Crypto exchange founder accused of fraud

US prosecutors on Tuesday accused Sam Bankman-Fried — the founder and former CEO of cryptocurrency exchange FTX — of fraud and violating campaign finance laws by misappropriating customer funds in what the new CEO called "old-fashioned embezzlement".

Police in the Bahamas said Bankman-Fried, 30, was arrested Monday at his gated community in Nassau. He made a court appearance Tuesday in the Bahamas, where FTX is based. It was Bankman-Fried's first in-person public appearance since the exchange's collapse. He told the court he might fight extradition to the United States.

Damian Williams, US attorney for the Southern District in New York, said at a news conference Tuesday that the arrest came at the request of the US government. He also said that he would "strongly encourage" anyone involved in FTX wrongdoing "to come see us before we come see you".

Williams said Bankman-Fried also made illegal campaign contributions to Democrat and Republican politicians with "stolen customer money", saying it was part of one of the "biggest financial frauds in American history".

Bankman-Fried was one of the largest Democratic Party donors — contributing $5.2 million to President Joe Biden's 2020 campaign — and the second-largest Democratic donor in the 2021-22 election cycle after George Soros, according to the Center for Responsive Politics.

Bankman-Fried and FTX executive Nishad Singh together gave $3 million to Senate Majority PAC, a group affiliated with Senate Majority Leader Chuck Schumer, Democrat of New York, reported The Wall Street Journal in November.

Bankman-Fried also donated $6 million to House Majority PAC, a group aligned with House Speaker Nancy Pelosi, Democrat of California.

Ryan Salame, a top FTX executive, contributed $2.5 million to the Senate Leadership Fund, associated with Republican Leader Senator Mitch McConnell of Kentucky, and $2 million to the Congressional Leadership Fund, associated with House Minority Leader Kevin McCarthy, a California Republican who could become the next House speaker in January.

The indictment states that "the defendant, and others known and unknown, would and did defraud the United States … by impairing, obstructing, and defeating the lawful functions of a department and agency of the United States through deceitful and dishonest means, to wit, the Federal Election Commission's function to administer federal law concerning source and amount restrictions in federal elections".

US Representative Alexandria Ocasio-Cortez, a New York Democrat, said Tuesday that cryptocurrency regulation in Washington should be led by politicians who don't receive campaign funding from the industry.

Bankman-Fried and his associates donated nearly $100,000 to at least a dozen members of the House Financial Services Committee ahead of the 2022 midterms, The Wall Street Journal reported.

The individual contributions were part of FTX's more than $70 million in spending on Democratic and Republican political campaigns as the firm sought to influence the regulation of crypto, the Journal reported.

"I believe that it makes it extremely difficult for any politician to regulate an industry that they receive donations from," Ocasio-Cortez told reporters. "It necessarily complicates the question, and even at the bare minimum I think it complicates faith in our institutions."

Bankman-Fried had been scheduled to appear before the House Financial Services Committee on Tuesday.

Peter Schiff, an economist and financial commentator, wrote Tuesday on Twitter: "From a tactical perspective, I don't understand why the US government didn't wait until after @SBF_FTX testified under oath before Congress tomorrow (Wednesday) before charging him with a crime. Prosecutors actually did #SBF a favor by saving him from himself."

"Fraud and fraudsters have been around just as long as that phrase has been around," said Representative Patrick McHenry of North Carolina, the committee's ranking Republican. "It appears to be the same old-school fraud — just using new technology."

A lawyer for the defendant requested that his client be released on $250,000 bail. Bahamian prosecutors have asked that Bankman-Fried be denied bail if he fights extradition.

FTX's current CEO, John Ray, told the House committee on Tuesday that the exchange lost $8 billion of client money.

"The FTX group's collapse appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced, non-sophisticated individuals," said Ray, who was named CEO of FTX after Bankman-Fried stepped down and the company filed for bankruptcy on Nov 11, leaving an estimated 1 million customers and other investors facing losses in the billions of dollars.

In the indictment unsealed Tuesday, US prosecutors said Bankman-Fried had engaged in a scheme to defraud FTX's customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.

He also defrauded lenders to Alameda by providing false and misleading information about the hedge fund's condition and sought through wire fraud to disguise the money he had earned, prosecutors said.

Also, the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) alleged Bankman-Fried committed fraud in lawsuits filed on Tuesday.

The CFTC sued Bankman-Fried, Alameda and FTX, alleging fraud involving digital commodity assets.

Since at least May 2019, FTX raised more than $1.8 billion from equity investors in a yearslong "brazen, multiyear scheme" in which Bankman-Fried concealed that FTX was diverting customer funds to Alameda Research, the SEC alleged.

"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 complaint reads.

Bankman-Fried ran in circles with celebrities such as NFL quarterback Tom Brady and former politicians like Tony Blair and Bill Clinton, who attended his conferences at luxury resorts in the Bahamas.

"FTX operated behind a veneer of legitimacy," said Gurbir Grewal, director of the SEC's enforcement division, at a news conference. "That veneer wasn't just thin; it was fraudulent."

Bankman-Fried founded FTX in 2019 and rode a cryptocurrency boom to build the company into one of the world's largest exchanges of the digital tokens. Forbes put his net worth a year ago at $26.5 billion.

A crypto exchange is a platform on which investors can trade digital tokens such as bitcoin.

FTX's liquidity crunch came after Bankman-Fried used $10 billion in customer funds to support Alameda.

Ray also said there was virtually no distinction between the operations of FTX and Alameda Research.

"I've just never seen an utter lack of record-keeping — absolutely no internal controls whatsoever," Ray told the House committee.

Ray said he has established that customer assets at FTX were commingled with those of Alameda Research. Client funds were used to engage in margin trading, which exposed customers to massive losses, he said, calling the practice "old-fashioned embezzlement".

Ray said he was surprised to learn that FTX was using Quickbooks — software geared toward small and midsize businesses — for accounting and approving invoices via the Slack.com instant-messaging program.

"At the end of the day, we're not going to be able to recover all the losses here," Ray said.

Agencies contributed to this story.