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The Securities and Exchange Commission (SEC) has officially charged FTX founder and former CEO Sam Bankman-Fried with defrauding investors.
"The Securities and Exchange Commission today charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX)," the Commission announced on Tuesday. It alleges that SBF violated anti-fraud provisions of both the Securities Exchange Act of 1933 and 1934.
The statement also said that additional securities law violations, as well as investigations into other individuals besides SBF, are ongoing.
FTX filed for bankruptcy on November 11 following mass withdrawals from users, which revealed that the platform did not have all of its users' funds. Its rival exchange had showed interest in acquiring FTX before it filed for Chapter 11, but Binance's CEO backed out of the deal, saying that it was "beyond our ability to help."
During the bankruptcy proceedings, John J. Ray III, the former Enron liquidator who took over the role of FTX's CEO, described FTX a business with a "complete failure of corporate controls" and called the situation "unprecedented" in his first submitted statement.
The screw has now turned, with formal charges replacing what SBF had tried to frame more as incompetence than malfeasance during his weeks-long media tour. The SEC alleges that Bankman-Fried "orchestrated a years-long fraud" when presenting his exchange's "sophisticated, automated risk measure to protect customer assets."
The complaint alleges that the FTX founder failed to disclose how the firm commingled funds with its sister trading firm Alameda Research, the "special treatment" afforded to Alameda, as well as using client funds for venture investments, political donations, and "lavish real estate purchases."
The SEC specifies $1.8 billion raised from equity investors, an important distinction from regular FTX users who have funds stuck on FTX’s platform—that group is considered the creditors, or people to whom the exchange owes money in its bankruptcy proceeding. Equity investors are angel investors and venture capitalists who write checks to back startups in return for equity, or shares in the company. The SEC charges are on behalf of these big-name backers who participated in FTX’s funding rounds since it launched in 2019, including: Pantera Capital, Digital Currency Group, Binance and Binance Labs, Consensus Lab, Sequoia Capital, Coinbase Ventures, Multicoin Capital, and Blackrock. Its latest funding round, for $400 million at a $32 billion valuation in January 2022, included SoftBank, the Ontario Teachers’ Pension Plan, and Paradigm.
"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," SEC Chair Gary Gensler said. "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."
Bankman-Fried was arrested yesterday in the Bahamas following a formal request from the U.S. Attorney's Office for the Southern District of New York.
Separately, prosecutors for the Southern District of New York yesterday charged Bankman-Fried with wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering.