FTX Co-founder Arrested, Indicted on Eight Counts

Credit: Sergei Elagin / Shutterstock.com

On Monday, December 12, former FTX Co-founder and CEO Sam Bankman-Fried (SBF) was arrested in the Bahamas pursuant to criminal charges filed in the Southern District of New York (SDNY). According to a tweet by U.S. Attorney for SDNY Damian Williams announcing the arrest, “USA Damian Williams: Earlier this evening, Bahamian authorities arrested Samuel Bankman-Fried at the request of the U.S. Government, based on a sealed indictment filed by the SDNY. We expect to move to unseal the indictment in the morning and will have more to say at that time.”¹And, on December 13, that indictment was unsealed, revealing eight counts, including conspiracy to commit wire fraud, securities fraud, commodities fraud, money laundering and conspiracy to defraud the U.S. and campaign finance regulations.²

The indictment itself is rather bare bones and does not include a line-by-line statement of facts in support of the charges or a so-called speaking indictment. Instead, the indictment lays out the charges and asserts that Bankman-Fried had been engaging in criminal activity beginning in 2019 and knowingly and intentionally “agreed with others to defraud customers of FTX by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research.”

In terms of the campaign finance-related charges, the government alleges that the defendant conspired to defraud the federal government by making illegal donations to political candidates, using the names of other persons to hide political contributions. In a follow-up letter on Tuesday, December 13, prosecutors explained to a federal judge in Manhattan that “The Government expects the evidence will show that the defendant violated campaign finance laws by causing political contributions to candidates and committees associated with both major political parties to be made in the names of co-conspirators, when in fact those contributions were funded by Alameda Research with misappropriated customer funds. This alleged scheme enabled the evasion of contribution dollar limits, corporate donation limits, and donation reporting requirements, and was in service of the defendant’s desire to influence the direction of policy and legislation on the cryptocurrency industry.”³

In announcing the arrest, the Office of the Attorney General of The Bahamas explained that “SBF’s arrest followed receipt of formal notification from the United States that it has filed criminal charges against SBF and is likely to request his extradition.... At such time as a formal request for extradition is made, The Bahamas intends to process it promptly, pursuant to Bahamian law and its treaty obligations with the United States,”⁴ citing the two nations’ “shared interest in holding accountable all individuals associated with FTX who may have betrayed the public trust and broken the law."⁵ At the time of arrest there was some question as to whether or not Bankman-Fried would be held pending an extradition hearing.

Yesterday, at Bankman-Fried’s first court appearance, that question, too, was answered as Bankman-Fried was held pending a February 8, 2023, extradition hearing. As reported by CoinDesk, Bahamian Magistrate Judge Joyann Ferguson-Pratt remanded Bankman-Fried into custody despite his lawyers’ request that he be released on a $250,000 bail, arguing, among other things, that he was not a flight risk given that he owns real estate in the Bahamas.⁶ According to the reporting, “Prosecutors in the Bahamas argued that granting Bankman-Fried bail would go against a treaty with the U.S., which required defendants to be held in custody pending extradition proceedings. Bankman-Fried told the judge he would not waive his right to fight the extradition effort, suggesting he may seek to remain in the Bahamas.”⁷ While Bankman-Fried did not waive his right to fight extradition, it also does not necessarily mean that he will actively seek to remain in the Bahamas. Given the close relationship between the U.S. and the Bahamas, as well as a clear extradition agreement, Bankman-Fried may ultimately decide the chances of winning that fight are slim and would delay any resolution with U.S. authorities.

In addition, prison life in the Bahamas may not be attractive. According to the most recent report by the U.S. Department of State, “Conditions at the government’s only prison, the Bahamas Department of Correctional Services (BDCS) facility commonly known as Fox Hill Prison, were harsh due to overcrowding, poor nutrition, inadequate sanitation, and inadequate medical care. Conditions at the Carmichael Road Detention Centre for migrants were adequate for short-term detention only.”⁸

The key takeaways are first, the extraordinary speed at which this case was investigated and indicted. While seemingly forever ago, it has only been a month since the collapse of FTX. In that month, teams of agents, investigators and prosecutors waded through thousands of pages of documents and millions of transactions and interviewed myriad witnesses. Federal prosecutors then packaged a mountain of evidence into a case to present to a grand jury that indicted one of the largest fraud cases in U.S. history. And, while sparse on details, this was arguably a complicated case to indict. U.S. prosecutors had to prepare an indictment comporting with Bahamian law to meet the extradition treaty requirement that an offense must be punishable by the laws of both jurisdictions. In addition, the U.S. must promise that it will only bring the charges lodged at the time of extradition so prosecutors may not supersede when Bankman-Fried is ultimately extradited to the U.S. This means U.S. prosecutors had to be sure of the charges even while moving quickly.

The second key takeaway, Tuesday, December 13, 2022, was an extraordinary day. Not only did we see an indictment unsealed and a detention hearing play out, but we also saw regulatory action. The Securities and Exchange Commission (SEC) filed civil charges alleging that Bankman-Fried misled FTX investors to the tune of about $2 billion and defrauded customers of the exchange in violation of securities laws.⁹ In addition, the Commodity Futures Trading Commission (CFTC) filed a complaint alleging fraud and misrepresentations that led to price manipulation in the digital assets space.¹⁰ And, if that was not enough, we saw a Capitol Hill hearing in which FTX’s current CEO told a story of unprecedented corporate malfeasance. John J. Ray explained that FTX was a company with “no corporate controls, no corporate oversight, and no independent board.” Ray continued, “The owners and senior management has virtual control of all accounts and could move money or assets as they desired, undetected by consumers.”¹¹

Finally, in any discussion of the collapse of FTX and the arrest and prosecution of Bankman-Fried and other executives, it is important to separate the business from the technology. FTX was in the business of the custody and trading of cryptocurrencies. But, the fraud, in this case, did not take place on blockchains. In fact, blockchains—the open, transparent, traceable, permanent ledgers where cryptocurrencies live and move—actually allow for more visibility on financial flows, demonstration of proof of reserves, and regulatory oversight. FTX was more akin to a Lehman or Enron—an opaque centralized institution where mismanagement and fraud were hidden from customers, investors and regulators. As the events of FTX play out over the coming weeks and months, as hearings are held and regulations crafted, it is important to remember that there are laws in the U.S. today that are intended to protect consumers and investors from the next FTX. Some of those laws were deployed this week.

Ari Redbord, was a former federal prosecutor at the U.S. Department of Justice for 11 years and is now head of legal and government affairs, TRM Labs, Washington, D.C., ari@trmlabs.com