NEW YORK – FTX founder Sam Bankman-Fried was charged by the US Securities and Exchange Commission (SEC) on Tuesday (Dec 13) with defrauding investors in what regulators called "a house of cards", hours before he was set to appear before a magistrate in the Bahamas.
Since at least May 2019, FTX raised more than US$1.8 billion (S$2.4 billion) from equity investors in a years-long fraud in which Bankman-Fried concealed that FTX was diverting customer funds to its affiliated crypto hedge fund Alameda Research, the SEC alleged in a statement.
Bankman-Fried used commingled FTX customers' funds at Alameda to make undisclosed venture investments, "lavish real estate purchases" and political donations, it said.
Separate charges would be announced by the US Attorney's Office for the Southern District of New York and the Commodity Futures Trading Commission later on Tuesday, the SEC said.
Representatives for Bankman-Fried did not respond immediately to requests for comment.
The SEC said it would seek a director and officer bar and a penalty against Bankman-Fried. It would also seek to prevent him from participating in future securities purchases, offers and sales except for his personal account.
"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 in a statement.
Bankman-Fried was arrested on Monday evening in the Bahamas and was expected to appear before a magistrate on Tuesday, marking his first in-person public appearance since the stunning collapse of FTX, which filed for bankruptcy in November after struggling to raise money as traders rushed to withdraw US$6 billion from the platform in just 72 hours.
Police in the Bahamas, where FTX was based, said the 30-year-old was arrested after 6pm on Monday at his luxury gated community called the Albany in the capital, Nassau.
Mr Damian Williams, the US Attorney for the Southern District of New York, said in a statement on Monday evening that the arrest came at the request of the US government, and an indictment against Bankman-Fried would be unsealed on Tuesday.
The Bahamas' attorney-general's office said it expected him to be extradited to the US. It was not immediately clear what would take place at the hearing or whether Bankman-Fried would decide to fight extradition, potentially setting up a high-stakes battle.
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Police in the Bahamas said in a statement that he was arrested due to "various financial offences against laws of the US, which are also offences" in the Bahamas.
Bankman-Fried has apologised to customers and acknowledged oversight failings at FTX, but said he does not personally think he has any criminal liability.
The charges come just hours before Bankman-Fried was previously scheduled to testify before Congress about the collapse of the exchange.
He planned to say he was pressured into nominating Mr John J. Ray III as FTX's new chief executive by the lawyers advising his firm at the time, according to a draft of his prepared remarks seen by Reuters.
Bankman-Fried founded FTX in 2019 and rode a cryptocurrency boom to build it into one of the world's largest digital token exchanges. Forbes pegged his net worth a year ago at US$26.5 billion, and he became a substantial funder of US political campaigns, media outlets and other causes.
FTX's liquidity crunch came after Bankman-Fried secretly used US$10 billion in customer funds to support his proprietary trading firm, Alameda Research, Reuters has reported, citing two people familiar with the matter. At least US$1 billion in customer funds had vanished, the people said.
Bankman-Fried resigned as FTX's chief executive officer the same day as the bankruptcy filing.
The US Attorney's Office in Manhattan, led by veteran securities fraud prosecutor Williams, in mid-November began investigating how FTX handled customer funds, a source with knowledge of the probe told Reuters.
Mr Ray is expected to tell members of the US House Financial Services Committee that the cryptocurrency exchange had "unacceptable management practices" including the commingling of assets and lack of internal controls, according to prepared remarks.
