throbber
Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 1 of 28
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`___________________________________________
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`Defendant.
`___________________________________________ )
`
`SECURITIES AND
`EXCHANGE COMMISSION,
`
`Plaintiff,
`
`v.
`
`
`
`
`
`
`
`SAMUEL BANKMAN-FRIED,
`
`Civil Action No. 22-cv-10501
`
`JURY TRIAL DEMANDED
`
`
`
`
`
`
`
`
`
`COMPLAINT
`
`Plaintiff Securities and Exchange Commission (the “Commission”), for its complaint
`
`against Defendant, Samuel Bankman-Fried (“Bankman-Fried”), alleges as follows:
`
`SUMMARY
`
`1.
`
`From at least May 2019 through November 2022, Bankman-Fried engaged in a
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`scheme to defraud equity investors in FTX Trading Ltd. (“FTX”), the crypto asset trading
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`platform of which he was CEO and co-founder, at the same time that he was also defrauding the
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`platform’s customers. Bankman-Fried raised more than $1.8 billion from investors, including
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`U.S. investors, who bought an equity stake in FTX believing that FTX had appropriate controls
`
`and risk management measures. Unbeknownst to those investors (and to FTX’s trading
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`customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of
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`dollars of the trading platform’s customer funds for his own personal benefit and to help grow
`
`his crypto empire.
`
`2.
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`Throughout this period, Bankman-Fried portrayed himself as a responsible leader
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`of the crypto community. He touted the importance of regulation and accountability. He told the
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 2 of 28
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`public, including investors, that FTX was both innovative and responsible. Customers around
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`the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure
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`on the FTX trading platform. But from the start, Bankman-Fried improperly diverted customer
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`assets to his privately-held crypto hedge fund, Alameda Research LLC (“Alameda”), and then
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`used those customer funds to make undisclosed venture investments, lavish real estate purchases,
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`and large political donations.
`
`3.
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`Bankman-Fried hid all of this from FTX’s equity investors, including U.S.
`
`investors, from whom he sought to raise billions of dollars in additional funds. He repeatedly
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`cast FTX as an innovative and conservative trailblazer in the crypto markets. He told investors
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`and prospective investors that FTX had top-notch, sophisticated automated risk measures in
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`place to protect customer assets, that those assets were safe and secure, and that Alameda was
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`just another platform customer with no special privileges. These statements were false and
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`misleading. In truth, Bankman-Fried had exempted Alameda from the risk mitigation measures
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`and had provided Alameda with significant special treatment on the FTX platform, including a
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`virtually unlimited “line of credit” funded by the platform’s customers.
`
`4.
`
`While he spent lavishly on office space and condominiums in The Bahamas, and
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`sank billions of dollars of customer funds into speculative venture investments, Bankman-Fried’s
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`house of cards began to crumble. When prices of crypto assets plummeted in May 2022,
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`Alameda’s lenders demanded repayment on billions of dollars of loans. Despite the fact that
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`Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was
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`unable to satisfy its loan obligations. Bankman-Fried directed FTX to divert billions more in
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`customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that
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`money could continue to flow in from lenders and other investors.
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`2
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 3 of 28
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`5.
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`But Bankman-Fried did not stop there. Even as it was increasingly clear that
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`Alameda and FTX could not make customers whole, Bankman-Fried continued to
`
`misappropriate FTX customer funds. Through the summer of 2022, he directed hundreds of
`
`millions more in FTX customer funds to Alameda, which he then used for additional venture
`
`investments and for “loans” to himself and other FTX executives. All the while, he continued to
`
`make misleading statements to investors about FTX’s financial condition and risk management.
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`Even in November 2022, faced with billions of dollars in customer withdrawal demands that
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`FTX could not fulfill, Bankman-Fried misled investors from whom he needed money to plug a
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`multi-billion-dollar hole. His brazen, multi-year scheme finally came to an end when FTX,
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`Alameda, and their tangled web of affiliated entities filed for bankruptcy on November 11, 2022.
`
`VIOLATIONS
`
`6.
`
`By engaging in the conduct set forth in this Complaint, Defendant has violated
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`Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)]; and Section
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`10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule
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`10b-5 thereunder [17 C.F.R. § 240.10b-5].
`
`7.
`
`Unless Defendant is permanently restrained and enjoined, he will continue to
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`engage in the acts, practices, transactions and courses of business set forth in this Complaint and
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`in acts, practices, transactions and courses of business of similar type and object.
`
`NATURE OF THE PROCEEDING AND RELIEF SOUGHT
`
`8.
`
`The Commission brings this action pursuant to the authority conferred upon it by
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`Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)] and Section 21(d)(1) of the Exchange
`
`Act [15 U.S.C. §§ 78u(d)(1)].
`
`9.
`
`The Commission seeks a final judgment: (i) permanently enjoining Defendant
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`3
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 4 of 28
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`from engaging in the acts, practices, transactions and courses of business alleged herein;
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`(ii) ordering Defendant to disgorge his ill-gotten gains and to pay prejudgment interest thereon
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`pursuant to Section 21(d)(5) and (7) of the Exchange Act [15 U.S.C. §§ 78u(d)(5) and (7)]; (iii)
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`imposing civil money penalties on Defendant pursuant to Section 20(d) of the Securities Act [15
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`U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)];
`
`(iv) imposing an officer and director bar pursuant to Section 20(e) of the Securities Act [15
`
`U.S.C. § 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)]; (v)
`
`prohibiting Defendant from participating in the offer or sale of securities including crypto asset
`
`securities pursuant to Section 21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)]; and
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`(vi) ordering such other and further relief the Court may find appropriate pursuant to Section
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`21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)].
`
`JURISDICTION AND VENUE
`
`10.
`
`This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d) and
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`22 of the Securities Act [15 U.S.C. §§ 77t(b), 77t(d), and 77v], and Sections 21(d), 21(e), and 27
`
`of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. In connection with the conduct
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`alleged in this Complaint, Defendant, directly or indirectly, made use of the means or
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`instruments of transportation or communication in, and the means or instrumentalities of,
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`interstate commerce, or of the mails.
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`11.
`
`Venue is proper in the Southern District of New York pursuant to Section 22(a) of
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`the Securities Act [15 U.S.C. § 77v(a)], and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
`
`Among other acts, Defendant made false and misleading statements to investors residing in this
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`District.
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`4
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 5 of 28
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`DEFENDANT
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`12.
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`Samuel Bankman-Fried (“Bankman-Fried”), age 30, was a co-founder and
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`majority owner of FTX and, prior to stepping down on November 11, 2022, its CEO. He was
`
`also a co-founder and majority owner of Alameda. He resided in Hong Kong and The Bahamas.
`
`RELEVANT ENTITIES
`
`13.
`
`FTX Trading Ltd. (d/b/a FTX.com) (“FTX”) is an Antigua and Barbuda
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`limited corporation. FTX’s principal place of business was in Hong Kong and The Bahamas.
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`FTX operated a global crypto asset trading platform and began operations in or around May
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`2019. FTX was available to customers in most countries, but was not permitted to provide
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`services to customers in the United States and several other countries. FTX was founded by
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`Bankman-Fried, Gary Wang (“Wang”), and Nishad Singh (“Singh”). On or about November 11,
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`2022, FTX and certain of its affiliates filed Chapter 11 bankruptcy petitions in the United States
`
`Bankruptcy Court for the District of Delaware, Case No. 22-11068 (Bankr. Del.).
`
`14.
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`Alameda Research LLC (“Alameda”) is a Delaware company that had
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`operations in the United States, Hong Kong, and The Bahamas. Alameda was a quantitative
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`trading firm specializing in crypto assets (a “crypto hedge fund”). Bankman-Fried and Wang co-
`
`founded Alameda in or around October 2017, and, prior to Alameda’s bankruptcy filing, had
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`been its sole equity owners, with Bankman-Fried owning 90%, and Wang owning 10%, of the
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`company. Bankman-Fried was CEO of Alameda from its inception until in or around October
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`2021, at which time Caroline Ellison (“Ellison”) and Sam Trabucco (“Trabucco”) became co-
`
`CEOs. In or around August 2022, Ellison became the sole CEO. Alameda has filed for Chapter
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`11 bankruptcy in the United States Bankruptcy Court for the District of Delaware, Case No. 22-
`
`11068 (Bankr. Del.).
`
`5
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 6 of 28
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`FACTS
`
`A.
`
`Bankman-Fried Created a Complex Web of Entities, with FTX and Alameda
`at Its Center.
`
`15.
`
`In or around October 2017, Bankman-Fried and Wang founded Alameda, a
`
`quantitative trading firm specializing in crypto assets.1
`
`16.
`
`At inception, Alameda was focused on arbitrage trading strategies, but went on to
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`employ other strategies including market making, yield farming (pooling of crypto assets in
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`exchange for interest or other rewards), and volatility trading. Alameda also offered over-the-
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`counter trading services, and made and managed other debt and equity investments.
`
`17.
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`At first, Bankman-Fried was responsible for trading operations, and Wang
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`handled the engineering and programming functions. Over time, Alameda hired additional
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`employees, including Singh (in or around December 2017), Ellison (in or around March 2018),
`
`and Trabucco (in or around 2019). By the end of 2021, Alameda had approximately 30
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`employees. At times, Alameda shared office space and employees with FTX.
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`18.
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`Bankman-Fried remained the ultimate decision-maker at Alameda, even after
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`Ellison and Trabucco became co-CEOs in or around October 2021. Bankman-Fried directed
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`investment and operational decisions, frequently communicated with Alameda employees, and
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`had full access to Alameda’s records and databases.
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`19.
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`In or around 2018, Bankman-Fried began work on building a crypto asset trading
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`platform. Together with Wang and Singh, Bankman-Fried ultimately founded FTX, which
`
`began operations in or around May 2019.
`
`
`1 Crypto assets are unique digital assets maintained on a cryptographically-secured blockchain. A blockchain or
`distributed ledger is a peer-to-peer database spread across a network of computers that records all transactions in
`theoretically unchangeable, digitally recorded data packages. The system relies on cryptographic techniques for
`secure recording of transactions. Crypto tokens may be traded on crypto asset trading platforms in exchange for
`other crypto assets or fiat currency (legal tender issued by a country).
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`20.
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`FTX offered its customers a number of services. For example:
`
`a.
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`FTX offered a “spot market,” a trading platform through which customers
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`could trade crypto assets with other FTX customers in exchange for fiat
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`currency (i.e., currency such as U.S. Dollars) or other crypto assets.
`
`b.
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`FTX offered “spot margin trading” services, which allowed FTX
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`customers to trade using assets they did not have (i.e., to trade “on
`
`margin”) by posting collateral in their FTX accounts and borrowing crypto
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`assets through the “spot market” on the FTX platform. FTX also allowed
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`customers to lend their crypto assets to other FTX customers who would
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`then use those crypto assets to spot trade.
`
`c.
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`FTX offered an off-platform (over-the-counter or “OTC”) portal that
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`enabled customers to connect and request quotes for spot crypto assets and
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`to conduct trades.
`
`21.
`
`Bankman-Fried was the ultimate decision-maker at FTX from the platform’s
`
`inception in or around May 2019 until he resigned as CEO on or about November 11, 2022 (“the
`
`Relevant Period”).
`
`22.
`
`In or around January 2020, Bankman-Fried, Wang, and Singh founded FTX US, a
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`crypto asset trading platform designed primarily for customers in the United States.2
`
`23.
`
`Over time, Bankman-Fried expanded his holdings to include a number of
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`companies focused on making and managing private (or “venture”) investments.
`
`24.
`
`This interconnected web of companies grew to include over 100 separate entities,
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`with Bankman-Fried at the top and Alameda, his crypto hedge fund, at the center.
`
`
`2 FTX US is the d/b/a for a subsidiary of West Realm Shires Inc., a separate legal entity from FTX Trading Ltd. that
`provided different services. FTX US’s conduct is not the subject of the allegations in this complaint.
`
`7
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 8 of 28
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`25.
`
`Throughout the Relevant Period, in multiple public statements, Bankman-Fried
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`held himself out as a visionary leader in the crypto industry, and touted his efforts to create a
`
`regulated and thriving crypto asset market. He conducted an intensive public relations campaign
`
`to brand himself and his companies as honest stewards of crypto.
`
`26.
`
`The reality was very different: From the start, contrary to what FTX investors
`
`and trading customers were told, Bankman-Fried continually diverted FTX customer funds to
`
`Alameda and then used those funds to continue to grow his empire, using billions of dollars to
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`make undisclosed private venture investments, political contributions, and real estate purchases.
`
`27.
`
`At the same time, throughout the Relevant Period, Bankman-Fried solicited equity
`
`investors by touting FTX’s controls and risk management, ultimately raising at least $1.8 billion
`
`dollars from investors in exchange for various classes of stock in FTX through multiple
`
`fundraising rounds, including raising: (1) approximately $8 million from the sale of shares of
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`FTX Series A preferred stock, with fundraising completed in or around August 2019;
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`(2) approximately $1 billion from the sale of shares of FTX Series B preferred stock, with
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`fundraising completed in or around July 2021; (3) approximately $420 million from the sale of
`
`shares of FTX Series B-1 stock, with fundraising completed in or around October 2021; and (4)
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`approximately $500 million from the sale of shares of FTX Series C stock, with fundraising
`
`completed in or around January 2022. Of this total, approximately $1.1 billion was invested in
`
`FTX by approximately 90 investors based in the United States.
`
`28.
`
`For the entire span of the Relevant Period, while raising money from equity
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`investors, Bankman-Fried, and those speaking at his direction and on his behalf, claimed in
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`widely distributed public forums and directly to investors that: FTX was a safe crypto asset
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`trading platform; FTX had a comparative advantage due to its automated risk mitigation
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 9 of 28
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`procedures; and FTX and its customers were protected from other customers’ losses due to
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`FTX’s automated liquidation process. As discussed further herein, these statements and others
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`were misleading in light of Bankman-Fried’s failure to disclose to FTX investors the diversion of
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`FTX customer funds to Alameda, which he then used for his own purposes, including loans to
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`himself. Similarly, Bankman-Fried’s statements concerning the separation of FTX and Alameda,
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`made throughout the Relevant Period, were misleading because he did not disclose the special
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`treatment afforded to Alameda on FTX, including its virtually unlimited “line of credit” at FTX,
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`its ability to carry a negative balance in its FTX customer account, and its exemption from
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`FTX’s automated liquidation process—none of which any other customer of the platform
`
`enjoyed, but which changed the risk profile of FTX.
`
`29.
`
`Bankman-Fried also misrepresented the risk profile of investing in FTX
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`throughout the Relevant Period by failing to disclose FTX’s exposure to Alameda and, relatedly,
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`that the collateral Alameda deposited on FTX consisted largely of illiquid, FTX-affiliated tokens,
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`including FTT. In addition to these material omissions, Bankman-Fried also made material
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`misrepresentations to FTX investors about FTX’s risk management and its relationship with
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`Alameda. As detailed below, Bankman-Fried made these material misstatements throughout the
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`Relevant Period, and the entire time he was raising or attempting to raise funds for FTX—from
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`the time FTX began operations in May 2019 through its ultimate demise in November 2022.
`
`B.
`30.
`
`Bankman-Fried Used Alameda to Carry Out His Fraudulent Scheme.
`
`Alameda (and its many subsidiaries) served a number of essential functions in
`
`Bankman-Fried’s growing web of companies. For example, Alameda was the primary market
`
`maker on FTX at the time of FTX’s inception in 2019. In this capacity, Alameda, at Bankman-
`
`Fried’s direction, was tasked with creating liquidity on FTX to allow the platform to function
`
`more efficiently. Bankman-Fried also made venture investments through an Alameda
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 10 of 28
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`subsidiary. Most crucially, Bankman-Fried used Alameda to house FTX customer assets and to
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`deploy those assets, under Bankman-Fried’s direction, to help grow his empire.
`
`31.
`
`From the inception of FTX, Bankman-Fried diverted FTX customer funds to
`
`Alameda, and he continued to do so until FTX’s collapse in November 2022.
`
`32.
`
`Bankman-Fried diverted FTX customer funds to Alameda in essentially two
`
`ways: (1) by directing FTX customers to deposit fiat currency (e.g., U.S. Dollars) into bank
`
`accounts controlled by Alameda; and (2) by enabling Alameda to draw down from a virtually
`
`limitless “line of credit” at FTX, which was funded by FTX customer assets.
`
`33.
`
`As a result, there was no meaningful distinction between FTX customer funds and
`
`Alameda’s own funds. Bankman-Fried thus gave Alameda carte blanche to use FTX customer
`
`assets for its own trading operations and for whatever other purposes Bankman-Fried saw fit. In
`
`essence, Bankman-Fried placed billions of dollars of FTX customer funds into Alameda. 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.
`
`i. FTX Customers Deposited Billions of Dollars into Alameda-Owned
`Bank Accounts, Which Alameda Spent on Its Own Trading Operations
`and to Expand Bankman-Fried’s Empire.
`
`34.
`
`From the start of FTX’s operations in or around May 2019 until at least 2021,
`
`FTX customers deposited fiat currency (e.g., U.S. Dollars) into bank accounts controlled by
`
`Alameda. Billions of dollars of FTX customer funds were so deposited into Alameda-controlled
`
`bank accounts.
`
`35.
`
`At least some of these bank accounts were not in Alameda’s name, but rather in
`
`the name of North Dimension Inc. (“North Dimension”), an Alameda subsidiary. North
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`Dimension’s website does not disclose any connection to Alameda. Bankman-Fried directed
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 11 of 28
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`FTX to have customers send funds to North Dimension in an effort to hide the fact that the funds
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`were being sent to an account controlled by Alameda.
`
`36.
`
`Alameda did not segregate these customer funds, but instead commingled them
`
`with its other assets, and used them indiscriminately to fund its trading operations and Bankman-
`
`Fried’s other ventures.
`
`37.
`
`This multi-billion-dollar liability was reflected in an internal account in the FTX
`
`database that was not tied to Alameda but was instead called “fiat@ftx.com.” Characterizing the
`
`amount of customer funds sent to Alameda as an internal FTX account had the effect of
`
`concealing Alameda’s liability in FTX’s internal systems.
`
`38.
`
`In quarterly balance sheets that Alameda provided to its third-party lenders,
`
`Alameda tracked this liability as a “loan,” but did not specify that the “loan” was from FTX.
`
`Instead, Alameda combined this liability with loans it had received from third-party lenders.
`
`39.
`
`Alameda was not required to pay interest on the liability reflected in the
`
`“fiat@ftx.com” account.
`
`40.
`
`In 2022, FTX began trying to separate Alameda’s portion of the liability in the
`
`“fiat@ftx.com” account from the portion that was attributable to FTX (i.e., to separate out
`
`customer deposits sent to Alameda-controlled bank accounts from deposits sent to FTX-
`
`controlled bank accounts). Alameda’s portion—which amounted to more than $8 billion in FTX
`
`customer assets that had been deposited into Alameda-controlled bank accounts—was initially
`
`moved to a different account in the FTX database. However, because this change caused FTX’s
`
`internal systems to automatically charge Alameda interest on the more than $8 billion liability,
`
`Bankman-Fried directed that the Alameda liability be moved to an account that would not be
`
`charged interest. This account was associated with an individual that had no apparent connection
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 12 of 28
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`to Alameda. As a result, this change had the effect of further concealing Alameda’s liability in
`
`FTX’s internal systems.
`
`ii. The FTX Platform, By Design, Granted Special Treatment to Alameda,
`Including Features that Allowed Alameda to Divert FTX Customer
`Assets.
`
`41.
`
`In addition to receiving cash deposits directly from FTX customers, Alameda
`
`benefited from undisclosed features of the FTX platform, which allowed it to divert FTX
`
`customer assets. For example:
`
`a. Negative Balance: Alameda was able to maintain a negative balance in its
`
`customer account at FTX. Bankman-Fried directed software code to be written in
`
`or around August 2019, and updated in or around May 2020, that ultimately
`
`allowed Alameda to maintain a negative balance in its account, untethered from
`
`any collateral requirements. No other customer account at FTX was permitted to
`
`maintain a negative balance.
`
`b. Line of Credit: On multiple occasions, Bankman-Fried directed FTX to increase
`
`the amount by which Alameda could maintain a negative balance in its account.
`
`In effect, this gave an unofficial “line of credit” to Alameda, since Alameda was
`
`able to draw down on its FTX customer account and use those funds—which
`
`were actually the funds deposited by other FTX customers—for its own trading.
`
`At Bankman-Fried’s direction, Alameda’s “line of credit” was continually raised
`
`to the point where it grew to tens of billions of dollars and effectively became
`
`limitless. No other FTX customer had a similar “line of credit.”
`
`c. Liquidation Exemption: In or around May 2020, Bankman-Fried directed that
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`Alameda be exempted from the “auto-liquidation” feature of FTX’s spot margin
`
`trading services. As a result, Alameda’s collateral could fall below the requisite
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`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 13 of 28
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`margin levels without triggering the automatic liquidation of its account.
`
`Alameda was the only customer exempted from FTX’s automatic account
`
`liquidation.
`
`42.
`
`All of these special privileges were afforded to Alameda—and only Alameda—at
`
`Bankman-Fried’s direction, and all were hidden from investors. These privileges permitted
`
`Alameda to draw on FTX customer assets to a virtually unlimited extent for its own uses.
`
`Because its own FTX trading account was able to maintain a negative balance of billions of
`
`dollars, unbacked by sufficient collateral, Alameda was able to divert billions of dollars in FTX
`
`customer assets. Alameda did just that in 2022.
`
`In 2022, Alameda Diverted Billions More in FTX Customer Assets.
`
`iii.
`Starting in or around 2021, Bankman-Fried directed Alameda to borrow billions
`
`43.
`
`of dollars from third-party crypto asset lending firms in order to fund Bankman-Fried’s venture
`
`investments and for his personal use. Certain of these loans included provisions permitting the
`
`lenders to demand re-payment at any time.
`
`44.
`
`In or around May 2022, as prices of crypto assets were dropping precipitously,
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`several of these lenders demanded re-payment from Alameda. Because Alameda did not have
`
`sufficient assets to cover all of these obligations, Bankman-Fried directed Alameda to draw on
`
`its “line of credit” from FTX. Billions of dollars of FTX customer funds were thus diverted to
`
`Alameda and used by Alameda to re-pay its third-party loan obligations.
`
`45.
`
`Because Alameda now had billions of dollars more in liability to FTX (on top of
`
`the billions of dollars reflected in the fiat@ftx.com account) Bankman-Fried—concerned that
`
`this enormous liability would alarm Alameda’s lenders—directed Alameda to hide this “line of
`
`credit” in Alameda’s balance sheet.
`
`46.
`
`Despite the fact that Alameda now owed FTX billions of dollars with no
`
`13
`
`

`

`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 14 of 28
`
`immediate prospects of raising capital to pay off its “line of credit,” Bankman-Fried continued to
`
`direct Alameda to draw on the “line of credit” in the summer of 2022. The customer funds
`
`diverted to Alameda were used, among other things, to pay hundreds of millions of dollars in
`
`“loans” to Bankman-Fried and other FTX executives, as well as hundreds of millions more to
`
`fund additional venture investments.
`
`iv. Bankman-Fried Assured Investors that FTX Customer Assets Were
`Secure, and Hid Alameda’s Close Relationship with FTX.
`
`47.
`
`Throughout the Relevant Period, Bankman-Fried was directly involved in
`
`soliciting potential investors in FTX. Bankman-Fried met, and otherwise communicated, with
`
`FTX investors including investors based in the United States. Along with another FTX
`
`employee, Bankman-Fried was the point-person for investor relations at FTX.
`
`48.
`
`FTX’s Terms of Service, which were publicly available on FTX’s website and
`
`accessible to investors, assured FTX customers that their assets were secure, providing: “you
`
`control the Digital Assets held in your Account;” “[t]itle to your Digital Assets shall at all times
`
`remain with you and shall not transfer to FTX;” and “none of the digital assets in your account
`
`are the property of, or shall or may be loaned to, FTX Trading.” The Terms of Service further
`
`provided: “Once we receive fiat currency we may issue you an equivalent amount of electronic
`
`money (“E-Money”)…which represents the fiat currency that you have loaded” and “[y]ou may
`
`redeem all or part of any E-Money held in your Account at any time.”
`
`49.
`
`Similarly, FTX posted on its website a document entitled, “FTX’s Key Principles
`
`for Ensuring Investor Protections on Digital-Asset Platforms,” in which FTX represented that it
`
`“segregates customer assets from its own assets across our platforms.” FTX further represented
`
`in that document that it maintained “liquid assets for customer withdrawals…[to] ensure a
`
`customer without losses can redeem its assets from the platform on demand.”
`
`14
`
`

`

`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 15 of 28
`
`50.
`
`In addition to making this document available to the public on its website, FTX
`
`specifically provided it to potential investors, including a U.S. investor who had invested $35
`
`million in FTX’s Series B fundraising round in July 2021. As described above, these statements
`
`to the public, customers, and investors were false—FTX did not segregate its customer assets
`
`from its own assets, and, as events would later demonstrate, did not maintain liquidity to allow
`
`customer withdrawals on demand.
`
`51.
`
`FTX investors were provided with FTX’s audited financial statements, and FTX
`
`represented in its purchase agreements that those financial statements “fairly present in all
`
`material respects the financial condition and operating results of” FTX. These audited financial
`
`statements, which do not include information about Alameda’s undocumented “line of credit”
`
`from FTX and other information discussed herein, were, at the very least, materially misleading.
`
`Indeed, FTX’s current CEO has voiced “substantial concern as to the information presented in
`
`these audited financial statements.”
`
`52.
`
`Throughout the Relevant Period, Bankman-Fried made public statements assuring
`
`that customer assets were safe at FTX. For example, he stated in a tweet on or about June 27,
`
`2022: “Backstopping customer assets should always be primary. Everything else is secondary.”
`
`He likewise tweeted on or about August 9, 2021: “As always, our users’ funds and safety comes
`
`first. We will always allow withdrawals (except in cases of suspected money
`
`laundering/theft/etc.).”
`
`53.
`
`Bankman-Fried also told investors, and directed other FTX and Alameda
`
`employees to tell investors, that Alameda received no preferential treatment from FTX. For
`
`example, Bankman-Fried told the Wall Street Journal in or around July 2022: “There are no
`
`parties that have privileged access.” Likewise, in a Bloomberg article published in or about
`
`15
`
`

`

`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 16 of 28
`
`September 2022, Bankman-Fried claimed that “Alameda is a wholly separate entity” than FTX.
`
`In the same article, Ellison is quoted as stating about Alameda: “We’re at arm’s length and don’t
`
`get any different treatment from other market makers.” Bankman-Fried made similar statements
`
`directly to investors.
`
`54.
`
`Bankman-Fried knew or recklessly disregarded that these statements were false
`
`and misleading because he was directly involved in establishing Alameda’s preferential
`
`treatment.
`
`C.
`
`FTX Had Poor Controls and Deeply Inadequate Risk Management
`Procedures, in Stark Contrast to Bankman-Fried’s Claims that It Was a
`Mature, Conservative Company.
`
`55.
`
` From its inception, FTX had poor controls and fundamentally deficient risk
`
`management procedures. Assets and liabilities of all forms were generally treated as
`
`interchangeable, and there were insufficient distinctions between the assignment of debts and
`
`credits to Alameda, FTX, and executives, including Bankman-Fried, Wang, and Singh. This
`
`reality was a sharp contrast to the image of FTX that Bankman-Fried consistently portrayed to
`
`the public and to investors—a mature company that managed funds and risk in a conservative,
`
`rigorous manner.
`
`56.
`
`FTX invested significant resources to develop and promote its brand as a
`
`trustworthy company. For example, in materials provided to one investor in or around June
`
`2022, FTX cultivated and promoted its reputation:
`
`FTX has an industry-leading brand, endorsed by some of the most
`trustworthy public figures, including Tom Brady, MLB, Gisele
`Bundchen, Steph Curry, and the Miami Heat, and backed by an
`industry-leading set of investors. FTX has the cleanest brand in
`crypto.
`
`FTX also promoted itself as a company that was willing to work collaboratively
`
`57.
`
`with regulators and lawmakers. In the same materials, FTX claimed: “FTX is also the only
`
`16
`
`

`

`Case 1:22-cv-10501 Document 1 Filed 12/13/22 Page 17 of 28
`
`major digital asset venue to maintain positive, constructive relationships with regulators and
`
`lawmakers.”
`
`i. The FTX Automated Risk Engine
`Bankman-Fried repeatedly touted FTX’s automated risk mitigation protocols—
`
`58.
`
`which he called FTX’s “risk engine”—to the public, and prospective investors, as a safe and
`
`reliable way for crypto asset trading platforms to manage risk. Bankman-Fried promoted the
`
`concept of “24/7” automated risk monitoring as an innovative benefit

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