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Sam Bankman Fried's SEC complaint: 6 things you need to know

Sam Bankman Fried wants to start a new company to repay everyone who lost money in FTX. As of today, that's looking pretty unlikely: the SEC is accusing him of fraud and wants to stop him from running any kind of company that buys and sells securities, crypto included, ever again.

This is what you need to know. 

1. The SEC says it's fraud

"From at least May 2019 through November 2022, Bankman-Fried engaged in a scheme to defraud equity investors in FTX Trading Ltd," states the complaint.

"Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire." 

2. SBF portrayed himself as a good guy, but he was deceiving customers all along

"From the start, Bankman-Fried improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research LLC (“Alameda”), and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations."

3. Alameda was funded by FTX customers 

Alameda had a, "virtually unlimited “line of credit” funded by the platform’s [FTX's] customers."

4. Alameda was owned by Bankman-Fried

SBF owned 90% of the stock. Gary Wang had 10%. 'At first, Bankman-Fried was responsible for trading operations, and Wang handled the engineering and programming functions.'

They later hired-in other people, like Caroline Ellison.

5. SBF's empire was big and broad 

The SEC says SBF ran an "interconnected web of companies grew to include over 100 separate entities, with Bankman-Fried at the top and Alameda, his crypto hedge fund, at the center."

6. When crypto plummeted in May 2022, FTX bailed out Alameda

The SEC says: "Bankman-Fried directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors."

He did this in what the SEC says were essentially two ways: "(1) by directing FTX customers to deposit fiat currency (e.g., U.S. Dollars) into bank accounts controlled by Alameda; and (2) by enabling Alameda to draw down from a virtually limitless “line of credit” at FTX, which was funded by FTX customer assets."

Fundamentally, the SEC says: "Alameda was drawing down a virtually unlimited line of credit from FTX, collateralized by a large illiquid position." 

7. FTX was supposed to have a comparative advantage because of its automated risk system, but it didn't apply to Alameda

FTX claimed that it had a comparative advantage due to its automated risk mitigation. What it didn't say was that, "in or around May 2020, Bankman-Fried directed that Alameda be exempted from the “auto-liquidation” feature of FTX’s spot margin trading services."

8. SBF had a wild [and possibly delusional] summer 

Even though Alameda had been bailed out in May, SBF kept spending. "Through the summer of 2022, he directed hundreds of millions more in FTX customer funds to Alameda, which he then used for additional venture investments and for “loans” to himself and other FTX executives." 

9. None of this was made clear to investors

Herein lies the issue. The SEC says: "Bankman-Fried solicited equity investors by touting FTX’s controls and risk management, ultimately raising at least $1.8 billion dollars from investors." They had no idea what was really going on with Alameda. 

7. Alameda was SBF's personal piggy bank 

The SEC says it boils down to the fact that: "Bankman-Fried placed billions of dollars of FTX customer funds into Alameda. He then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses."

The SEC says SBF wasn't the only beneficiary.  FTX co-founders Nishad Singh and Wang also borrowed $554 million and $224.7 million, respectively, in 2021 and 2022.

None of this was disclosed to FTX equity investors or to the platform’s trading customers. The SEC says: "Special privileges were afforded to Alameda—and only Alameda—at Bankman-Fried’s direction, and all were hidden from investors."

8. Attempts were made to deceive investors and conceal what was going on 

Nor was it just passive concealment: the SEC says SBF actively deceived investors. "Bankman-Fried also told investors, and directed other FTX and Alameda employees to tell investors, that Alameda received no preferential treatment from FTX." He also said that FTX had no exposure to FTT at all. 

Most damningly, the SEC says attempts were made to conceal the impact of what was going on by transferring FTX customer money to accounts in the name of North Dimension Inc., an Alameda subsidiary. 

More than $8bn was transferred into Alameda-controlled bank accounts. When this triggered an automatic interest charge to Alameda, SBF had the Alameda liability moved into another account where this wouldn't happen. "This account was associated with an individual that had no apparent connection with Alameda."

Alameda, meanwhile, tracked this liability as a loan but didn't say it came from FTX. 

The SEC says SBF knew what he was up to: "Bankman-Fried knew or was reckless in not knowing that at the time that he made those representations, they were false and misleading."

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Photo by Matthew Ansley on Unsplash

 

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AUTHORSarah Butcher Global Editor

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