The U.S. Securities and Exchange Commission (SEC) has charged Sam Bankman-Fried, the founder of cryptocurrency exchange FTX, with orchestrating a “scheme to defraud equity investors” in the collapsed cryptocurrency exchange.
On Monday night, Bankman-Fried was arrested at his home in the Bahamas. He has been charged with misleading large investors who committed nearly $2 billion to the exchange in recent years, regarding the financial health of the trading platform and its sister crypto trading platform Alameda Research.
The SEC said that in his representations to investors, Bankman-Fried promoted FTX as a “safe, responsible crypto asset trading platform,” and specifically touted its “sophisticated, automated risk measures to protect customer assets.”
In reality, the complaint alleges, FTX’s founder “orchestrated a years-long fraud to conceal from FTX’s investors the undisclosed diversion of FTX customers’ funds to Alameda Research” and the “undisclosed special treatment afforded to Alameda on the FTX platform.”
That special treatment included a virtually unlimited line of credit funded by FTX’s customers and exempting the trading firm from key risk mitigation measures.
FTX did not disclose its exposure to Alameda’s “significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.”
The SEC’s complaint also alleges Bankman-Fried used comingled user funds at Alameda to make “undisclosed venture investments, lavish real estate purchases, and large political donations.”