Matt Stankiewicz, Partner at The Volkov Law Group, continues blog series on the collapse of FTX, looking at the criminal charges filed against founder and CEO Sam Bankman-Fried.  He can be reached at [email protected].

Following FTX’s stunning collapse, federal prosecutors have quickly taken steps to hold FTX’s founder and CEO Sam Bankman-Fried (“SBF”) accountable.   On December 13, the Department of Justice (“DOJ”) announced a criminal indictment against SBF in the Southern District of New York.  The 14-page indictment charges SBF with a litany of crimes, including conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission and commit campaign finance violations.  

The DOJ appears to have pulled out all the stops by enlisting the assistance of the Department’s Office of International Affairs, National Cryptocurrency Enforcement Team, Public Integrity Section, and the DEA, as well as that of the Securities and Exchange Commission and the Commodity Futures Trading Commission.  The case is spearheaded by the U.S. Attorney’s Office for the Southern District of New York’s Securities and Commodities Fraud Task Force, which is known for its aggressive enforcement actions.

“One month ago, FTX collapsed, causing billions of dollars in losses to its customers, lenders, and investors.  Now, a federal grand jury in New York has indicted the former founder and chief executive officer of FTX and charged him with crimes related to the phenomenal downfall of that one-time cryptocurrency exchange, including fraud on customers, investors, lenders, and our campaign finance system. As today’s charges make clear, this was not a case of mismanagement or poor oversight, but of intentional fraud, plain and simple.”

U.S. Attorney Damian Williams

The charges stem from SBF’s alleged misappropriation of $8 billion in customer funds from the FTX platform.  As previously discussed, SBF loaned customer funds to its trading arm, Alameda Research, to try and stem the losses from some poor trading strategies and to cover loan repayments as the cryptocurrency values plummeted during the bear market.  SBF funneled these loans through a back door in its bookkeeping to circumvent internal controls and avoid detection by those outside of his inner circle.  The lack of any semblance of financial controls at FTX borders on absurdity and will be discussed in depth in a later post.

Alameda apparently then lost those funds through poor trades and strategies.  Further, and arguably worse, Alameda made significant personal loans to various FTX executives, including SBF, worth hundreds of millions of dollars.  These funds were used to purchase extravagant real estate and other lavish expenses.  The top executives used customer deposits as their own personal piggy bank.  All of which was never disclosed to investors or customers, and many even lacked formal documentation internally.

Additionally, SBF and co-conspirators used customer funds to make significant donations to various political candidates and parties.  Much of these donations were made publicly to Democratic candidates, however subsequent information revealed that the company made equal contributions to Republican candidates through various corporations and individuals to obfuscate their true source.  Additionally, the indictment alleges that SBF circumvented campaign contribution limits and reporting requirements by routing these donations through various parties.  To put these donations in perspective, SBF himself was publicly the second largest contributor to the Biden campaign in 2020. 

SBF was arrested by Bahamian authorities on the evening of December 12 after the US Attorney’s Office shared the indictment with the Bahamian government.  SBF’s lawyer has said he plans to fight extradition to the United States.  The Bahamian judge has denied SBF bail, leaving him in the notoriously rough Fox Hill prison in The Bahamas until his extradition hearing in February. 

This marks a stunning fall from grace for purported wunderkind SBF – at his height, SBF was estimated to have a net worth of $32 billion, which has purportedly now plummeted to under a million dollars. The situation continues to look worse and worse for the individual who recently graced the cover of Fortune magazine, and I expect we’ll all continue to be shocked by the malfeasance as more facts come to light.