Prosecutors and regulators say from FTX’s launch, Bankman-Fried funneled customer money from the crypto trading platform to an affiliated hedge fund called Alameda Research, where it became a piggy bank for the 30-year-old and his inner circle to fund a lavish lifestyle and a multimillion-dollar charm offensive in Washington, all while making risky crypto investments. And at every turn, prosecutors and regulators argue in extensive filings this week, Bankman-Fried lied to customers and investors.
If what regulators say is true, Bankman-Fried’s recent media blitz only deepens his peril, legal experts say. That’s because the former billionaire’s attempts to whitewash his record could help prosecutors prove he knew what he did was wrong. A spokesman for Bankman-Fried declined to comment.
“It’s sometimes said that a false exculpatory story is almost as good for the government as a confession,” said Harry Sandick, a former assistant U.S. attorney in the Southern District of New York, which is bringing the criminal case against Bankman-Fried. “If you’re trying to cover up something, it makes it more likely there was something to cover up.”
The former chief executive faces a swirl of charges. Federal prosecutors on Tuesday revealed an eight-count indictment, detailing offenses from fraud to money laundering and campaign finance violations. He’s in jail in the Bahamas. On Thursday, Bankman-Fried filed a new request for bail to the Bahamian Supreme Court, according to Eyewitness News. The nation’s highest court will hear his case on Jan. 17 after a judge denied him bail Tuesday arguing his financial resources made him a flight risk.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are also bringing civil charges against Bankman-Fried. The two market regulators, in a pair of documents totaling 68 pages, laid out a detail-rich reconstruction of the massive fraud they say the FTX founder directed behind the scenes.
U.S. charges FTX founder Sam Bankman-Fried with criminal fraud
The dramatic contrast between the two sides’ versions of events goes to the heart of FTX’s multibillion-dollar wipeout. Here are four areas where they diverge:
1. Did Bankman-Fried knowingly send FTX customer funds to Alameda?
Bankman-Fried has avoided directly addressing whether he deliberately diverted consumer funds to Alameda, which is core to the government’s case. Pressed by ABC’s George Stephanopoulos, Bankman-Fried said, “I did not know there was any improper use of customer funds.” And in an interview with Andrew Ross Sorkin at the New York Times’s DealBook conference, Bankman-Fried said, “I didn’t knowingly commingle funds. … I wasn’t trying to commingle funds.”
The SEC says Bankman-Fried diverted customer deposits to his hedge fund, Alameda Research, from the earliest days of FTX’s operations, back to May 2019. The agency says he used the deposits to make “undisclosed venture investments, lavish real estate purchases, and large political donations.”
According to the SEC, Bankman-Fried had two methods of securing the funds. He encouraged FTX customers to deposit traditional currency into bank accounts controlled by Alameda; and he allowed the hedge fund to draw from a “virtually limitless” line of credit at FTX funded by customer assets. Bankman-Fried tried to conceal the activity, the SEC says, setting up the bank accounts under an Alameda subsidiary called North Dimension that made no public mention of that affiliation “in an effort to hide the fact that the funds were being sent to an account controlled” by the hedge fund.
2. Did Bankman-Fried lead Alameda?
Bankman-Fried said he didn’t control the firm. “Look, I wasn’t running Alameda,” he told DealBook. “I didn’t know exactly what was going on. … Obviously, that’s a pretty big mistake and oversight, that I wasn’t more aware. I think I was scared of — I was nervous because of the conflict of interest about being too involved.”
The SEC notes that he owned 90 percent of the company and “remained the ultimate decision-maker” there even after appointing two associates, Caroline Ellison and Sam Trabucco, to serve as co-CEOs in October 2021. He retained “direct decision-making authority over all of Alameda’s major trading, investment, and financial decisions,” the CFTC added, pointing out that he remained a signatory on the firm’s bank accounts.
Lawmakers grapple with sheer size of FTX’s missing billions
Bankman-Fried and his team used the fund as a “personal piggy bank,” tapping it for luxury condos, private jets, personal loans and risky private investments, the SEC and CFTC said.
3. Did Bankman-Fried use customer funds to pay off Alameda’s lenders?
The former executive denied any knowledge of using FTX customer money to pay off debts racked up by his hedge fund. “I don’t know of FTX deposits being used to pay off Alameda creditors,” Bankman-Fried told ABC’s Stephanopoulos.
The SEC, however, says Bankman-Fried diverted eye-popping amounts for just that purpose. The agency says Bankman-Fried’s “house of cards began to crumble” in May, when a crypto market downturn prompted other companies that Alameda had borrowed from to demand repayments. At that point, the hedge fund had already siphoned off hundreds of millions of dollars in FTX customer funds. But Bankman-Fried “directed FTX to divert billions more in customer assets” to maintain its ties to its lenders and keep the enterprise afloat.
4. Where did Bankman-Fried’s political contributions come from?
Bankman-Fried plowed at least $40 million into political campaigns this year, making him one of the top donors in the country. He said he earned the money, telling DealBook he took it from “basically, profits. It was substantially smaller than the amount of trading profits that Alameda had made over the prior few years.”
But the political spending is the focus of one of the Justice Department’s charges, which alleges in part that Bankman-Fried violated a ban on using corporate money for campaigns. The SEC said the funds for “large political donations” came from customer deposits that Alameda took from FTX.
While prosecutors appear to have ample evidence to make their case, Bankman-Fried’s public relations tour could help them bring it home, said Timothy Howard, a former Manhattan federal prosecutor. “You could see a prosecutor playing video of the DealBook summit. It’s very compelling to a jury to see him talking,” he said, especially if Bankman-Fried opts out of taking the stand. “The prosecutors would love a closing argument where they just rattle off each and every lie they believe they can prove.”
Paulina Villegas in Nassau, Bahamas, contributed to this report.