On Monday night, former FTX CEO Sam Bankman-Fried denied being part of a group chat called “Wirefraud” with other leaders of the bankrupt crypto exchange. Less than a day later, Bahamian police arrested Bankman-Fried after U.S. federal prosecutors indicted him on a bevy of charges—including wire fraud.
Prosecutors from the Southern District of New York announced eight counts on several charges Tuesday: wire fraud and conspiracy to commit wire fraud (against both customers and lenders), conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the United States and violate campaign finance law.
FTX collapsed in early November after journalists discovered Bankman-Fried, 30, was using the crypto exchange’s assets to prop up Alameda Research, a crypto hedge fund he also founded. Bankman-Fried—also known as SBF—has maintained that he was simply “lazy and disconnected” and “should have done better.” Federal prosecutors allege that’s not the whole story.
What are the criminal charges against Bankman-Fried?
“Prosecutors are telling a pretty simple story, which is that Sam Bankman-Fried stole his customers’ money and assets and used them to make speculative bets and enrich himself,” said Lee Reiners, policy director at the Duke Financial Economics Center. That story fits with the testimony of the man FTX hired to clean up the mess, current CEO John Ray. This is a case of “old-fashioned embezzlement,” he told the House Financial Services Committee Tuesday.
The first two charges in SBF’s indictment are wire fraud and conspiracy to commit wire fraud. He and his unnamed co-conspirators “engaged in a scheme to defraud customers of FTX.com by misappropriating those customers’ deposits, and using those deposits to pay expenses and debts of Alameda Research,” according to the indictment.
The third and fourth charges were similar, albeit with “lenders to Alameda Research” as the victims. While using FTX customer money to pay off Alameda’s debts, prosecutors say SBF and his alleged co-conspirators also provided false and misleading information about Alameda’s financial condition to people or entities who had loaned money to the hedge fund.
With the fifth charge, U.S. attorneys are also dipping a toe into one of the thorniest debates surrounding the crypto industry: whether crypto tokens and contracts should be considered securities or commodities. Conspiracy to commit commodities fraud implies that at least something sold to FTX customers constituted a commodity, Reiners explained.
The sixth count, conspiracy to commit securities fraud, is based on the allegation that SBF “caused an email to be sent to an FTX investor … that contained materially false information about FTX’s financial condition.”
The seventh charge—money laundering—alleges that SBF engaged in a transaction designed to hide the wire fraud. The eighth charge deals with campaign finance violations in which Bankman-Fried allegedly contributed to candidates and campaign committees “in the names of other persons” and directly used corporate funds to do so.
As the case unfolds, it will likely continue to draw comparisons to the trial of Elizabeth Holmes, the ex-CEO of the blood-testing company Theranos. She was convicted in January of three counts of wire fraud and one count of conspiracy to commit wire fraud after she lied to investors, and she is now spending 11 years in prison.
Does SBF face civil charges too?
Both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have levied civil charges against the former crypto mogul.
The SEC’s complaint alleges that SBF was engaged in a “massive, years-long” fraud stretching back to the founding of the company in 2019. After placing FTX customer money into an FTX-affiliated hedge fund, Alameda Research, he “used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments” while hiding his scheme from investors in FTX. The SEC is asking a federal court to force SBF to pay fines (with interest) and ban him from working in the securities and crypto industries.
The CFTC suit also argues that Bankman-Fried’s fraud negatively affected some of the commodity markets the agency regulates.
Given the crumbling of his net worth, Bankman-Fried would be unlikely to ever be able to pay the damages the agencies seek. While Reiners said these suits are “less important” than the criminal indictment, they reinforce the prosecutors’ narrative.
What comes next?
The timeline for SBF’s extradition from the Bahamas is unclear, but the case will play out in the Southern District of New York. It’s possible he could face further charges in the future.
“We’re still just scratching the surface in terms of what happened at FTX,” Reiners said.
But others cautioned that proving Bankman-Fried’s intent, let alone an agreement to conspire with others, could be a big hurdle for prosecutors to clear.
“The fact that FTX went belly up is itself not proof of fraud,” said Mark Schamel, a criminal defense attorney in Washington, D.C. “Bankruptcy and mismanagement do not equal fraud.”
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