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Sam Bankman-Fried criminal charges? Allegations of mismanaged client funds pose potential legal issues for SBF

By Raphael Sanis and Peter Henn

Edited by Charlie Mellor


Updated

FTX founder Sam Bankman-Fried
The SEC was investigating FTX prior to its implosion, according to The Wall Street Journal – Photo: Getty Images

While Sam Bankman-Fried has now stepped down from his bankrupt exchange, there is speculation that the FTX founder could face criminal charges for allegedly misusing customer funds.

FTX and its founder came under scrutiny after financial revelations about Bankman-Fried’s trading firm Alameda Research.

Mass withdrawals from the cryptocurrency exchange followed, which sent the FTX exchange and the ecosystem’s native FTX token (FTT) token crashing. FTX then announced on 11 November that it had filed for Chapter 11 Bankruptcy, and that Bankman-Fried was stepping down.

It has now been reported that Bankman-Fried, along with two other executives, is under supervision in the Bahamas, while that country’s authorities have launched their own investigation into FTX. Meanwhile, FTX’s Bahamian subsidiary, FTX Digital Markets, had applied for Chapter 15 bankruptcy protection from an American court. 

It was reported on 15 November that authorities in both the Bahamas and the US were looking at extraditing the man known in crypto circles as SBF to the United States to potentially face criminal charges. 

However, it appeared that, on the following day, the disgraced former billionaire was at least free enough to tweet to say that he was attempting to raise liquidity, in a bid to help reimburse people who had money tied up in FTX. 

FTT to USD

FTX accusations

FTX had reportedly misused billions of dollars’ worth of consumer investments, according to The Wall Street Journal. The cryptocurrency exchange had allegedly used these funds to finance “risky bets” by Alameda Research, which ultimately led to its downfall.

A Twitter user highlighted that this breached FTX’s terms of service. The exchange had specified that deposited cryptocurrencies would be protected.

The user, who goes by Twitter profile wassielawyer, tweeted: “FTX’s [terms of service] specifically states that title to assets remains with the customer.”

According to FTX’s terms of service: “None of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat digital assets in users’ accounts as belonging to FTX Trading.”

Capital.com asked FTX to comment, but FTX did not immediately respond to our request. 

DOGE/USD

0.15 Price
-14.590% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

ETH/USD

2,975.94 Price
-8.410% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

XRP/USD

0.48 Price
-14.160% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

BCH/USD

464.70 Price
-13.650% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.50

SEC investigation

The US Justice Department and US Securities and Exchange Commission (SEC) had already been investigating the cryptocurrency exchange before its collapse, according to The Wall Street Journal. The investigation was focused on the exchange’s US branch.

The two government agencies suspect that some of the assets listed on the cryptocurrency exchange violated securities laws. This would result in the person handling the assets, in this case FTX, also breaching these regulations.

Meanwhile, it was revealed that Gary Gensler, the SEC chair, met Bankman-Fried earlier this year.

Gensler was interviewed recently by CNBC and said: “We’ve been clear in these meetings… that non-compliance was not going to work, the public is going to be hurt.”

The SEC chair also said he would continue to bring cases to the court for those breaching regulation, but did not verify if FTX was being investigated.

Congressman Tom Emmer later criticised Gensler on Twitter and said he was actually “helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly”.

SBF under supervision

Bankman-Fried, along with FTX co-founder Gary Wang and director of engineering Nishad Singh, are now under supervision by local authorities in the Bahamas, according to CoinTelegraph.

Some media reports claimed that the three executives, together with Caroline Ellison, CEO of Alameda Research, were looking to fly to Dubai. Bankman-Fried has previously denied rumours that he had fled to Argentina after the exchange filed for bankruptcy.

SBF’s fortune wiped out

Potential criminal charges are not the only impact from the implosion that Bankman-Fried is facing. The founder and CEO saw his wealth plummet by almost 94% on 8 November, according to Bloomberg. He announced his resignation on 11 November.

His net worth fell from just under $16bn to less than $1bn – with some reports noting that Bankman-Fried’s personal wealth had fallen to $991m. 

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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