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An Overview of the SEC, SDNY and CFTC Cases Against Sam Bankman-Fried

As has been widely reported, last week, the SEC, CFTC, and U.S. Attorney’s Office (“USAO”) for the Southern District of New York (“SDNY”) announced charges against Samuel Bankman-Fried (“SBF”), the co-founder and majority owner of FTX Trading Ltd. (“FTX”), a crypto asset trading platform, and Alameda Research LLC (“Alameda”), a trading firm specializing in crypto assets. [1] This blog post provides an overview of the claims asserted against SBF, FTX, and Alameda, and discusses some of the surprising aspects of each of the cases.

The SEC’s Complaint against SBF

The SEC’s Complaint alleges that SBF defrauded investors in FTX by concealing (1) that FTX directed billions of dollars of FTX customer assets to Alameda,[2] (2) that FTX provided special privileges to Alameda, including an exemption from risk mitigation measures and an essentially unlimited line of credit,[3] and (3) FTX’s exposure to Alameda, which was collateralized by largely overvalued and illiquid assets, including FTT, an FTX-affiliated token.[4] The SEC alleges that SBF used the funds appropriated to Alameda to make undisclosed investments, lavish real estate purchases, large political donations, and personal “loans” to himself and other executives, as well as to pay Alameda’s lenders following a crash in crypto asset prices in Spring 2022.[5]

The Complaint alleges that SBF made many omissions and misstatements of material fact to further the fraud scheme. For example, the Complaint alleges that SBF and Caroline Ellison, the ex-CEO of Alameda and SBF’s personal friend, misrepresented that FTX and Alameda were two separate entities, operating at arm’s length and without any preferential treatment, when in fact, FTX maintained a special relationship with Alameda that permitted Alameda to leverage FTX’s customers’ assets and expose FTX to a high degree of risk.[6] In addition, an FTX document published on its website and provided to potential investors misleadingly claimed that FTX segregated customer assets from its own assets and maintained sufficient liquid assets for customer withdrawals.[7] SBF also made material misstatements indicating that FTX did not invest customer assets, and inaccurately reflected FTX’s level of exposure to FTT.[8] On many occasions, SBF made misleading public statements that touted FTX’s controls and risk management measures.[9]

The SEC complaint charges SBF with fraud in the offer or sale of securities, in violation of Section 17(a) of the Security Act and fraud in connection with the purchase or sale of securities, in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.[10]

What is noteworthy about the SEC’s case is that the SEC did not allege that SBF defrauded FTX customers through the offer or sale of crypto-tokens. The SEC’s leadership has issued many pronouncements over the past several years expressing the view that the majority of crypto-tokens are in fact securities[11] because they are investment contracts under the Supreme Court’s Howey test.[12] Indeed, the SEC is currently engaged in a contentious litigation in SDNY with Ripple Labs, concerning whether its XRP token was a security that was subject to registration requirements under the Securities Act.[13]

In light of these prior pronouncements and enforcement actions by the SEC, it is somewhat surprising that the agency did not opt to allege that SBF and FTX defrauded customers, in addition to investors, which would require proof that the crypto-tokens on FTX’s exchange were securities.  It may be that because the case is only in its earliest stages, the SEC does not have yet have sufficient evidence to support the fact-intensive inquiry necessary to show that the tokens traded on the exchange were securities.  Or it could be that the SEC opted to pursue the path of least resistance, by focusing on the alleged fraud on FTX’s investors, which involved traditional securities.  If the SEC is looking to have the highest likelihood of success in this high-profile case, prosecuting this comparatively “low-hanging” fruit of fraud against investors, then this complaint advances the SEC’s objectives.  It remains to be seen whether the SEC will seek to amend its complaint at some point to include allegations of fraud on FTX’s customers, which could significantly increase the potential recoveries by the SEC in this case, assuming the agency ultimately prevails.

The SDNY Indictment Against SBF

The SDNY Indictment charges SBF with two counts of conspiracy to commit wire fraud (one count as to customers and one as to lenders), two counts of wire fraud (one count as to customers and one count as to lenders), conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the United States and violate campaign finance laws.[14]

There are a few noteworthy aspects of the SDNY’s case against SBF.  First, the case reflects a continuation of the SDNY’s utilization of the wire fraud and money laundering statutes to prosecute matters involving digital assets.  Earlier this year, and as discussed in a previous blog post, the SDNY filed a noteworthy case against an individual who allegedly engaged in insider trading of NFTs.[15]  Rather than charge the defendant with traditional violations of the Securities Exchange Act of 1934, the SDNY opted to charge the defendant with violations of the wire fraud and money laundering statutes, which do not require proof that the digital assets are securities.  This decision makes the case an easier one for the prosecutors to charge and prove and reduces the appellate risk should there be a conviction.

Another interesting component of the Indictment is the campaign finance charge. SBF has been vocal about giving to political causes, and the Indictment alleges he violated federal law by conspiring to make unlawful donations in other people’s names and corporate contributions.  But with whom did he conspire? The USAO has not shared any information regarding which campaigns or committees benefitted from these donations, or may have participated in the conspiracy, which could provide another interesting wrinkle to this case. 

Finally, the Indictment is not what practitioners would call a “speaking indictment.”  Unlike the SEC and CFTC filings, it tells the reader very little about what SBF did to violate criminal law.  This is likely due to the speed in which the case was charged and the fact that the government’s investigation into SBF and others is still ongoing.  One would expect that in a superseding indictment the prosecutors will add substantive offenses to join these conspiracy charges, possibly charge other defendants, and provide additional narrative detail.

The CFTC’s Complaint Against SBF, FTX, and Alameda

The CFTC’s Complaint contains many of the same factual allegations as the SEC Complaint.[16] However, the charges focus on the fraud exacted on FTX’s customers, rather than its investors, and charges FTX and Alameda along with SBF.

FTX’s digital trading platform allowed customers to trade digital assets, including bitcoin, ether, and tether, all of which the CFTC considers to be commodities.[17] In November 2022, when the alleged wrongdoings at FTX and Alameda came to light, there was a corresponding crash in the value of these commodities. The CFTC alleges that this crash was attributable, directly or indirectly, to the actions of SBF and other representatives of FTX and Alameda and that these actions were made within in the scope of their employment. Accordingly, it charged SBF, FTX, and Alameda with fraud and fraudulent misstatements of material fact and material omissions. [18]

Takeaways and Insights

The agencies’ speed in bringing actions against SBF is notable, as fraud cases often take months or years to investigate before charges are filed. The speed of the investigation may be indicative of a significant level of cooperation from FTX’s interim leadership and other insiders or due to concerns that SBF poses a flight risk (he was living outside of the United States for the past several months). It could also be because, despite its relationship to crypto, the allegations are not complex. In fact, FTX’s new CEO described the scheme as “not sophisticated” and “old-fashioned embezzlement” in his testimony before the House Committee on Financial Services on Tuesday.[19] There is no older crime than what SBF did here: taking money from people and using it for your own purposes.  Further, SBF’s very public and easily attributable statements may have reduced some of the investigatory burden.

SBF was arrested by the Bahamian authorities on December 12, 2022, and SDNY has sought his extradition to the United States. On December 19, 2022, SBF consented to extradition to the United States.[20]  This was not much of a surprise, as the Bahamas and the United States have a standard extradition treaty that permits extradition for crimes that are felonies in both countries.[21] The Bahamian authorities had expressed a willingness to cooperate with U.S. authorities and there was no reason to believe Bankman-Fried would not have been extradited if he decided to fight extradition.[22] Upon his arrival in New York, he will be arraigned on the charges, he will learn about whether the district court judge will agree to release him on bail, and a schedule will be set for discovery and pretrial motions.

The big question is what more is there to come?  It will be interesting to see whether the SEC ultimately decides to amend its Complaint to add in additional allegations that SBF defrauded FTX’s customers, which would require proof that the tokens offered on the FTX platform are securities.  It will also be interesting to see what additional defendants might be named in each of the three cases.

This blog will continue to monitor these cases for future developments.

[1] SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX, Secs. & Exchg. Cmm’n, Dec. 13, 2022; CFTC Charges Sam Bankman-Fried, FTX Trading and Alameda with Fraud and Material Misrepresentations, Commodity Futures Trading Cmm’n, Dec. 13, 2022; United States Attorney Announces Charges Against FTX Founder Samuel Bankman-Fried, U.S. Dep’t of Just., Dec. 13, 2022.

[2] SEC v. Bankman-Fried, No. 1:22-cv-10501 (S.D.N.Y) ¶¶ 34-40 (“SEC Complaint”).

[3] Id. ¶¶ 41-46.

[4] Id. ¶ 26.

[5] Id. ¶ 26, 46.

[6] Id. ¶ 53.

[7] Id. ¶¶ 49-50.

[8] Id. ¶¶ 78; 66.

[9] Id. ¶ 27.

[10] Id. at 25-28.

[11] See, e.g., Oral Testimony of Gary Gensler Before the United States Senate Committee on Banking, Housing, and Urban Affairs, Secs. & Exchg. Cmm’n, Sept. 15, 2022 (Chair of the SEC noting his belief that “of the nearly 10,000 crypto tokens on the market . . . the vast majority are securities”); Statement on Financial Stability Oversight Council’s Report on Digital Asset Financial Stability Risks and Regulation Before the Financial Stability Oversight Council Open Meeting, Sec. & Exchg. Cmm’n, Oct. 3, 2022 (Chair of the SEC reiterating his belief that the vast majority of crypto tokens are securities and that offers and sales of those tokens are covered by securities laws).

[12] S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946) (defining an investment contract under the Securities Act as the investment of money “in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”).

[13] S.E.C. V. Ripple Labs, Inc., 1:20-cv-10832 (S.D.N.Y.).

[14] United States v. Bankman-Fried, 1:22-cr-673 (S.D.N.Y.).

[15] United States v. Chastain, No. 22-cr-305 (S.D.N.Y. May 31, 2022).

[16] Commodity Futures Trading Cmm’n v. Bankman-Fried, No. 1:22-cv-10503 (S.D.N.Y.).

[17] Id. ¶ 33.

[18] Id. at 33-36.

[19] David McCabe & Ephrat Livni, The new FTX chief says the company appeared to use ‘old-fashioned embezzlement.’, N.Y. Times, Dec. 13, 2022.

[20] Royston Jones Jr., David Yaffe-Bellany, Matthew Goldstein and Rob Copeland, Sam Bankman-Fried Said to Agree to Extradition After Chaotic Hearing, N.Y. Times, Dec. 19, 2022.

[21] Treaty Between the United States of America and the Bahamas, U.S. Dep’t of State, Mar. 9, 1990.

[22] In fact, the media is now reporting that Bankman-Fried has agreed to extradition. Royston Jones Jr., David Yaffe-Bellany, Matthew Goldstein and Rob Copeland, Sam Bankman-Fried Said to Agree to Extradition After Chaotic Hearing, N.Y. Times, Dec. 19, 2022.