the trading firm to keep on trading and borrowing even when deep in the red.
That bottomless trading ultimately created the hole that Bankman-Fried opted to fill with billions of dollars of user deposits, resulting in a run of the exchange’s reserves that ultimately tanked it.
As usual, the CFTC’s involvement in the case suggests it believes Bitcoin, Ethereum, and Tether to be digital commodities, contrary to the SEC’s view that almost every crypto token (aside from Bitcoin) is a security. This disagreement forms the basis of the years-long jurisdictional squabble over the correct legal treatment of cryptocurrencies.
Bankman-Fried was taken into custody at his home in the Bahamas on Monday, where FTX was headquartered. If found guilty of the charges, Bankman-Fried faces a significant financial penalty and possible imprisonment.