After FTX founder Sam Bankman-Fried (SBF) was arrested in the Bahamas on Tuesday , the U.S. Securities and Exchange Commission (SEC) issued a statement stating that it has formally filed a lawsuit against SBF, accusing him of defrauding FTX Trading Ltd. (FTX) for several years.
The SEC pointed out that SBF raised more than $1.8 billion from investors while covering up the fact that it transferred FTX client funds to Alameda Research, a cryptocurrency trading company. SEC Chairman Gary Gensler said in a statement:
Sam Bankman-Friend built a house of cards on a foundation made of lies, but instead told investors, “It’s one of the safest structures in the cryptocurrency world.”
The SEC asserted that “FTX operated under the façade of legitimacy created by SBF, flaunting a dedicated risk engine and claiming to adhere to specific investor protection principles, but this disguise was weak and deceptive.”
The SEC mentioned in the indictment that since FTX was founded in May 2019, it has continuously deposited billions of dollars in customer funds into Alameda Research for wanton squandering, and completely concealed it from investors. In 2021, SBF instructed Alameda Research to borrow billions of dollars from outside, and when the cryptocurrency market plummeted in May 2022, it instructed Alameda Research to use customer funds to repay the loan.
Over the years, FTX client funds were used to make undisclosed venture capital investments, purchase luxury homes, and make political donations, the indictment alleges.
In addition to the alleged fraud, SBF is being investigated for other violations of securities laws, the SEC said, while investigations into other related persons and entities are ongoing.
In a press release announcing the charges, SEC Chairman Gary Gensler reiterated his oft-repeated stance: In fact, cryptocurrency trading platforms still need to comply with existing securities laws.
This may be SBF’s toughest test since FTX’s bankruptcy, as the specific charges against SBF in this lawsuit are violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. If SBF is convicted, in addition to forfeiting his property and facing a fine, he would also be barred from participating in the offering, purchase, offer or sale of any securities (except for personal accounts) and from serving as a corporate officer or board member.