Federal prosecutors on Tuesday charged disgraced cryptocurrency entrepreneur Sam Bankman-Fried with defrauding investors out of billions of dollars and making illegal campaign contributions.
The indictments rolled out as the new CEO of FTX, John Ray III, told a House committee that the company had collapsed from shoddy management and “old-fashioned embezzlement.”
The lawmakers on the House Financial Services Committee, many of whom are Democrats who received campaign contributions from Mr. Bankman-Fried, pointed fingers at the Securities and Exchange Commission for lax oversight of the cryptocurrency industry.
Some of Mr. Bankman-Fried’s political spending violated campaign finance laws by funneling tens of millions of dollars in contributions to political candidates under the names of other donors, according to the indictment.
Damian Williams, U.S. attorney for the Southern District of New York, said the illegal campaign contributions were made “to candidates and committees associated with both Democrats and Republicans.”
He said the donations came from Mr. Bankman-Fried’s hedge fund, Alameda Research, a part of his now-collapsed FTX cryptocurrency exchange empire once valued at $32 billion.
“These contributions were disguised to look like they were coming from wealthy co-conspirators when, in fact, the contributions were funded by Alameda Research with stolen customer money, and all of this dirty money was used in service of Bankman-Fried’s desire to buy bipartisan influence and impact the direction of public policy in Washington,” Mr. Williams said at a press conference in Manhattan.
Mr. Bankman-Fried was the second-biggest campaign donor to Democrats in the election cycle this year. He gave about $40 million to lawmakers and the Biden presidential campaign as he lobbied Congress and the White House on regulatory proposals for the cryptocurrency industry. He has said he also contributed tens of millions of dollars in unspecified “dark money” to Republican candidates.
The indictment unsealed Tuesday charges Mr. Bankman-Fried with a host of financial crimes. It says he played a central role in the rapid collapse of FTX and hid its problems from the public and investors. The Securities and Exchange Commission said he illegally used investors’ money to buy real estate on behalf of himself and his family.
More than $300,351 of Mr. Bankman-Fried’s campaign donations went to nine members of the House Financial Services Committee, seven of them Democrats. The committee held a hearing Tuesday into the collapse of FTX, minus the expected testimony of Mr. Bankman-Fried, 30, who was arrested hours earlier in the Bahamas.
Mr. Ray, a corporate restructuring specialist who took over FTX last month, told the House panel that the collapse was one of the worst business failures he has seen — a “paperless bankruptcy” fueled by an “utter lack of record-keeping.”
Comparing it to the failures of Enron and the Bernie Madoff investment scandal, he said a firm that once had a market valuation of about $32 billion lost nearly all of the money from more than 1 million investors.
“They use Quickbooks. A multibillion-dollar company using Quickbooks,” Mr. Ray said, referring to an online tool used by small and medium-sized companies to track expenses. “Never in my career have I seen such an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever.”
Mr. Ray said FTX went on a $5 billion “spending binge” in 2020 and 2021 and purchased assets for far more than they were worth. He concluded, “This is really old-fashioned embezzlement. This isn’t sophisticated.”
The SEC’s civil charges against Mr. Bankman-Fried included accusations that he used FTX customer assets for his own trading operations at his Alameda hedge fund and “for whatever other purposes Bankman-Fried saw fit.”
“In essence, Bankman-Fried placed billions of dollars of FTX customer funds into Alameda,” the SEC complaint stated. “He then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns and make private investments, among other uses. None of this was disclosed to FTX equity investors or to the platform’s trading customers.”
Committee Chairwoman Maxine Waters, a California Democrat who has been accused of being too cozy with Mr. Bankman-Fried and other FTX executives, changed her tone on Tuesday by stating unequivocally that he had committed fraud.
“I am hopeful that the arrest … means he will be held accountable for the fraud he has committed and the harm he has caused,” Ms. Waters said.
She said all FTX investors are locked out of their accounts and most of them can hope to recover only a fraction of their losses at best.
“I’m so deeply troubled to learn how common it was for Bankman-Fried and FTX employees to steal from the cookie jar of customer funds to finance their lavish lifestyle,” Ms. Waters said.
Although Democrats received nearly all of Mr. Bankman-Fried’s campaign donations, some committee Democrats blamed Republicans for discouraging the SEC from regulating the cryptocurrency industry.
“I don’t get the point of cryptocurrency to begin with, other than if you’re a terrorist or someone that wants to hide money,” said Rep. Juan Vargas, California Democrat. “But if we are going to have it, we have to regulate it. That’s where the government comes in. Somebody’s got to take charge of this. I’ve always thought it was the SEC. We had a lot of pushback from my [Republican] friends on the other side. I didn’t hear them today pushing back quite as they normally do.”
Rep. Brad Sherman, California Democrat, urged Mr. Ray to investigate an FTX loan of $55 million to co-CEO Ryan Salame, who gave millions of dollars in campaign contributions to Republican candidates. Mr. Sherman called for an investigation into possible violations of campaign finance laws, asking whether the loan to Mr. Salame “immediately proceeded disguised campaign contributions.”
Mr. Ray said such loans, including one of $1 billion to Mr. Bankman-Fried, were not explained in company records.
Rep. Patrick T. McHenry, North Carolina Republican, said the cryptocurrency industry holds promise and that fraud charges against Mr. Bankman-Fried are “nothing new.”
“It appears to be the same old-school fraud, just using new technology,” Mr. McHenry said. “We have to separate the bad actions of an individual from the good created by an industry and an innovation. I believe in the promise in digital assets and those around the world building blockchain technologies.”
Ms. Waters said she was surprised by the arrest of Mr. Bankman-Fried and was disappointed that the public wouldn’t hear his testimony.
In a draft of his written testimony viewed by Reuters, Mr. Bankman-Fried planned to offer an apology at the hearing.
“I would like to start by formally stating, under oath: I fucked up,” he was to say. He criticized his company’s attorneys and cryptocurrency rival Binance for actions that he blamed for worsening the collapse of FTX.
“Last year, my net worth was valued at $20b,” Mr. Bankman-Fried wrote. “Last I saw, I believe my bank account had about $100k in it.”
Rep. Alexandria Ocasio-Cortez, New York Democrat, asked Mr. Ray why $100 million was withdrawn from FTX in the Bahamas within 25 hours before he took over the company from Mr. Bankman-Fried. Mr. Ray didn’t answer directly but said he is investigating whether Mr. Bankman-Fried sought to retain some control over FTX during bankruptcy proceedings.
FTX filed for bankruptcy protection on Nov. 11, when the firm ran out of money after the cryptocurrency equivalent of a bank run. The collapse of cryptocurrency’s second-largest exchange has garnered worldwide attention and prompted worries in the cryptocurrency industry that the pain could become widespread. Estimates are that FTX customers could lose billions of dollars.
Despite the taint of FTX’s campaign donations, several lawmakers said Congress must take more action to regulate the cryptocurrency industry.
Thomas Gorman, a former SEC official and a partner at the international law firm Dorsey & Whitney, said cryptocurrency assets “exist at the intersection of regulation” where the Justice Department, the SEC and the Commodity Futures Trading Commission all have limited authority over the industry.
“No agency had the authority to govern the internal systems and controls of FTX except through fraud claims,” Mr. Gorman said. “That is not sufficient. The total absence of regulation resulted in the predictable: a huge mess. While Congress is now conducting hearings to try and determine why FTX failed, the answer is clear: It’s the absence of regulation.”
• This article is based in part on wire service reports.