SBF charged with “orchestrating a massive, years-long fraud”

Aaaaand there it is. The US Securities and Exchange has levelled the first formal charges against Sam Bankman-Fried, and the watchdog doesn’t mince its words.

FT Alphaville’s bold emphasis in the painfully stark charge sheet below, and some our comments further down. HT to Kadhim Shubber for the document. Don’t forget that criminal charges are also expected to be unsealed later today (RIP the conspiracy theories that predicted that SBF’s political donations would shield him from prosecution).

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Plaintiff: SECURITIES AND EXCHANGE COMMISSION

Defendant: SAMUEL BANKMAN-FRIED

Plaintiff Securities and Exchange Commission (the “Commission”), for its complaint against Defendant, Samuel Bankman-Fried (“Bankman-Fried”), alleges as follows:

SUMMARY

1. From at least May 2019 through November 2022, Bankman-Fried engaged in a scheme to defraud equity investors in FTX Trading Ltd. (“FTX”), the crypto asset trading platform of which he was CEO and co-founder, at the same time that he was also defrauding the platform’s customers. Bankman-Fried raised more than $1.8 billion from investors, including U.S. investors, who bought an equity stake in FTX believing that FTX had appropriate controls and risk management measures. Unbeknownst to those investors (and to FTX’s trading customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire.

2. Throughout this period, Bankman-Fried portrayed himself as a responsible leader of the crypto community. He touted the importance of regulation and accountability. He told the public, including investors, that FTX was both innovative and responsible. Customers around the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform. But from the start, Bankman-Fried improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research LLC (“Alameda”), and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.

3. Bankman-Fried hid all of this from FTX’s equity investors, including U.S. investors, from whom he sought to raise billions of dollars in additional funds. He repeatedly cast FTX as an innovative and conservative trailblazer in the crypto markets. He told investors and prospective investors that FTX had top-notch, sophisticated automated risk measures in place to protect customer assets, that those assets were safe and secure, and that Alameda was just another platform customer with no special privileges. These statements were false and misleading. In truth, Bankman-Fried had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited “line of credit” funded by the platform’s customers.

4. While he spent lavishly on office space and condominiums in The Bahamas, and sank billions of dollars of customer funds into speculative venture investments, Bankman-Fried’s house of cards began to crumble. When prices of crypto assets plummeted in May 2022, Alameda’s lenders demanded repayment on billions of dollars of loans. Despite the fact that Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations. Bankman-Fried directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors.

5. But Bankman-Fried did not stop there. Even as it was increasingly clear that Alameda and FTX could not make customers whole, Bankman-Fried continued to misappropriate FTX customer funds. Through the summer of 2022, he directed hundreds of millions more in FTX customer funds to Alameda, which he then used for additional venture investments and for “loans” to himself and other FTX executives. All the while, he continued to make misleading statements to investors about FTX’s financial condition and risk management. Even in November 2022, faced with billions of dollars in customer withdrawal demands that FTX could not fulfill, Bankman-Fried misled investors from whom he needed money to plug a multi-billion-dollar hole. His brazen, multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliated entities filed for bankruptcy on November 11, 2022.

Read the full charges here. The first thing to note in the sheet is the date, “From at least May 2019 . . .”, by which the SEC means FTX’s entire existence. It was around May 2019 that SBF bought the FTX.com domain and the first fundraising announcement didn’t drop until August of that year.

Obviously, a lot of the allegations in here have already come out at various times. Some of the most interesting parts are about the relationship between SBF, FTX and Alameda, the “tangled web” the SEC is referring to. From the charges (our emphasis):

34. From the start of FTX’s operations in or around May 2019 until at least 2021, FTX customers deposited fiat currency (e.g., U.S. Dollars) into bank accounts controlled by Alameda. Billions of dollars of FTX customer funds were so deposited into Alameda-controlled bank accounts.

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36. Alameda did not segregate these customer funds, but instead commingled them with its other assets, and used them indiscriminately to fund its trading operations and Bankman-Fried’s other ventures.

37. This multi-billion-dollar liability was reflected in an internal account in the FTX database that was not tied to Alameda but was instead called “fiat@ftx.com.” Characterizing the amount of customer funds sent to Alameda as an internal FTX account had the effect of concealing Alameda’s liability in FTX’s internal systems.

An FTX’s balance sheet compiled by SBF, which we published last month, contained a reference to a $8bn “Hidden poorly internally labled ‘fiat@’ account”.

Thar, it appears, she blows.

Cont. (our emphasis):

38. In quarterly balance sheets that Alameda provided to its third-party lenders, Alameda tracked this liability as a “loan,” but did not specify that the “loan” was from FTX. Instead, Alameda combined this liability with loans it had received from third-party lenders.
39. Alameda was not required to pay interest on the liability reflected in the “fiat@ftx.com” account.
40. In 2022, FTX began trying to separate Alameda’s portion of the liability in the “fiat@ftx.com” account from the portion that was attributable to FTX (i.e., to separate out customer deposits sent to Alameda-controlled bank accounts from deposits sent to FTX-controlled bank accounts). Alameda’s portion — which amounted to more than $8 billion in FTX customer assets that had been deposited into Alameda-controlled bank accounts — was initially moved to a different account in the FTX database. However, because this change caused FTX’s internal systems to automatically charge Alameda interest on the more than $8 billion liability, Bankman-Fried directed that the Alameda liability be moved to an account that would not be charged interest. This account was associated with an individual that had no apparent connection to Alameda. As a result, this change had the effect of further concealing Alameda’s liability in FTX’s internal systems.

At this stage we don’t think we know who this individual is. Overall though, that’s not a massive deal compared to the general insanity of this arrangement.

On top of the fiat@ arrangement, the SEC says Alameda “benefited from undisclosed features of the FTX platform, which allowed it to divert FTX customer assets”:

a. Negative Balance: Alameda was able to maintain a negative balance in its customer account at FTX. Bankman-Fried directed software code to be written in or around August 2019, and updated in or around May 2020, that ultimately allowed Alameda to maintain a negative balance in its account, untethered from any collateral requirements. No other customer account at FTX was permitted to maintain a negative balance.

b. Line of Credit: On multiple occasions, Bankman-Fried directed FTX to increase the amount by which Alameda could maintain a negative balance in its account. In effect, this gave an unofficial “line of credit” to Alameda, since Alameda was able to draw down on its FTX customer account and use those funds — which were actually the funds deposited by other FTX customers — for its own trading. At Bankman-Fried’s direction, Alameda’s “line of credit” was continually raised to the point where it grew to tens of billions of dollars and effectively became limitless. No other FTX customer had a similar “line of credit.”

c. Liquidation Exemption: In or around May 2020, Bankman-Fried directed that Alameda be exempted from the “auto-liquidation” feature of FTX’s spot margin trading services. As a result, Alameda’s collateral could fall below the requisite margin levels without triggering the automatic liquidation of its account. Alameda was the only customer exempted from FTX’s automatic account liquidation.

These are all bad things, but our initial impression is that a., in particular, is a really bad thing.

NB: As part of our rubbernecking coverage, FTAV has also been publishing detailed information about FTX’s finances that readers may find relevant:

Untangling the knotty empire of Bankman-Fried and FTX
FTX balance sheet, revealed
FTX: The Wallet Inspection
Revealed: the Alameda venture capital portfolio

More to follow…