The US Securities and Exchange Commission has charged former FTX CEO Sam Bankman-Fried with defrauding investors through opaque risk management and the diversion of client funds to Alameda Research.
The SEC alleges that Bankman-Fried falsely represented FTX’s risk management mechanism to equity investors, who invested $1.8 billion in the exchange.
SEC seeks to block Bankman-Fried from offering securities
Additionally, the SEC complained that Bankman-Fried failed to be transparent about the diversion of FTX client funds to its quant trading firm Alameda Research and concealed Alameda’s exemption from FTX’s risk management policies while the trading firm owned FTX. There was a large amount of illiquid FTT tokens. The agency recently declared FTT a security.
As a result of the complaint, the SEC seeks an injunction that would prevent Bankman-Fried from buying or selling securities as part of the trading endeavor and asks that he pay the profits from his alleged fraudulent activities. Additionally, they want the former FTX boss banned from senior corporate positions and imposed civil penalties.
FTX filed for Chapter 11 bankruptcy on November 11, 2022, following a liquidity crisis that saw it unable to meet customer demand for withdrawals. Bankman-Fried was subsequently arrested in the Bahamas and extradited to the US, where she faced eight criminal charges, including wire fraud and violation of political campaign funding laws. A US judge has set a hearing date for October 2023.
He is currently out on a $250 million recognizance bond that sees him confined to his parents’ home in Palo Alto, California. He recently started a blog post to defend himself against the cheating allegations.
Reaction to SEC allegations against SBF
NFT tool builder Origin Protocol said they were pleased with the complaint, while others criticized the SEC for profiting from financial crimes.
The SBF drew criticism from FTX’s new CEO, John J. Ray III, who said in his first public interview since taking over the reins that he is ready to revive FTX.
Insolvency expert Ray, best known for his role in the Enron bankruptcy, said FTX’s newly-appointed task force would leave no stone unturned. “Everything is on the table. If there’s a way forward on that, we’ll not only figure it out, we’ll do it,” Ray said.
Shortly after the report appeared, Bankman-Fried criticized Ray for “paying lip service” to an idea that Bankman-Fried herself claimed she had tried to do some time earlier.
According to the WSJ, however, the idea of a revival of FTX.com comes from a number of investors who see the exchange as a viable venture. Ray is also examining whether reviving the business could restore anxious customers awaiting the outcome of the exchange’s bankruptcy trial currently underway in Delaware.
Since taking over in November 2022, Ray’s team has tried to trace all the money in the exchange. He also liquidated FTX affiliates and hired investment bankers for $5 billion in venture capital investments.
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