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The FTX files: US authorities outline sprawling case against crypto exchange

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A year ago Sam Bankman-Fried ditched his trademark shorts and T-shirt for a suit and sat before the US House of Representatives as the acceptable face of crypto. Lawmakers could not see that under the table, his shoelaces were untied.

Bankman-Fried had much more than sloppy dressing to conceal. This Tuesday, the man once welcomed in Washington for his innovative regulatory vision was due to testify again, but this time to explain why his FTX cryptocurrency exchange, valued at $32bn only in January, had imploded.

Now his public appearances in coming months will be reserved for courtrooms. Hours before he was due to testify, Bankman-Fried was arrested in the Bahamas and charged with fraud by three separate US authorities. The 30-year-old, once crypto’s golden boy, faces criminal and civil cases and potentially a prison sentence of over 100 years. One US prosecutor this week called it “one of the biggest financial frauds in American history”.

In one irony, his words to Congress last December, touting his “transparent”, “robust”, “consistent” risk controls as a model for mainstream US financial markets, now appear in the long list of accusations against him.

The Securities and Exchange Commission, which filed civil charges alongside a criminal indictment by the Department of Justice, alleges this was one of many lies the FTX founder told as part of a years-long fraud to enrich himself by funnelling money customers entrusted to FTX to his private trading firm, Alameda Research.

“This guy was the poster child for stable exchanges. The idea was that he was going to bring a certain amount of sanity to the market,” said Charles Whitehead, professor at Cornell Law School. “And then it turns out it has been this fraternity down in the Bahamas and all these terrible things.”

The ties between Alameda, founded in 2017, and FTX, the trading venue he launched in 2019, are crucial to the case against Bankman-Fried.

“From the start, Bankman-Fried improperly diverted customer assets to his privately held crypto hedge fund, Alameda Research and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations,” the SEC alleges.

The charges, filed about a month after FTX went bankrupt, mark a swift move for retribution by US authorities. But the watchdogs have also been criticised for failing to spot the alleged fraud before it collapsed under its own weight. In hearings this week, senator Kyrsten Sinema said the chargers were “reactive, not proactive and frankly it was the least the government could do”.

The allegations now arrayed against Bankman-Fried portray what congressman Ritchie Torres this week called an “incestuous relationship” between Alameda and FTX.

The trading firm provided vital liquidity to kick-start the FTX exchange, and helped it vault to the top of the digital asset world, processing $20bn in daily transactions at its peak. Meanwhile, Alameda allegedly benefited from secret special treatment, including faster transactions, the ability to run negative balances, exemption from liquidation on overextended trades, and — most importantly — a nearly limitless supply of loans from FTX’s customer vaults, according to the SEC and the Commodity Futures Trading Commission.

Alameda also accepted billions in cash deposits to its bank accounts from FTX customers, which it “spent on its own trading operations and to expand Bankman-Fried’s empire”, the SEC said.

Bankman-Fried has denied intentional wrongdoing, and tried in a series of media interviews before his arrest to paint the collapse of his companies as the result of extreme mismanagement. Earlier this week, Bankman-Fried’s lawyer said the FTX founder was “reviewing the charges with his legal team and considering all of his legal options”.

He has claimed that money leaked to Alameda by mistake, and that he was largely unaware of how the trading firm had spent it. Although majority owner of both companies, he stood down as chief executive of Alameda after launching FTX.

The charges maintain that the public separation between Alameda and FTX was cosmetic. In its lawsuit against the exchange’s founder and the two companies, the CFTC said Bankman-Fried “maintained direct decision-making authority over all of Alameda’s major trading, investment, and financial decisions” and was in nearly constant contact with executives at the trading firm. The new management running FTX and Alameda in bankruptcy declined to comment.

Former employees say they frequently saw Bankman-Fried and Alameda chief executive Caroline Ellison, who were at times romantic partners and roommates, walking laps of the parking lot at the companies’ Nassau office compound, locked in long conversations.

Bankman-Fried also conceded in an interview with the Financial Times earlier this month that he was involved in discussions about Alameda’s financial health in June, when crypto prices were crashing. The market crisis inflicted heavy losses on Alameda, which simultaneously faced calls to repay large quantities of loans.

The US agencies allege Bankman-Fried personally directed a bailout of Alameda with customer money, and a cover-up of massive amounts appropriated from FTX. In the spring, he shifted Alameda’s $8bn liability to the FTX account of an unnamed individual, which Bankman-Fried called “our Korean friend’s account” and “the weird Korean account”, according to the CFTC.

The case against Sam Bankman-Fried

Federal prosecutors in the Southern District of New York unsealed an indictment against Bankman-Fried on eight counts, including wire fraud and conspiracy to commit money laundering. Read the indictment.

The Securities and Exchange Commission, the Wall Street regulator, filed civil fraud charges against the FTX founder in a lawsuit. Read the complaint.

The Commodity Futures Trading Commission also filed suit, naming Bankman-Fried, FTX and Alameda Research, alleging fraud. Read the complaint.

Bankman-Fried also intervened to make sure his trading firm was exempt from paying interest on its FTX positions, as other customers normally had to, the SEC claims.

By September, Bankman-Fried was contemplating shuttering the trading firm. In an internal document, he wrote that Alameda’s bad trades had “cost more in [expected value] than all the money Alameda has ever made or ever will make”, according to the CFTC.

But he also reflected on the deeply intertwined relationship between Alameda and FTX. “Given the amount that Alameda is doing, we can’t really shut it down,” Bankman-Fried concluded.

In early November, a Coindesk report on Alameda’s financial health sent customers rushing to withdraw their deposits from FTX. But the money was not there.

On Monday afternoon, Bankman-Fried said online he “didn’t believe” he would be detained if he set foot inside the US. In a sense, he was right. But American justice has long arms. Hours later, police in the Bahamas knocked on his door.

Additional reporting by Nikou Asgari

What happens to Sam Bankman-Fried now?

Bankman-Fried appeared in court in the Bahamas on Tuesday. He was denied bail, and faces a spell in Nassau’s Fox Hill Prison, which has been criticised in international reports for overcrowding and lacking sanitation. A hearing on his extradition to the United States is scheduled for February.

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