The US Commodity Futures Trading Commission (CFTC) on Thursday announced it has finished up legal proceedings against the FTX crypto exchange and has ordered the now-bankrupt entity to pay back its fraud victims a cool $12.7 billion in restitution.
The permanent injunction, finalized in New York’s Southern District Court, requires FTX to pay $8.7 billion in relief, as well as another $4 billion in disgorgement (legally obtained profits) to customers and victims of a massive, years-long fraud scheme. FTX is made up of two corporate entities, FTX Trading Ltd. and Alameda Research LLC.
FTX founder Sam Bankman-Fried is now serving a 25-year sentence for his role in orchestrating the failed pyramid scheme with a core group of FTX company insiders. As part of his sentencing, Bankman-Fried was also ordered to forfeit more than $11 billion in assets.
In addition to the court-ordered restitution, the CFTC found FTX guilty of a slew of other regulatory violations, subjecting the company to further injunctions, including trading and registration prohibitions, and requiring participation in other ongoing litigation.
.@CFTC Obtains $12.7 Billion Judgment Against FTX and Alameda: https://t.co/S6irxpka58
undefined CFTC (@CFTC) August 8, 2024
The CFTC said the multi-billion-dollar judgment to repay victims is the largest and speediest recovery effort in the Commission’s history, as the FTX exchange collapsed less than two years ago.
“FTX used age-old tactics to create an illusion that it was a safe and secure place to access crypto markets,” said CFTC Chairman Rostin Behnam.
“The basic regulatory tools, like governance, customer protections, and surveillance that exist to identify misconduct and ultimately prevent collapse, were simply not there,” the Chairman said.
The CFTC has agreed not to collect any payment from FTX until all customers are repaid, with interest.
“Commingled and misappropriated”
The CFTC case found that FTX and Alameda made “material misrepresentations and omissions to customers.
For example, at one point, FTX touted itself as “the safest and easiest way to buy and sell crypto” and that customer assets, including digital assets such as bitcoin and ether, were held in “custody” by FTX and segregated from customer assets, when in fact, the customer funds were “commingled and misappropriated,” the CFTC said.
Bankman-Fried was arrested by US authorities in the Bahamas back in December 2022. A New York Jury found the 32-year-old former Wall Street financier guilty of seven counts of fraud and conspiracy last November.
Besides directing his executives to use FTX customer funds to plug losses in Alameda, prosecutors said Bankman-Fried also used client money to buy himself luxury real estate, make other tech and cryptocurrency investments, and donate millions to crypto-friendly politicians.
The CFTC also named two former FTX executives in the complaint, Caroline Ellison and Zixiao “Gary” Wang, as well as a third FTX insider, Nishad Singh, for their participation in the scheme.
The Commission said cases against the four individual defendants, including Bankman-Fried, are pending.
In a related settlement agreement this week, which still needs final approval, a Delaware Bankruptcy Court decided not to seek monetary fines against FTX, instead directing any funds collected to compensate FTX fraud victims.
At one point, Bankman-Fried, who has never admitted to any wrongdoing and is appealing his conviction, was estimated by Forbes to be worth $26 billion.
Behnam said the FTX resolution is consistent with other crypto enforcement actions he has handed down in the past, “including major players Binance, BitMEX, and Tether.”
Still, Behnam believes the lack of “digital asset legislation to fill regulatory gaps, entities will continue to operate in the shadows… sharpening their deceptive practices and continuing to dupe customers."
“This is just the tip of the iceberg,” he said.
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