Sam Bankman-Fried fooled investors and customers by presenting himself as the J.P. Morgan of a new crypto world. But a lawsuit filed by the Securities and Exchange Commission on Tuesday alleges he was really Bernie Madoff all along.
The explosive suit alleges that Bankman-Fried’s FTX crypto currency exchange was a fraud right from the start when it was founded in 2019, which he used as his own personal piggy bank to fund his hedge fund Alameda Research’s extremely risky trading moves.
The SEC alleges that Alameda was given a “virtually unlimited line of credit funded by the platform’s customers,” despite assuring depositors that their money was safe and secure. He is also accused of lying to investors and the public by claiming to run a conservative investment business with sophisticated risk measures and that Alameda had no special privileges above anyone else.
Instead, Bankman-Fried spent lavishly on office spaces and luxury apartments in the Bahamas where his companies were based, as well as on speculative venture investments and political donations.
“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by,” said Gurbir Grewal, director of the SEC’s division of enforcement. ”But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent,”
As the lawsuit put it: “there was no meaningful distinction between FTX customer funds and Alameda’s own funds.”
“Bankman-Fried thus gave Alameda carte blanche to use FTX customer assets for its own trading operations and for whatever other purposes Bankman-Fried saw fit,” the suit continued.
A spokesman for Bankman-Fried declined to comment.
The suit comes just a day after Bankman-Fried was arrested by authorities in the Bahamas, who said they were acting at the request of the U.S. Justice Department. The U.S attorney for the southern district of New York said that a criminal indictment against Bankman-Fried waa expected to be unsealed on Monday morning.
The SEC also said an additional case was expected to be brought against Bankman-Fried by the Commodity Futures Trading Commission.
The SEC suit filed Tuesday does charge Bankman-Fried for abusing FTX’s customers by taking their funds. Instead, it focusses on the equity investments he raised from sophisticated investors in venture funding rounds for FTX, saying Bankman-Fried defrauded 90 of those investors out of $ 1.8 billion by lying about how he ran his company. The SEC said that its investigation is ongoing and that further charges against Bankman-Fried and others involved in running FTX could later be filed.
The SEC suit alleged that the fraudulent house of cards Bankman-Fried had built began to crumble in May when the price of many of the world’s key crypto currencies began plummeting. That led Alameda, which held most of its assets in crypto, into a major credit crunch with its lenders.
“Despite the fact that Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations,” the suit read. “Bankman-Fried directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors.”
The suit alleged that even with the walls coming down around him, Bankman-Fried continued to lie to his investors about the scope and nature of the problem FTX faced as he raced to secure more funding to plug the huge holes developing in the firm’s ledger book. On Nov. 11, FTX filed for Chapter 11 bankruptcy protection.
Steve Gelsi, Ciara Linnane and Jeremy Owens contributed to this report.