CEO Sam Bankman Fried
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FTX founder Sam Bankman-Fried was arrested by Bahamian authorities tonight after the United States Attorney for the Southern District of New York submitted a sealed indictment to the Bahamian government setting the requirements for extradition and the US trial prepared for the one-time crypto billionaire at heart of the crypto exchange collapse.
Bankman-Fried was scheduled to testify before the House Financial Services Committee on Tuesday. His arrest is the first concrete step by regulators to hold individuals accountable for last month’s multi-billion dollar FTX implosion.
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Damian Williams, the US Attorney for the Southern District of New York, said on Twitter that the federal government expected to “unseal the indictment in the morning.”
Bahamas Attorney General Ryan Pinder said the United States would “probably seek his extradition.”
In a statement, Bahamian Prime Minister Philip Davis said, “The Bahamas and the United States have a common interest in holding accountable all individuals associated with FTX who may have betrayed public trust and broken the law.”
“While the United States pursues criminal charges against SBF individually, the Bahamas will continue its own regulatory and criminal investigation into the collapse of FTX, with the continued cooperation of its law enforcement and regulatory partners in the United States and elsewhere,” the statement continued.
Bahamian regulators and FTX attorneys have been engaged in an uphill battle in chambers and the court of public opinion. Earlier Monday, FTX lawyers accused the Bahamian government of allegedly colluding with Bankman-Fried to remove FTX assets from corporate control and into crypto wallets controlled by Bahamian regulators.
Bankman-Fried’s arrest by Bahamian law enforcement and his pending extradition indicate that close cooperation between the Bahamas and the US will continue to develop during the bankruptcy process. The Bahamas and the United States have had an extradition treaty since the early 20th century when the Bahamas was still under British control. The current agreement was signed in 1990 and requires the requesting party to produce an arrest warrant issued by a judge or “other competent authority”.
In November, FTX and its subsidiaries filed for bankruptcy and Bankman-Fried resigned as CEO. The crypto trading company spectacularly imploded after a bank run on assets.
The collapse of FTX was accelerated when reports from CoinDesk revealed a highly concentrated position in self-issued FTT coins used by Bankman-Fried hedge fund Alameda Research as collateral for billions of dollars in crypto loans. Binance, a competing exchange, announced it was selling its stake in FTT, resulting in a massive cash withdrawal. The company froze assets and filed for bankruptcy days later. Reports later claimed that FTX had mixed customer funds with Bankman-Fried’s crypto hedge fund Alameda Research, losing billions in customer deposits in the process.
Bankman-Fried was replaced by John J. Ray III, who had overseen Enron’s bankruptcy. Ray is also scheduled to testify before Congress this week. In prepared notes released Monday, Ray said FTX experienced a “spending frenzy” from late 2021 through 2022, when approximately “$5 billion was spent buying a variety of companies and investments, many of which were just could be worth a fraction of what was paid for them” and that the company made more than $1 billion in “loans and other payments … to insiders.”
Ray also confirmed media reports that FTX client funds were mixed up with Alameda Research assets. Alameda used customer funds for margin trading, which exposed them to massive losses, Ray said.
Legal experts told CNBC that if the federal government presses charges of wire or bank fraud, Bankman-Fried could face life in prison with no possibility of supervised release. Such severe punishment would be unusual, but not exceptional. The head of the pyramid scheme, Bernie Madoff, was sentenced to 150 years in prison, an effective sentence of life, for his massive pyramid scheme. The collapse of FTX has already triggered the demise of BlockFi Lending and thrown the entire space into disarray.