FTX Founder Arrested and Charged with Fraud and Investor Deception

Sam Bankman-Fried, the former CEO and founder of the cryptocurrency exchange FTX, which collapsed last month, has been arrested by authorities in the Bahamas at the request of the United States. The U.S. Securities and Exchange Commission (SEC) has already filed charges against Bankman-Fried, alleging that he deliberately orchestrated a fraudulent scheme to deceive investors and illegally used customer funds, with a total of $1.8 billion invested in the exchange.

Bahamian law enforcement detained Bankman-Fried on December 12, 2022, as officially announced by representatives of the U.S. Attorney’s Office.

Since the scandalous collapse and bankruptcy of FTX and Alameda Research last month, Bankman-Fried had remained free and was staying in the Bahamas, where FTX’s headquarters were previously located. He was giving extensive interviews, posting on Twitter, and was scheduled to travel to the U.S. the following week to testify before Congress.

Ironically, on the day of his arrest, during an appearance on the Unusual Whales podcast, Bankman-Fried stated that he was not afraid to travel to the U.S. and did not believe he could be arrested. Apparently, he was not intimidated even by at least five civil lawsuits accusing FTX, its top executives, and celebrity promoters of fraud.

According to the SEC, Sam Bankman-Fried is accused of orchestrating a scheme to defraud investors in the FTX cryptocurrency platform, where he served as CEO and co-founder.

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception, while telling investors it was one of the safest structures in the crypto industry,” wrote SEC Chair Gary Gensler.

The regulator reports that since May 2019, FTX raised over $1.8 billion from investors, including about $1.1 billion from 90 U.S. investors. Authorities emphasize that while Bankman-Fried promoted FTX as a safe and responsible platform for trading crypto assets, with a special focus on protecting customer assets, in reality he organized a fraudulent scheme to hide the following from FTX investors:

• The secret transfer of FTX customer funds to Alameda Research LLC (his private hedge fund);
• A secret special arrangement for Alameda on FTX, allowing the fund to have an almost unlimited “credit line” funded by customer assets, and exempting Alameda from key risk-reduction measures;
• Undisclosed risks related to Alameda’s significant holdings of overvalued, illiquid assets, including tokens associated with FTX.

It is also emphasized that Bankman-Fried used FTX customer funds in Alameda for secret venture investments, luxury real estate purchases, and large political donations.

“FTX operated under a veneer of legitimacy created by Mr. Bankman-Fried, touting, among other things, its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s commitment to strict investor protection principles and detailed terms of service. But as we allege in our complaint, this veneer was not just thin, it was fraudulent,” wrote Gurbir Grewal, Director of the SEC’s Division of Enforcement. “The collapse of FTX highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers. While we continue to investigate FTX and other entities for potential violations of federal securities laws, today we are holding Mr. Bankman-Fried accountable for fraudulently obtaining billions of dollars from FTX investors and misusing FTX customer funds.”

Interestingly, according to official documents, the SEC believes that Bankman-Fried was making decisions at Alameda even after Caroline Ellison and Sam Trabucco became co-CEOs. Authorities state that, despite Bankman-Fried’s previous claims that he was not involved in the numbers and was unaware of what was happening at Alameda, he actually controlled the fund’s investment and operational activities, regularly communicated with employees, and had full access to all internal records and data.