At one point in the last several years, Sam Bankman-Fried, the cofounder of cryptocurrency exchange FTX, was reportedly worth an estimated $26 billion. At the beginning of last week, that number was a reported $16 billion. Now, it’s approximately zero dollars and zero cents. And that’s got to hurt, but probably of more concern to “SBF,” as he is known, is the prospect of potentially going to prison following the stunning, epic collapse of his company, which filed for bankruptcy on Friday, days after he assured customers that “FTX is fine.”
The Wall Street Journal reports that the Manhattan US attorney’s office has launched an investigation into FTX’s implosion, according to people familiar with the matter. At present, one thread prosecutors are likely focusing on, per the Journal, is that FTX reportedly lent billions in customer money to Alameda Research—a crypto trading firm that also happens to be owned by SBF—to fund risky trades. As the Journal notes, “Using customer funds for proprietary trading or lending them out—without an investor’s consent—is generally forbidden in the regulated securities and derivatives markets.” While such protections do not exist in the unregulated crypto market, as the Journal points out, FTX’s terms of service explicitly told users that they owned the cryptocurrencies in their accounts; the terms of service document reads: “None of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading.” As the Journal’s Gregory Zuckerman reported last week, revelations about the use of customer funds not only shocked Bankman-Fried’s “admirers” and employees, they “tore a hole in FTX’s finances” and “set the stage for the exchange’s swift implosion.”
FTX is also reportedly under investigation at the Securities and Exchange Commission and the Commodity Futures Trading Commission.
According to prosecutors, using customer money for a purpose that was not clearly communicated can be the basis for fraud or embezzlement charges. “What this will boil down to is, were there deliberate lies to convince depositors or investors to part with their assets?” Samson Enzer, a former Manhattan federal prosecutor, told the Journal. “Were there statements made that were false, and the maker of those statements knew they were false, and made with the intent to deceive the investor?” The Feds could also point to SBF’s tweets last week, just before the company collapsed, in which he wrote that FTX was “fine” and so were its assets, particularly in light of the fact that he later deleted such claims.
As the Journal notes, “Authorities would need to show Mr. Bankman-Fried intended to mislead customers when he wrote those tweets,” and while it can be difficult to prove intent, prosecutors could point to the allegedly secret efforts SBF undertook to prop up Alameda. “That is all potentially powerful circumstantial evidence of intent,” Aitan Goelman, a former federal prosecutor, told the Journal. Over the weekend, Reuters reported that of the roughly $10 billion in customer funds SBF moved from FTX to Alameda, at least $1 billion, and potentially up to $2 billion, had “vanished.” The outlet also wrote that Bankman-Fried has “secretly transferred” the money; in response, he texted Reuters to say he “disagreed with the characterization” of the transfer, writing, “We didn’t secretly transfer. We had confusing internal labeling and misread it.” Asked about the reportedly missing funds, he responded, “???”
Reuters also reported that:
In his texts to Reuters, Bankman-Fried denied implementing a “backdoor.” On Friday, he tweeted that he was “piecing together” what had happened at FTX, adding: “I was shocked to see things unravel the way they did earlier this week. I will, soon, write up a more complete post on the play by play.” At 10 p.m. on Sunday in the Bahamas, where SBF is based and FTX operated, he tweeted, “What.” Nearly an hour later, he tweeted the letter H. Over the course of Monday, he appeared to be spelling out Happened, though as of the late afternoon, he’d only gotten to the letter n.