Breakingviews: FTX sins don’t absolve its big-money enablers

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An FTX logo and a representation of cryptocurrencies are seen through broken glass in this illustration taken December 13, 2022. REUTERS/Dado Ruvic/Illustration

NEW YORK, Dec 13 (Reuters Breakingviews) - The U.S. Securities and Exchange Commission wants everyone to know that Sam Bankman-Fried was a bad actor. That’s hardly surprising at this point. The financial watchdog and the Commodity Futures Trading Commission on Tuesday alleged that the founder of bankrupt currency exchange FTX committed fraud, while federal prosecutors made a criminal case. But none of that absolves his establishment enablers who contributed to the mess.

Each lawsuit focuses on different parts of the alleged wrongdoing. The SEC, which oversees U.S. investors’ interests, is accusing Bankman-Fried of defrauding 90 investors based in the United States, who poured $1.1 billion of equity into the company. The CFTC focused on customers, whose money it says FTX sent to Bankman-Fried’s hedge fund Alameda Research, which allegedly used it for venture investments and loans to FTX executives. The U.S. government, meanwhile, has accused Bankman-Fried of eight criminal violations, ranging from wire fraud to conspiracy to commit money laundering.

Bankman-Fried clearly has a tough road ahead. The lawsuits were swift and aggressive, perhaps enabled by what new FTX Chief Executive John J. Ray III called a “paperless bankruptcy” in a Congressional hearing on Tuesday. Based on filings, Bankman-Fried’s record-keeping seems to have been close to non-existent. The SEC is even using Bankman-Fried’s recent tweets against him. Given all the evidence marshaled in the various complaints, and the lack of a more sophisticated institution behind him, the 30-year-old is far from a tricky target.

But Ray’s testimony implicates investors, too. It wouldn’t have taken much scratching below the surface to uncover FTX’s lack of controls. That’s the sort of thing venture capitalists are supposed to do as part of due diligence. Meanwhile members of both political parties have bickered about the shape of digital currency regulation while also taking money from the industry, including Bankman-Fried himself. One of the few major crypto fish that SEC Chair Gary Gensler has caught to date is Kim Kardashian, who in October was ordered to pay $1.3 million for her part in pumping up the industry.

On Tuesday, Republican Congressman Patrick McHenry said that he looked forward to hearing from Gensler early and often next year. He wants to know how Gensler is going to apply securities law on trading platforms, which Gensler has, according to McHenry, failed to do. That is fair enough. The only problem is McHenry was part of a larger Republican effort last year that attacked proposed measures from the SEC, while also criticizing President Joe Biden for trying to “stop digital assets.” McHenry seemed to welcome oversight on Tuesday. Hopefully one responsible party will stand up.

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CONTEXT NEWS

U.S. federal prosecutors filed a criminal lawsuit against Sam Bankman-Fried, alleging he committed fraud and violated campaign finance laws. The case was unsealed on Dec. 13, a day after Bankman-Fried was arrested in the Bahamas.

In the indictment, prosecutors said Bankman-Fried engaged in a scheme to defraud FTX's customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research.

The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission also alleged Bankman-Fried committed fraud in complaints filed on Dec. 13.

Editing by Liam Proud and Amanda Gomez

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