The wall of legal troubles erected by regulators against Sam Bankman-Fried, the founder of FTX, continues to grow.
After the U.S. Securities and Exchange Commission filed a complaint, the Commodity Futures Trading Commission has filed a suit against the former wonder boy of crypto.
The CFTC is suing Bankman-Fried for violations of federal commodities laws, it said in a complaint filed Dec. 13 in Manhattan federal court.
"At Bankman-Fried's direction, FTX executives created features in the underlying code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX," the regulator said.
The CFTC alleges that Bankman-Fried and other FTX executives took hundreds of millions of dollars in loans from Alameda, which they used to buy real estate and make political donations.
Bankman-Fried is the only individual against whom the regulator has personally lodged a complaint. The CFTC also sued FTX and its sister company, Alameda Research.
The SEC complaint had accused Bankman-Fried of fraud. He was arrested on Dec. 12 in the Bahamas at the request of the American authorities
SEC Charged FTX CEO With 'Years-Long Fraud'
"Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors," a complaint from the SEC alleged on Dec. 13.
The federal regulator says the former crypto boss raised more than $1.8 billion from equity investors, including about $1.1 billion from some 90 U.S.-based investors.
In his representations to investors, Bankman-Fried had promoted FTX as a "safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets."
"We allege that 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 alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws."
In its complaint, the SEC said several times that the former trader had committed fraud and misused the funds of FTX customers.
As a crypto exchange, FTX executed orders for clients, taking their cash and buying cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ crypto.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market-making. The cash FTX borrowed was used to bail out other crypto institutions in summer 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This was a significant exposure, due to the concentration risk and the volatility of FTT.
The insolvency of FTX stemmed from a liquidity shortfall when clients attempted to withdraw funds from the platform. The shortfall appears to have been the result of Bankman-Fried allegedly transferring $10 billion of customer funds from FTX to Alameda Research.
