The Federal Lawsuits Against FTX Show a Much Deeper Fraud Than Many Thought

This post was originally posted on Observer.com .

When FTX filed for bankruptcy on Nov. 11, there was a minimalist, somewhat charitable version of what happened, definitely encouraged by the many media interviews FTX founder and CEO Samuel Bankman-Fried gave the media. In this version of events, FTX recently suffered a kind of run on its crypto assets that caused it to go under. There may have been inadequate corporate controls but, Bankman-Fried insisted, no intent to defraud.

The version offered today in a lawsuit from the Securities and Exchange Commission (SEC) and in an indictment issued by the US Attorney’s office in New York’s Southern District is far, far more sinister and damning. According to the SEC, FTX was committing fraud from the very moment it began operating in May 2019. FTX, the SEC insists, was a “house of cards” that defrauded not only customers but also early investors. The indictment not only charges FTX and Bankman-Fried with wire fraud, but also commodities and securities fraud and even money laundering.

For example, the SEC charges that from the very beginning, Bankman-Fried diverted account funds from FTX customers to Alameda Research, the crypto hedge fund 90 percent owned by Bankman-Fried. Alameda had a “virtually limitless” line of credit from FTX, because it alone among FTX customers had the ability to hold a negative balance; the company’s computer code was rewritten to allow for this. Not only was this relationship not disclosed to people who opened FTX trading accounts, but it was also not disclosed to the investors who ultimately put about $1.8 billion of equity into FTX.

With unrestricted access to FTX customer funds, Bankman-Fried “then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses,” according to the SEC.

The SEC even alleges that Bankman-Fried was involved in fraud on a very granular level. An internal account in the FTX database labeled fiat@ftx.com concealed the billions in liability that Alameda had built up. In presentations to lenders, FTX would characterize Alameda’s liability as a “loan,” without specifying that the loan came from FTX. Earlier this year, FTX tried to separate out its liabilities from Alameda’s, but that caused the liabilities to go into an account that would charge interest. Bankman-Fried personally intervened, the SEC says, in order to preserve the fraud.

The level of personal spending is also breathtaking. While it has been widely reported that Bankman-Fried bought Bahamian real estate and made substantial political donations, a charitable observer would assume that was with his own money. According to the SEC, Bankman-Fried borrowed more than $1.33 billion, including two instances in which Bankman-Fried was both the lender and the borrower.

It can be notoriously tricky to gain convictions in complicated financial cases; in 2009, Bear Stearns executives were acquitted on federal charges of misleading investors in mortgage-backed securities. Still, the depth and length of fraud alleged by the government will make it hard for Bankman-Fried to present a convincing defense.