“It’s fair to say that […] this is one of the biggest financial frauds in American history.” That was Damian Williams, the US Attorney for the Southern District of New York, on December 13, 2022, the day his office unsealed an indictment against FTX founder Sam Bankman-Fried.
The shift from a collapsed exchange to a criminal case came fast. Bankman-Fried had been arrested in the Bahamas the day before, just over a month after FTX filed for bankruptcy on November 11. He faced eight counts, among them conspiracy to commit wire fraud on customers and lenders, money laundering and campaign finance violations.
What prosecutors say happened
The indictment describes a scheme that ran from 2019, the year Bankman-Fried founded FTX, until the exchange failed. Customer deposits, prosecutors say, were taken to pay debts and expenses at his private trading firm Alameda Research and to fund investments. Williams said the money also paid for political donations, “to buy bipartisan influence and impact the direction of public policy in Washington.” Williams added that FTX lied to investors this year about its business and its risk management.
The civil side was just as blunt. Gurbir Grewal, the SEC’s enforcement director, said FTX “operated behind a veneer of legitimacy,” and that the veneer “wasn’t just thin, it was illegitimate.” The SEC alleged Alameda received what amounted to an unlimited line of credit drawn from customer funds. SEC chair Gary Gensler said Bankman-Fried “built a house of cards on a foundation of deception.” Investors had put $1.8bn into the exchange since May 2019, the regulator said. The Commodity Futures Trading Commission, which also sued, said it had counted $8 billion in customer losses so far.
FTX, once valued at $32bn, was based in the Bahamas.
The wreckage, according to the man cleaning it up
John Ray, the new FTX chief executive overseeing its liquidation, told lawmakers it was “just plain old embezzlement.” He described a firm with “virtually no internal controls.” Staff tracked expenses in Slack messages and kept books in QuickBooks, which Ray called “a very nice tool, just not for a multibillion-dollar company.”
Bankman-Fried was due to appear before the House Financial Services Committee that same day. His arrest meant he never did, and committee chair Maxine Waters questioned the timing. Williams said the charges had been authorised the previous Wednesday and the indictment returned on Friday. “We had a warrant for his arrest,” he said.
A Bahamas judge refused bail, calling Bankman-Fried a flight risk, and set an extradition hearing for February 8. His lawyer said he was reviewing the charges and weighing all legal options.
Sources
- FTX 'One of the Biggest Financial Frauds in American History': Prosecutor Damian Williams (Decrypt)
- FTX chief charged in one of 'biggest financial frauds' in US history (The News International)
