Bankman-Fried Indicted, Denied Bail, Plans to Fight Extradition to U.S.

Sam Bankman-Fried Charged by US With Fraud Over FTX Collapse

FTX founder Sam Bankman-Fried was charged with eight criminal counts, including conspiracy and wire fraud, for allegedly misusing billions of dollars in customers’ funds before the spectacular collapse of his cryptocurrency empire.

An indictment detailing the charges was unsealed by a federal court judge in Manhattan Tuesday morning following weeks of speculation the 30-year-old would end up in handcuffs after his company — one of the biggest cryptocurrency exchanges in the world — ended up in bankruptcy last month.

The indictment alleges that Bankman-Fried agreed with others “to defraud customers of FTX.com by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research."

Prosecutors give a stark warning to other crypto platforms in the wake of the SBF indictment and call it ‘one of the biggest financial frauds in American history’

Williams was joined by a host of U.S. officials in outlining the charges against Bankman-Fried, including Gurbir Grewal, director of the SEC Enforcement Division. The SEC brought a separate set of civil charges against Bankman-Fried on Tuesday, and Grewal warned other unregulated and rogue cryptocurrency trading platforms to register with the SEC soon, or risk falling afoul of federal prosecutors.

“One immediate takeaway from today’s announcement should be that noncompliant trading platforms pose dramatic risks to both their investors and to their customers,” he said. “It’s imperative that noncompliant platforms come into compliance.”

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“As Chair Gensler has made clear, the runway is getting shorter for them to come in to register with us. And for those who do not, the Enforcement Division stands ready to take action,” he said.

FTX’s Sam Bankman-Fried Denied Bail by Judge in the Bahamas

At the end of a hearing that lasted more than three hours, the judge denied bail to Mr. Bankman-Fried, who will remain in the custody of the Bahamian authorities. The chief magistrate, Joyann Ferguson-Pratt, said Mr. Bankman-Fried’s access to financial resources made his risk of fleeing “so great” that he had to remain behind bars.

FTX Founder Bankman-Fried’s Arrest Sets Up Possible Extradition Fight

At his press conference on charges against Bahamas-based FTX founder Sam Bankman-Fried, Manhattan US Attorney Damian Williams said the case shows “you can commit fraud in shorts and t-shirts in the sun.”

But Williams didn’t address how US authorities plan to get Bankman-Fried back from his tropical locale to face the eight-count indictment unsealed against him Tuesday in New York federal court.

In his first appearance since his arrest Monday evening, Bankman-Fried told a Bahamian judge at an arraignment Tuesday that he wouldn’t waive his right to an extradition hearing. A defense lawyer said Bankman-Fried planned to fight being sent to the US.

What Sam Bankman-Fried, arrested in the Bahamas, got for his baffling media blitz.

What did SBF really think would come from all that talking after FTX and its associated crypto hedge fund, Alameda Research, filed for Chapter 11 bankruptcy? In addition to all the tweets that pissed off the companies’ bankruptcy lawyers, there was one infamously softball New York Times interview, some damning Vox DMs, phone calls to Axios and crypto enthusiast Tiffany Fong and New York magazine, a DealBook Summit appearance with Andrew Ross Sorkin, a Good Morning America interview with George Stephanopoulos, a lot of hourslong Twitter Spaces hosted by crypto-industry insiders, a Bloomberg visit to SBF’s Bahamian penthouse, a conversation with Puck, a podcast interview with the Block (a website that previously received tens of millions in undisclosed funds from SBF himself), and on-camera chats with the Wall Street Journal and Forbes. Oh, and finally, an interview with prominent crypto skeptic Molly White that occurred mere hours before his arrest, in which SBF predicted that he wouldn’t be arrested, just like he’d claimed on a preceding Twitter space. (I’m sure I missed a dozen others, at least.)

How to Do Fraud at a Futures ExchangeBut — as we have also discussed before — another important element of the alleged fraud is that FTX advertised good risk management and had bad risk management. Bankman-Fried has been going around on a weird media tour whose essential message is “I made mistakes and was careless, sorry,” presumably thinking that that is a defense to fraud charges, that “carelessness” and “fraud” are entirely separate categories. The SEC is having none of it…

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If you attract customers and investors by saying that you have good risk management, and then you lose their money, and then you say “oh sorry we had bad risk management,” that is not a defense against fraud charges! That is a confession!

The FTX Meltdown May Have Been Limited by the Real Cash Value Involved.

But there’s another mystery that faces the Securities and Exchange Commission, which charged Bankman-Fried with fraud on Tuesday: How much real money was ever involved?

Even die-hard crypto bros will have to admit they know what I mean by “real money”: it’s that flimsy, magical construct backed by government imprimatur that we all call fiat currency. Actual dollars, euros and yen. To me, this is one of the most interesting questions that’s far from being answered about the entire crypto bubble. Peak valuation of crypto assets was $3 trillion, but much of that amounts to little more than a high score in a computer game. What was the base money, the real-world cash — which despite rampant inflation we all agree still has a relatively stable value — that was sucked into the crypto machine?

Sam Bankman-Fried’s Crypto Crash

The SEC complaint is more voluble. “From the inception of FTX, Bankman-Fried diverted FTX customer funds to Alameda,” it says, to the point that “there was no meaningful distinction.” Then SBF “used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments.” He took enormous loans, “including two instances in which Bankman-Fried was both the borrower in his individual capacity and the lender in his capacity as CEO of Alameda.”

Mr. Bankman-Fried claimed Alameda had no special privileges on the FTX platform. Yet the SEC says his hedge fund was granted a “virtually unlimited” credit line and was exempt from the “automated risk mitigation protocols” that SBF trumpeted as ensuring FTX’s stability. The mixing of funds was obfuscated in internal accounts. The beginning of the end arrived when crypto prices fell and “many of Alameda’s lenders demanded repayment of loans.”

If the authorities are correct, this is a story as old as time that reoccurs every time there is a financial mania. The thoroughly modern twist in the SBF allegation was to convince investors to place money into a digital box, except with a hole in the bottom leading directly to a proprietary hedge fund. In such a case, the remedy is also old and familiar: Enforce the fraud laws already on the books.

SEC Case Could Take Down Administrative State’s Home Court AdvantageWhen the Jarkesy decision was appealed to the entire 5th Circuit, however, the judges voted not to rehear the case. That means that the decision is final unless it is appealed to the Supreme Court and the Supreme Court hears the case.

Unless the SEC wants to give up its home court advantage, a Supreme Court petition is its only option.

If and when the Jarkesy decision reaches the Supreme Court, it will present an arguably unprecedented challenge to the administrative state’s enforcement actions. Basic rights such as the trial by jury and the independent judiciary will be implicated.