CFTC, SEC, Lay Out Case Against FTX, Alameda

As seems to often happen in the US, two regulators have announced charges against bankrupt crypto exchange FTX and its offshoot trading firm Alameda Research.

The US Commodity Futures Trading Commission (CFTC) has filed charges against both firms and FTX CEO Sam Bankman-Fried, who was arrested in the Bahamas earlier this week, alleging fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce. Further, the complaint asserts that defendants’ actions caused the loss of over $8 billion in FTX customer deposits.

The US Securities and Exchange Commission (SEC) meanwhile, has charged Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX, and says investigations as to other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.

The CFTC complaint alleges that from at least May 2019 through November 11, 2022, Bankman-Fried controlled both FTX.com and Alameda, a digital asset trading firm that operated as a primary market maker on FTX. It says that FTX held itself out as “the safest and easiest way to buy and sell crypto” and represented that customers’ assets, including both fiat and digital assets including bitcoin and ether, were held in “custody” by FTX and segregated from FTX’s own assets. “To the contrary, FTX customer assets were routinely accepted and held by Alameda and commingled with Alameda’s funds,” the CFTC states. “Alameda, Bankman-Fried, and others also appropriated customer funds for their own operations and activities, including luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.”

Both complaints allege that, at Bankman-Fried’s direction, FTX employees created features in the FTX code that favoured Alameda and allowed it to execute transactions even when it did not have sufficient funds available, including an “allow negative flag” and effectively limitless line of credit that allowed Alameda to withdraw billions of dollars in customer assets from FTX. These features were not disclosed to the public, they allege.

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” says SEC chair Gary Gensler. “The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”

Gurbir Grewal, director of the SEC’s Division of Enforcement, adds, “FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service. But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent.

“FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike,” Grewal continues. “While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers.”

For the CFTC, chairman Rostin Benham says, “Digital commodity asset markets continue to present risks for investors due to the lack of basic protections. The CFTC continues to be fully committed to using all available enforcement tools and authorities to protect investors and root out those who seek to profit through fraud and misappropriation.”

CFTC acting director of enforcement Gretchen Lowe, adds, “As defendants touted and marketed FTX.com as a model digital commodity asset platform, defendants were committing fraud to the detriment of US investors and to the credibility of the digital asset markets. We will work tirelessly to use the full scope of our enforcement authority to hold such fraudsters accountable.”