SEC Files Complaint Against Samuel Bankman-Fried For Fraud – Securities

On December 13, 2022, the SEC filed a civil Complaint against
Samuel Bankman-Fried, the disgraced former CEO of FTX Trading Ltd.
(“FTX”), in the Southern District of New York, alleging
that Bankman-Fried engaged in a massive years-long scheme to
defraud both investors and the platform’s customers whereby he
misled investors about FTX’s risk management measures and was
“diverting billions of dollars of the trading platform’s
customer funds for his own personal benefit and to help grow his
crypto empire.” SEC Complaint at ¶ 1. The Complaint,
which includes an allegation that Bankman-Fried violated Section
10(b) of the Exchange Act and Rule 10b5, lays out
Bankman-Fried’s alleged fraud in detail and sets forth the
alleged false and misleading statements which the former CEO made.
For example, the Complaint alleges that Bankman-Fried told
investors that Alameda Research LLC, “his privately-held
crypto hedge fund”, “was just another platform customer
with no special privileges”, even though he “placed
billions of dollars of FTX customer funds into Alameda”, which
enjoyed the unique privilege of drawing on “FTX customer
assets to a virtually unlimited extent” and of
“maintain[ing] a negative balance of billions of dollars,
unbacked by sufficient collateral”, and where Bankman-Fried
“used Alameda as his personal piggy bank to buy luxury
condominiums, support political campaigns, and make private
investments”, all of which was not disclosed to investors or
platform trading customers. SEC Complaint ¶¶ 2, 3, 33, 42
and 64. See also SEC Complaint ¶ 67. To this end, the SEC
Complaint alleges that Bankman-Fried’s statement that “FTX
had top-notch, sophisticated automated risk measures in place to
protect customer assets” was false and misleading, as evident
by when Bankman-Fried himself admitted in public, after the
collapse of his company, that “I wasn’t spending any time
or effort trying to manage risk on FTX…if I had been spending an
hour a day thinking about risk management on FTX, I don’t think
that would have happened. SEC ¶¶ 3 and 62.

The SEC Complaint can be accessed here. The docket for this case – Case
1:22-cv-10501 – can be accessed here.¹

In a press release announcing the filing of the Complaint,
Gurbir Grewal, Director of the SEC’s Division of Enforcement,
stated that while the SEC “continue[s] 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.” The press release
can be accessed here.

It is likely that Bankman-Fried will, at a minimum, have to pay
a fine to the SEC to settle his case. The questions will be whether
such a settlement will involve Bankman-Fried giving up (or
disgorging) his ill-gotten gains and distributing them to investors
harmed by the alleged violations or involve a monetary penalty that
is placed in a “fair fund” for distribution, whether any
such settlement will be considered significant enough given the
sheer magnitude of the fraud, and how much money investors will
ultimately receive given that FTX has filed for bankruptcy.² It
is worth noting that the SEC received a record $6.439 billion in civil
penalties, disgorgement, and pre-judgment interest in fiscal year
2022, and that there is currently considerable media attention
being paid to the collapse of both FTX and Bankman-Fried as well as
the nature of the fraud allegations at hand. Still, it remains to
be seen how much money can be recovered for those investors wronged
by Bankman-Fried’s allegedly fraudulent actions.

Footnotes

1. In addition to being named as a defendant in the SEC
Complaint, Bankman-Fried is also the subject of a Complaint filed against him by the Commodity
Futures Trading Commission (CFTC) and, perhaps most critically,
a federal criminal indictment filed in Southern
District of New York. Bankman-Fried’s defense has been
complicated by Caroline Ellison, the former Chief Executive of
Alameda, and Gary Wang, a co-founder of FTX, pleading guilty to
fraud and cooperating in Bankman-Fried’s federal criminal
case, as well as by Bankman-Fried’s inexplicable decision
to talk to the media about his company’s collapse, including his statement to George Stephanopoulos on ABC that
he “wasn’t spending any time or effort trying to manage
risk on FTX”. SEC Complaint at ¶ 62.

2. See “Investor Bulletin: How Victims of
Securities Law Violations May Recover Money”, U.S. Securities
and Exchange Commission, June 21, 2018, available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_recovermoney.html

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