Prosecutors Say FTX Was Engaged in a ‘Massive, Yearslong Fraud’ in Crypto

· Civil and criminal charges filed against Mr. Bankman-Fried in the Southern District of New York say he repeatedly lied to customers, investors and lenders about the structure of his business empire

· Mr. Bankman-Fried was charged with eight counts, including wire fraud against customers and lenders

· In Nassau, the capital of the Bahamas, Mr. Bankman-Fried appeared in court for the first time, having spent the night in a police cell

A criminal indictment unsealed on Tuesday and a complaint by the S.E.C. describe years of wrongdoing in Sam Bankman-Fried’s crypto empire.

Sam Bankman-Fried’s lies, prosecutors say, stretched back to the very beginning.

From the founding of his cryptocurrency exchange FTX in 2019, Mr. Bankman-Fried engaged in widespread fraud, the federal authorities charged on Tuesday, and used his customers’ deposits to finance his political activities, buy lavish real estate and invest in other companies.

A series of civil and criminal charges filed against Mr. Bankman-Fried in the Southern District of New York say he repeatedly lied to customers, investors and lenders about the structure of his business empire and how he handled the billions of dollars in funds that crypto users deposited in his exchange.

In a 13-page criminal indictment, Mr. Bankman-Fried was charged with eight counts, including wire fraud against customers and lenders, as well as conspiracy to defraud the United States and violate campaign finance laws. A civil complaint filed by the Securities and Exchange Commission laid out a detailed narrative of FTX’s collapse, claiming that for three years Mr. Bankman-Fried had misappropriated billions in customer deposits to fund his business and political activities.

The charges against Mr. Bankman-Fried came on one of the most dramatic days in the rapidly unfolding collapse of FTX, which has rocked the crypto industry. In Washington, the company’s new chief executive, who took over when the firm filed for bankruptcy, testified in Congress, laying out the myriad management failures that contributed to the exchange’s implosion. In Nassau, the capital of the Bahamas, Mr. Bankman-Fried appeared in court for the first time, having spent the night in a police cell after being arrested at his home on Monday evening. He was denied bail and will remain in custody.

The arrest surprised the FTX founder and his parents, who were visiting him, according to a person with knowledge of the matter. Mr. Bankman-Fried was taken away in handcuffs.

Mr. Bankman-Fried appeared in Magistrate Court, dressed in a blue suit and white shirt, eschewing his usual disheveled outfit of shorts and a T-shirt. He was escorted inside by the police, while his parents, the Stanford Law School professors Joe Bankman and Barbara Fried, sat in the rear of the gallery.

The lead prosecutor for the Bahamian authorities, Franklyn Williams, argued that Mr. Bankman-Fried was a flight risk, with sufficient financial resources to escape the country. A lawyer for Mr. Bankman-Fried said that his decision to remain in the Bahamas after FTX collapsed showed he had no intention to flee, adding that Mr. Bankman-Fried required medication for depression and attention deficit disorder.

The court’s chief magistrate, Joyann Ferguson-Pratt, ruled that Mr. Bankman-Fried should remain in custody. He was allowed a few minutes with his parents, who embraced him in a long hug as the courtroom was cleared.

Mr. Bankman-Fried’s arrest was a stunning fall from grace for an executive who was once described as a modern-day John Pierpont Morgan, and became a darling of big investors in Silicon Valley and a prolific Democratic Party donor. These days, Mr. Bankman-Fried, 30, is more often likened to Bernie Madoff, the fraudster who orchestrated a notorious Ponzi scheme.

As FTX collapsed, the S.E.C. said in its complaint, investors were kept in the dark about what was going on. Federal prosecutors said Mr. Bankman-Fried’s lenders were also kept in the dark. And hundreds of thousands of FTX customers around the world were kept in the dark, too — only to find out that their money was gone.

“Bankman-Fried was orchestrating a massive, yearslong fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire,” the S.E.C. said.

According to court filings, Mr. Bankman-Fried was indicted by a grand jury on Dec. 9. The arrest took place three days later, when Bahamian authorities took Mr. Bankman-Fried into custody at Albany, the luxury apartment complex where he has lived since he moved FTX to the island from Hong Kong last year.

At a news conference on Tuesday, Damian Williams, the U.S. attorney for the Southern District of New York, said the investigation into FTX was “very much ongoing” and “moving very quickly.”

He called the company’s collapse “one of the biggest financial frauds in American history.”

Federal prosecutors will need to extradite Mr. Bankman-Fried so he can face trial in federal court in the United States. But while the Bahamas has an extradition treaty with the United States, that process could stretch for weeks or months if Mr. Bankman-Fried contests it.

Mark Cohen, a lawyer for Mr. Bankman-Fried, said his client “is reviewing the charges with his legal team and considering all of his legal options.”

Just over a month ago, Mr. Bankman-Fried was widely viewed as one of the few reliable figures in a freewheeling, loosely regulated industry. He contributed $5.6 million to President Biden’s 2020 election effort, and FTX spent lavishly on TV commercials with an array of celebrity endorsers like the basketball star Stephen Curry and the N.F.L. quarterback Tom Brady. He was at the forefront of an industrywide effort to bring crypto into the mainstream of American commerce.

But strip away all the references to crypto in the S.E.C.’s civil complaint, and a picture emerges of garden-variety lies to investors — falsehoods that date back to 2019.

Regulators say Mr. Bankman-Fried lied to dozens of big venture capital firms and wealthy family offices, as he raised nearly $2 billion to finance his company.

The S.E.C. claims that Mr. Bankman-Fried misled those investors in reports about the financial health of FTX and its sister company, Alameda Research, a crypto trading platform that he had helped start. He also misled investors about the close ties between the two companies, the S.E.C. said, and concealed how he had allowed his trading firm to routinely borrow money from FTX customers — borrowing that occurred despite claims that all customer money was safe.

The mixing of money allowed Alameda to make bigger trades, invest in other crypto companies, buy Bahamas real estate and make personal loans to FTX executives. The fraud was enabled in two key ways, the S.E.C. said: FTX customers were directed to deposit fiat currency, like U.S. dollars, into bank accounts controlled by Alameda, and the trading firm could draw down from a “virtually limitless” line of credit funded by FTX customer assets.

Then in the spring, when the crypto market began to crater, other crypto firms that were lenders to Alameda began to call in their loans, demanding repayment, according to the authorities. That forced Mr. Bankman-Fried and others at FTX to double down and take even more money from FTX customers to make Alameda whole.

The strategy of taking money from FTX to keep Alameda afloat imploded when customers of the crypto exchange started demanding their money this fall. The financial hole was $8 billion, so big that the whole enterprise collapsed.

In the indictment and accompanying court papers, federal prosecutors echoed many of the allegations in the S.E.C.’s complaint. They also claimed Mr. Bankman-Fried had broken campaign finance laws by making political contributions to both parties “in the names of co-conspirators, when in fact those contributions were funded by Alameda Research with misappropriated customer funds.”

The scheme was “in the service of the defendant’s desire to influence the direction of policy and legislation on the cryptocurrency industry,” prosecutors wrote in court papers.

The Commodity Futures Trading Commission also filed civil charges, claiming that Mr. Bankman-Fried, FTX and Alameda had defrauded customers and other cryptocurrency investors by manipulating the prices of certain digital assets, front-running other traders on the FTX platform, and lying about the location and use of customer funds.

The C.F.T.C. described a scheme to artificially boost the value of a digital token called FTT, which was created by FTX and issued to some investors while Alameda used it as collateral for loans from other cryptocurrency firms. According to the complaint, FTX used a third of its revenues to buy FTT and remove it from the marketplace, artificially inflating its value.

For weeks, Mr. Bankman-Fried claimed in numerous media interviews that he never intended to defraud anyone and that he had no idea what was going on at Alameda. But Rebecca Roiphe, a former prosecutor and a professor at New York Law School, said those arguments were unlikely to succeed in a courtroom.

“One of the classic defenses in a white collar case is to plead ignorance,” she said. “But it just doesn’t ring true when you head the company and have so much control over the organization.”

Before his arrest, Mr. Bankman-Fried was scheduled to testify at a hearing on Tuesday in front of the House Financial Services Committee, which is investigating the collapse of FTX. The hearing went ahead without him, featuring testimony from John Jay Ray III, a veteran of corporate restructuring who has taken over as chief executive of FTX.

In his opening statement, Mr. Ray blamed the collapse of FTX on the “absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals.”

In the early 2000s, Mr. Ray oversaw the unwinding of Enron, the energy trading firm that collapsed in an accounting scandal. At the hearing, he called the perpetrators of Enron’s crimes “highly sophisticated,” whereas FTX executives appeared to have engaged in “really just old-fashioned embezzlement,” he said.

“Even with most failed companies, we have a fair road map of what happened,” Mr. Ray said in his testimony. “We’re dealing with a literal paperless bankruptcy. It makes it difficult to track.”

The S.E.C., in its complaint, amplified those concerns and warnings. The complaint said that from the beginning, “FTX had poor controls and fundamentally deficient risk management procedures.” The S.E.C. said the company treated assets and liabilities as “interchangeable” in its accounting ledgers and bookkeeping.

For now, however, no one other than Mr. Bankman-Fried has been charged.

On a number of occasions, though, the indictment references other people who assisted Mr. Bankman-Fried in carrying out the allegedly fraudulent scheme, without naming any of them.

Legal experts, including some lawyers familiar with the investigation, have said it is likely that some of Mr. Bankman-Fried’s former associates are cooperating with the authorities, especially given the speed with which the charges were filed.

“Somebody had to describe to them what happened and what was done with specifics,” said Erik Gordon, a law and business professor at the University of Michigan. “Someone gave them a short cut.”