BREAKING: Sam Bankman-Fried Orchestrated 'Massive, Years-Long Fraud,' SEC Court Filing Says
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BREAKING: Sam Bankman-Fried Orchestrated 'Massive, Years-Long Fraud,' SEC Court Filing Says

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5 months ago

"Customers around the world believed his lies and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform," the document says.

BREAKING: Sam Bankman-Fried Orchestrated 'Massive, Years-Long Fraud,' SEC Court Filing Says

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The Securities and Exchange Commission's complaint against Sam Bankman-Fried has been unveiled — with FTX's founder accused of engaging in a years-long scheme to defraud the company's investors and customers.

In a new court filing, the SEC claims that the 30-year-old raised over $1.8 billion from investors who bought an equity stake in the exchange — "believing FTX had appropriate controls and risk management measures." It adds:

"Unbeknownst to those investors (and to FTX's trading customers,) Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform's customer funds for his own personal benefit and to help grow his crypto empire."

The document lays into SBF for portraying himself as a responsible leader in the crypto sector who believed in the importance of regulation and accountability.

"Customers around the world believed his lies and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform."

Yet the SEC claims that Bankman-Fried had "improperly diverted customer assets" to sister trading firm Alameda Research from the very start of FTX's existence — using these funds "to make undisclosed venture investments, lavish real estate purchases and large political donations."

The filing also alleges that, while SBF assured investors that FTX had "top-notch, sophisticated automated risk measures in place to protect customer assets," Alameda Research was being given "significant special treatment" and a "virtually unlimited line of credit."

According to the SEC, Bankman-Fried "spent lavishly" on office space and luxury penthouses in The Bahamas, but his "house of cards began to crumble" in May 2022 when the crypto markets crashed — a downturn linked to the demise of Terraform Labs. This saw Alameda's lenders demand repayment on billions of dollars worth of loans — obligations it could not satisfy.

"Bankman-Fried directed FTX to divert billions more in customer assets to Alameda to ensure Alameda maintained its lending relationships."

It's also claimed that SBF continued to "misappropriate FTX customer funds" after this — directing hundreds of millions more to Alameda so it could be used for investments and "loans" to himself and other executives.

The SEC says there was no meaningful distinction between FTX's funds and Alameda's assets — with SBF giving this trading firm "carte blanche" to use customer assets for its own trading operations "and for whatever other purposes Bankman-Fried saw fit."

Damningly, the court filing adds:

"In essence, Bankman-Fried placed billions of dollars into Alameda. He then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns and make private investments, among other uses."

Overall, it's alleged more than $8 billion in FTX customer assets was deposited into Alameda-controlled accounts — and when the exchange's internal systems attempted to automatically charge Alameda interest, SBF allegedly directed that this liability be moved to an account where no interest would be charged.

The SEC claims that — while no customer account at FTX was allowed to maintain a negative balance — SBF directed software code to be written "in or around" August 2019 that ultimately allowed Alameda to maintain a negative balance in its account without facing collateral requirements.

Further on in the court document, it's claimed that audited financial statements provided by FTX were "materially misleading" because they failed to include information about the line of credit that Alameda had received.

As was expected, SBF's statements in media interviews are now being used against him — including one where he told The Wall Street Journal in July:
"There are no parties that have privileged access."
Quotes from a Bloomberg article also feature, this time published in September 2022. There, SBF claims Alameda is a "wholly separate entity" from FTX — with Alameda's CEO Caroline Ellison declaring:
"We're at arm's length and don't get any different treatment from other market makers."

Continuing in its complaint, the SEC says FTX had poor controls and "deficient" risk management procedures from the day it launched — and reality was in sharp contrast to the image that SBF and his exchange portrayed to the world.

It's alleged that evidence he gave to the House Committee on Financial Services and the Commodity Futures Trading Commission about FTX's risk mitigation protocols was "materially misleading" — primarily because it didn't apply to Alameda Research.

The first quote from SBF's most recent round of interviews to national media outlets appears on page 17, where he acknowledges that risk management practices were inadequate. The embattled founder is quoted as saying:

"I wasn't even trying, like, I wasn't spending any time or effort trying to manage risk on FTX."

The SEC also points out that Alameda's collateral largely consisted of FTT, an "illiquid cryptoasset" that was created by FTX itself. The court filing adds:

"Bankman-Fried and FTX's system valued this collateral at trading prices, but the collateral deposited by Alameda was not worth the value assigned to it. Alameda and FTX collectively owned the majority of these tokens, and only a small portion of the FTX-affiliated tokens were in circulation."

It's alleged that if Alameda or FTX ever dared to sell these FTT holdings, market prices for this altcoin would have plunged.

"Even if FTX had liquidated Alameda's portfolio, the sales of those thinly traded tokens would not have generated sufficient funds to cover the amount Alameda borrowed from FTX."

The SEC puts forward two unkind scenarios related to this arrangement: Either Sam Bankman-Fried knew that this was the case, or he was "reckless" in not knowing.

Elsewhere, the court document says that FTX customer funds were used to fund loans to Sam Bankman-Fried and other executives — ensuring personal real estate could be purchased. In two instances, SBF was both the borrower in his individual capacity and the lender in his capacity as CEO of Alameda, the SEC alleges.

"Bankman-Fried also used commingled funds from Alameda to make large political donations and to purchase tens of millions of dollars in Bahamian real estate for himself, his parents and other FTX executives."

The SEC goes on to claim that these loans "were poorly documented, and at times not at all."

Attention then turns to SBF's efforts to rescue distressed crypto firms and "further mislead investors" despite the "precarious financial position" FTX and Alameda were in — with his exchange swooping in to help BlockFi.

"In the summer of 2022, Bankman-Fried knew, or was reckless in not knowing, that FTX was in a precarious financial condition. However, he continued to spend hundreds of millions of dollars to purchase and support other crypto companies."

The SEC goes on to warn these actions "further imperiled FTX's financial condition."

Bankman-Fried has been accused of violating the Securities Act — and the regulator wants him to pay disgorgement plus pre-judgment interest, as well as penalties. The SEC is also calling for him to be barred from acting as an officer or director.

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