The U.S. Securities and Exchange Commission has charged former FTX CEO Sam Bankman-Fried for defrauding investors through opaque risk management and diversion of customer funds to Alameda Research.
The SEC alleges that Bankman-Fried inaccurately represented FTX’s risk management mechanism to equity investors who invested $1.8 billion in the exchange.
SEC Wants to Prevent Bankman-Fried From Offering Securities
Additionally, the SEC complained that Bankman-Fried failed to be transparent about the diversion of FTX customer funds to his quant trading firm Alameda Research and concealed Alameda’s exemption from FTX’s risk management policies, despite the trading firm holding large amounts of FTX’s illiquid FTT token. The agency recently declared FTT a security.
As a result of the complaint, the SEC seeks injunctions that will prevent Bankman-Fried from buying or selling securities as part of a business endeavor and asks that he pay back profits from his alleged fraudulent activities. Additionally, they want the former FTX boss to be barred from senior corporate positions and be charged a civil penalty.
FTX filed for Chapter 11 bankruptcy on Nov. 11, 2022, after a liquidity crisis that saw it unable to meet customer demand for withdrawals. Bankman-Fried was later arrested in the Bahamas and extradited to the U.S., where he faces eight criminal charges, including wire fraud and violation of political campaign funding laws. A U.S. judge has set an Oct. 2023 trial date.
He is currently out on a $250 million recognizance bond that sees him confined to his parents’ home in Palo Alto, California. He recently started a blog post to defend himself against the fraud allegations.
Reaction to SEC Charges Against SBF
NFT tool builder Origin Protocol said they were happy with the complaint, while others criticized the SEC for profiting from financial crimes.
SBF slammed FTX’s new CEO John Jay Ray III, who said he is open to reviving FTX in his first public interview since assuming control of the reins.
Ray, an insolvency expert most famous for his role in the Enron bankruptcy, said that FTX’s newly-appointed task force would leave no stone unturned. “Everything is on the table. If there is a path forward on that, then we will not only explore that, we’ll do it.” Ray said.
Shortly after the report surfaced, Bankman-Fried criticized Ray for “paying lip service” to an idea that Bankman-Fried himself claimed he tried to carry out a while back.
According to the WSJ, however, the idea for the revival of FTX.com came from several investors who see the exchange as a viable enterprise. Ray is also investigating whether reviving the business could restore bereft customers waiting for the outcome of the exchange’s bankruptcy trial, currently underway in Delaware.
Since taking over in Nov. 2022, Ray’s team has tried to locate all the exchange’s money. They have also hired investment bankers to liquidate FTX affiliates and $5 billion in venture capital investments.
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