New FTX CEO calls corporate structure ‘unprecedented’ in bankruptcy filing

Former FTX CEO Sam Bankman-Fried arrested in Bahamas, faces charges from SDNY, SEC, CFTC

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Authorities in the Bahamas arrested Sam Bankman-Fried, former chief executive of the now bankrupt cryptocurrency exchange FTX Trading Ltd., Monday evening after the U.S. filed criminal charges, according to a press statement.

The criminal charges against Bankman-Fried filed by prosecutors in the Southern District of New York include eight different counts, covering allegations of wire fraud, securities fraud and money laundering. The former CEO also faces a complaint from the Securities and Exchange Commission which is investigating him for securities law violations and the Commodity Futures Trading Commission also piled on.

“SBF’s arrest followed receipt of formal notification from the United States that it has filed criminal charges against SBF and is likely to request his extradition,” said Bahamas Attorney General Ryan Pinder about the matter.

Pinder added that authorities would hold Bankman-Fried in accordance with the nation’s extradition agreement with the U.S.

Bankman-Fried’s arrest came a day before his expected virtual testimony in front of the House Financial Services Committee today about the catastrophic implosion of his crypto empire. In the month after the collapse of FTX, he has been making the rounds pleading his case in the media, and to his former colleagues, trying to paint himself as apologetic about the failure as if it were largely incompetence and out of his control.

The saga began with documents leaked by CoinDesk revealing that FTX was using its native FTT cryptocurrency tokens as collateral for billions of crypto loans, between itself and its sister company Alameda Research. Changpeng “CZ” Zhao, the CEO of Binance, the largest crypto exchange by volume, then announced it was going to withdraw its take in FTT, which caused FTX to have a liquidity crisis and revealed that FTX was insolvent.

Bankman-Fried stepped down as CEO during the Nov. 11 bankruptcy of FTX and was replaced by John Ray III, who, after reviewing the corporate structure of the company, said in a court filing that he has never in his entire career “seen such a complete failure of corporate controls.”

SEC and CTFC pile on complaints

The Securities and Exchange Commission also officially charged Bankman-Fried with defrauding investors. The commission also stated that it is continuing investigations into other securities law violations as well.

The SEC’s complaint alleges that FTX raised more than $1.8 billion from investors and represented itself as “a safe, responsible crypto asset trading platform” but in reality, he was committing what the commission called “years-long fraud” concealing the diversion of customer funds to Alameda Research and undisclosed risk.

The complaint also alleges that Bankman-Fried mismanaged customer funds at Alameda to make venture investments, real estate purchases and political donations.

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said SEC Chair Gary Gensler. “The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws.”

The SEC also seeks to block Bankman-Fried from participating in future activities involving securities such as the issuance, purchase, offer or sale, except for his own personal use.

In a “parallel action” the Commodities Futures Trading Commission also today announced charges against Bankman-Fried alleging that Bankman-Fried and other FTX executives used hundreds of millions of dollars of loans, reported Bloomberg.

Allegations in the complaint included charges that FTX comingled customer funds and that Bankman-Fried violated the Commodities Exchange Act.

“At Bankman-Fried’s direction, FTX executives created features in the underlying code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX,” the CFTC said in the complaint.

In the filing, the CFTC alleged that Alameda Research was able to access as much as “$8 billion in customer funds” from an account that was earmarked for FTX but was controlled by Alameda. Further stating that the use of customer funds by Alameda was not authorized by FTX customers, nor were customers made aware, thus this was in violation of the contractual terms of service of the exchange.

Image: FTX

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