: SEC charges Sam Bankman-Fried with defrauding investors in now-bankrupt FTX

Bankman-Fried, who is known as SBF, lives in the Bahamas, where FTX was also based.

“SBF’s arrest followed receipt of formal notification from the United States that it has filed criminal charges against SBF and is likely to request his extradition,” said a statement from the Bahamian attorney general.

The SEC is seeking to bar Bankman-Fried from the securities industry and will seek to impose a civil fine and bar him from serving as a company officer or director.

SBF was expected to testify remotely in front of a House Financial Services Committee panel on Tuesday. He had been called to appear before the criminal charges were announced.

Also read: ‘Crypto is a garden of snakes,’ Democrat says as Congress probes FTX fallout

The SEC said Bankman-Fried made undisclosed diversions of customer funds and provided undisclosed special treatment to Alameda Research LLC, a private crypto hedge fund run by him.

The SEC also charged him with commingling FTX customers’ funds at Alameda in order to make undisclosed venture investments, real-estate purchases and political donations.

The crypto whiz kid who was once worth billions orchestrated “a scheme to defraud equity investors,” the SEC said. Investigations as to other violations of securities law and into other entities and persons relating to the alleged misconduct are ongoing, the SEC said.

“In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets,” the SEC said. “In reality, Bankman-Fried orchestrated a years-long fraud.”

Since at least May 2019, FTX raised more than $1.8 billion from equity investors, including approximately $1.1 billion from about 90 U.S.-based investors, the SEC said.

SEC Chair Gary Gensler said Bankman-Fried’s alleged fraud “is a clarion call to crypto platforms that they need to come into compliance with our laws.” Gensler called on crypto players to properly protect customer funds and to separate conflicting lines of business.

The SEC is utilizing its fraud charges against Bankman-Fried as firepower in its push to bring aspects of the crypto world under securities regulations, said Bridget Moore, partner and co-chair of the litigation department at the law firm Baker Botts. 

Looking past the egregious missteps made by Bankman-Fried as outlined by the company’s new CEO John J. Ray III, it remains to be seen if the SEC will succeed in winning the debate over whether it has the authority to regulate cryptocurrency brokers.

Meanwhile, the SEC is signaling that it intends to increase its scrutiny of other crypto companies, Moore said. 

Regardless of the regulatory outcome or the penalties imposed on Bankman-Fried, investigations by the SEC and other regulators “will ramp up significantly,” Moore said.

Moore noted the SEC also stepped up its activities regarding investment advisers after Bernie Madoff was arrested in late 2008 for running a Ponzi scheme that defrauded investors of billions of dollars.

In parallel actions Tuesday, the U.S. Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission (CFTC) also announced charges against Bankman-Fried.

The complaint said the actions of Bankman-Fried, FTX Trading and Alameda Research caused the loss of more than $8 billion in FTX customer deposits and that fraud and material misrepresentations were committed with the sale of digital commodities in interstate commerce.

The CFTC is seeking restitution, disgorgement, civil monetary penalties, permanent trading and registration bans and a permanent injunction against further CFTC violations.

The CFTC cautioned that repayment of lost funds may not always be made if perpetrators do not have sufficient funds or assets.

Ciara Linnane and Jeremy Owens contributed to this report.