After weeks of speculation as to whether former billionaire, now hapless participant, Sam Bankman-Fried would be arrested for fraud surrounding FTX, the cryptocurrency exchange he ran into the ground, the mystery is over. The crypto exchange founder surrendered to Bahamian custody last week and is now awaiting extradition to the United States.
The SEC alleges that Bankman-Fried orchestrated “a years-long fraud to conceal from FTX’s investors” the diversion of FTX customer funds to Alameda Research, a hedge fund owned by Bankman-Fried; the special treatment afforded to Alameda, such as unsecured and unlimited lines of credit; and FTX’s exposure to Alameda’s “significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.”
The SEC complaint also alleges that Bankman-Fried commingled FTX customers’ funds and used them to fund unrelated investments, purchase real estate, and make large political donations. The vast majority of these donations found their way into the coffers of the Democratic Party’s political machine, potentially impacting the outcome of 2022’s midterm elections. The CTFC filing further alleges that Bankman-Fried, FTX, and Alameda Research “caused the loss of over $8 billion in FTX customer deposits.”
The timing of the arrest—i.e., one languid month after the fraud had been revealed and FTX had collapsed, but then suddenly one day before his scheduled testimony—raised many eyebrows. Why wouldn’t the Department of Justice, the SEC, and the CFTC have been curious to hear what Bankman-Fried had to say? Most prosecuting attorneys would salivate at the prospect of Bankman-Fried tightening the noose around his own neck with the verbal rush that was sure to come forth in this public venue, especially considering what he’d already said in disdain of his lawyers’ and others’ advice to please quit talking and stop making it worse for himself and everyone he had harmed.
Eyes on the SEC
The SEC, or at least its chairman, Gary Gensler, may have also sought to avoid too much fuss being made over the several times that Gensler and his staff had met in consultation with Bankman-Fried to plot how to bring crypto regulation under SEC authority, in exchange for giving FTX special treatment which would put FTX ahead of its competitors.In an apparent attempt to shift the narrative, Chairman Gensler said, “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.” He went on to warn all crypto platforms, wherever they may be domiciled, that they must come into compliance with U.S. laws. Fair enough. FTX was a fraud, and other crypto platforms should take notice.
Yet U.S. House Financial Services Committee member Rep. Tom Emmer (R-Minn.) lays much of the responsibility at Chairman Gensler’s feet, noting, “We need to get to the bottom of this. We need to understand why Gary Gensler and the SEC were not doing their job. We need to understand how this was allowed to get to the point where people and their savings are getting hurt. That’s exactly what the regulator’s supposed to be taking care of.”
The SEC has some explaining to do, true, but so do the numerous political actors within the Democratic Party who received and used stolen funds. A few have already sought to return the money or to donate it to charity. But these examples remain rare. Most recipients have remained silent amid the scandal, perhaps hoping it will all go away, forgotten amid some newer crisis or media’s and the public’s attention shifting elsewhere.
While we don’t yet have enough detailed information to run this to ground, the fraud which FTX appears to have perpetrated reaches into the highest orders of political power in this country. The scandal of FTX is an early domino to topple in what may be a long line of downfall, an exposure which likely is evidence of the vast corruption that may characterize the current political environment.
