Sam Bankman-Fried, the disgraced co-founder of digital-asset exchange FTX, was accused by U.S. regulators of orchestrating a multi-year fraud against investors — one that helped support his lavish lifestyle.

Bankman-Fried, who had been living in an expansive penthouse on the island, was arrested on Monday evening in the Bahamas after U.S. prosecutors filed a criminal indictment. The arrest followed weeks of speculation about the possible misuse of client funds. He’ll be arraigned in the island nation on Tuesday, and faces an extradition process once federal prosecutors in Manhattan unseal their charges.

Bankman-Fried’s attorney, Mark Cohen of Cohen & Gresser, didn’t immediately respond to a request for comment outside normal business hours.

Bankman-Fried diverted billions of dollars of customer funds to help grow his other entities, according to the SEC’s civil complaint filed Tuesday also in New York’s Southern District court. Wall Street’s main regulator alleged that FTX raised more than $1.8 billion, including $1.1 billion from about 90 U.S.-based investors, in an “orchestrated scheme to defraud equity investors” who bought in based on the belief that FTX had appropriate controls.

“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 in a statement.

Bankman-Fried misled investors, telling them that FTX had sophisticated risk controls and that their assets were secure, according to the SEC. Instead he was using their money as a “virtually unlimited line of credit” for trading firm Alameda Research, which Bankman-Fried also founded. The SEC claimed that, from the start, Bankman-Fried diverted customer assets to Alameda to make undisclosed investments, political donations and lavish real estate buys. The SEC also alleged that Bankman-Fried concealed risks and obscured FTX’s relationship with the trading firm.

The CFTC is bringing charges against SBF, FTX and Alameda for fraud of digital commodity assets, a person familiar said.

More than 100 FTX-related entities, including Alameda, filed for U.S. bankruptcy protections on Nov. 11. The criminal and civil charges filed so far have focused entirely on Bankman-Fried, which raises questions about whether other former FTX and Alameda executives have been cooperating with prosecutors.

The White House declined to comment on the arrest and charges.

The House Financial Services Committee, which had scheduled a hearing into FTX’s collapse for Tuesday, is still planning to go ahead with the proceedings even though Bankman-Fried will no longer be able to attend. “It’s important for the American public to understand FTX and what was going on,” Chairwoman Maxine Waters said on Monday night following his arrest.

Bankman-Fried, 30, is being held at the Cable Beach police station in Nassau, according to an officer working at the facility. The person, who declined to give a name when reached by phone, said that all the cells there are “comfortable” but didn’t provide details.

The facility is about 13 miles from the Albany Bahamas luxury community where Bankman-Fried lives, and is located close to a main tourist zone.

In media interviews since FTX’s collapse, Bankman-Fried has admitted major managerial missteps, but has also claimed that he never tried to commit fraud or break the law.

In draft remarks prepared for the U.S. House hearing and obtained by Bloomberg News prior to his arrest, he offered a blunt assessment of his plight.

“I would like to start by formally stating under oath: I f–ked up,” Bankman-Fried wrote in the draft.

He added that the company’s new managers, led by restructuring expert John J. Ray III, have repeatedly rebuffed his offers to help sift through the wreckage of the collapsed crypto empire. Ray, who’s now leading the company, hasn’t responded to five of his emails, he said. Ray is still scheduled to testify at the hearing on Tuesday.

In remarks prepared for the House hearing, Ray blamed FTX’s collapse on the failures of its previous leaders.

“The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals,” Ray said in the written testimony released Monday in advance of the hearing. The prior management “failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.”

Before the arrest and long before his empire collapsed into bankruptcy, federal prosecutors in Manhattan had already been looking into FTX as part of broader sweep of exchanges and potential anti-money laundering violations under the Bank Secrecy Act.

The investigation, led by the Complex Frauds and Cybercrime Unit, took a different trajectory after FTX’s catastrophic implosion.

Prosecutors were closely examining whether hundreds of millions of dollars were improperly transferred to the Bahamas around the time of FTX’s Nov. 11 bankruptcy filing in Delaware, according to a person familiar with the matter.

They were also digging into whether FTX broke the law by transferring funds to Alameda Research, the bankrupt investment firm also founded by Bankman-Fried, Bloomberg reported previously.

Last week, prosecutors, the FBI, Department of Justice officials and FTX’s new CEO and restructuring expert Ray met at SDNY’s headquarters in downtown Manhattan. Potential charges were not discussed at that meeting, according to a person familiar with the conversation.

Bob Van Voris, Ava Benny-Morrison, Katanga Johnson and Gillian Tan report for Bloomberg News.

Copyright 2022 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.