Sam Bankman-Fried's Terrible, Horrible, Very Bad DayFormer FTX CEO Will Stay in Bahamas Jail Pending Extradition to US
The many alleged failures of former FTX CEO Sam Bankman-Fried fell into relief Tuesday amid a welter of unsealed criminal and civil prosecutions and damning congressional testimony by his successor at the all-but-officially bankrupt cryptocurrency trading platform.
The image of sophistication that the company and CEO had carefully constructed disappeared piece by piece throughout the day, ending with a Bahamas magistrate ordering the 30-year-old former cryptocurrency wunderkind into an island jail pending likely extradition next year to the United States. The judge reportedly was not swayed by entreaties that Bankman-Fried remain free on bail to ensure he keeps his vegan diet and is guaranteed access to allergy medicine and prescription Adderall. Bahamas authorities arrested Bankman-Fried late Monday at the behest of the United States. FTX moved its headquarters to the archipelago nation in 2021.
U.S. federal prosecutors kicked off the day by unsealing an eight-count indictment against Bankman-Fried, for which he faces up to 115 years imprisonment if found guilty on all counts.
"I think it's fair to say that by anyone's lights, this is one of the biggest financial frauds in American history," said Damian Williams, the U.S. attorney for the Southern District of New York, during a press conference to discuss the charges. Until its November collapse, FTX was one of the world's largest cryptocurrency exchanges.
Bankman-Fried's alleged wrongdoing boils down to using customer deposits for cryptocurrency at FTX to pay losses incurred by Alameda Research, the supposedly independent crypto hedge fund also helmed by Bankman-Fried. Prosecutors say he also violated campaign finance law by using FTX customer money to make tens of millions of dollars' worth of illegal political donations.
In interviews made before his arrest, Bankman-Fried has distanced himself from Alameda Research, telling The Wall Street Journal he can "only speculate" about what happened to more than $5 billion in funds meant as FTX deposits but received by Alameda accounts.
"This is really just old-fashioned embezzlement," said John J. Ray, the corporate restructuring specialist who took over FTX last month following Bankman-Fried's resignation under pressure. The current FTX CEO began testimony at 10 a.m. before the House Financial Services Committee in a hearing touted as including Bankman-Fried as the second witness - up until his arrest. "This is just taking money from customers and using it for your own purpose. Not sophisticated at all," Ray said.
Among the management practices Ray highlighted that underpinned the fraud was a computer infrastructure lacking in security controls to stop senior management from redirecting FTX customer money into Alameda Research.
FTX stored private keys with access to "hundreds of millions of dollars in crypto assets" without encryption or security controls. The company did not have a complete inventory of wallets or a record of their location, he said.
"They used QuickBooks," Ray said, referring to the accounting software used by consumers and small businesses. "Nothing against QuickBooks - very nice tool, just not for a multibillion-dollar company."
Ray also told the committee that cybersecurity experts are tracking the $477 million worth of digital tokens stolen by hackers on Nov. 12 from FTX. "We're relying on forensic and cybersecurity experts who are tracking the crypto," he said. "You can ultimately find where the crypto ends up. We've got law enforcement involved. So we're tracking it. I think we got all the help we need on that front" (see: 'Unauthorized Transactions' Lead to Missing Funds at FTX).
"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," said SEC Chair Gary Gensler. The complaint accuses Bankman-Fried of treating Alameda "as his personal piggy bank" while he bought luxury real estate and made private investments and political donations.
Gensler called Bankman-Fried's years of alleged fraud "a clarion call to crypto platforms that they need to come into compliance with our laws."