Bankman-Fried Used FTX Customers’ Money as ‘Personal Slush Fund,’ Class Action Alleges

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Sam Bankman-Fried faces another proposed class action over the abrupt collapse of the FTX cryptocurrency exchange last month, with the case alleging the embattled founder and ex-CEO deliberately caused “one of the most spectacular financial frauds since Bernie Madoff.” 

The 20-page lawsuit out of California alleges Bankman-Fried, often referred to by his initials, SBF, tricked consumers into thinking FTX was worth far more than it was, and essentially used the platform and customers’ deposits as “his personal slush fund.” 

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The suit claims Bankman-Fried paid investors, employees and vendors shares of FTX’s own currency, FTT, which he controlled and “inflated the value of,” while loaning out customers’ deposits into his ostensibly separate crypto hedge fund, Alameda Research. Further, Bankman-Fried wrote into FTX’s code a “secret back door” that allegedly allowed him to siphon off customer deposits and move them to Alameda, so as to cover the hedge fund’s trading losses, the case relays. 

Bankman-Fried is also alleged to have regularly used FTX’s assets to fund his own investments, buy $300 million worth of real estate, and become a prolific political campaign funder, the filing says. 

After FTX filed for emergency Chapter 11 bankruptcy protection on November 11, billions belonging to consumers who invested in cryptocurrency on the FTX platform “evaporated” overnight as Bankman-Fried attempted to convince users that everything was fine, the complaint states. 

“In the end, SBF was not the altruistic savior to the crypto industry that he held himself out to be,” the lawsuit summarizes. “He instead chose to capitalize on the lack of effective regulatory oversight of the crypto market and defraud his customers out of billions of dollars.” 

Once one of the fastest-growing crypto exchanges in the world, FTX came down with a crash in less than 11 months, in part because of the “murky” history of FTX and Alameda “propping each other up” with money invested with the former, the case alleges. Per the suit, Bankman-Fried “made sure to get paid at both Alameda and FTX,” and at age 30 the defendant was briefly worth $26 billion, according to the case.

Although it appeared on the outside that Bankman-Fried was funding his spending and lending habits in part from the profits he made at Alameda, the reality was that the hedge fund was surviving only because Bankman-Fried lent it billions in FTX customer deposits, the lawsuit shares. 

As the crypto market was shaken to its core in Spring 2022, with asset prices crashing and several companies failing in rapid succession, Bankman-Fried stepped in and began “scooping up distressed crypto companies as a lender of last resort,” the suit says. According to the case, Bankman-Fried’s Alameda Research extended an emergency $500 million credit to crypto broker Voyager Digital. Nevertheless, Voyager failed, and this proved to be the final nail in the coffin for Alameda and a sign of collapse for FTX, the lawsuit relays.

“Ultimately, none of these investments panned out. Alameda had borrowed money to make investments, then got FTX to bail it out to help make payments on those loans. SBF used customer deposits to fund Alameda’s bailout without the permission of those customers. Alameda’s loan to Voyager was wiped out once the brokerage firm filed for bankruptcy. To help prop up Alameda and its failed investments, SBF transferred at least $4 billion from FTX to Alameda in 2022. The money SBF transferred from FTX was, in large part, FTX customer deposits.” 

According to the lawsuit, Bankman-Fried transferred these funds via a back door in FTX’s software that allowed him to alter the company’s financial records without alerting anyone else. Bankman-Fried had the help of co-defendants Nishad Singh, FTX’s director of engineering, and Gary Wang, FTX’s chief technology officer, the case claims, noting that Bankman-Fried relied on the two for their “technical know-how.” 

As the filing tells it, all that was clear in the aftermath of the FTX collapse was that Bankman-Fried took $10 billion in customer funds and transferred it to Alameda Research without permission. 

“[A]nd now a large portion of that total is missing,” the suit says. 

The suit also names as defendants Alameda Research co-CEOs Caroline Ellison and Sam Trabucco.

The lawsuit looks to cover all persons in the United States who had Bitcoins or other cryptocurrency, assets or money stored with FTX on November 10, 2022. 

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