SEC Chooses ‘Simpler Case’ in Pursuing FTX’s Bankman-Fried

US securities regulators could’ve taken various routes in pursuing a civil suit against FTX co-founder Sam Bankman-Fried. They chose the path of least resistance.

The Securities and Exchange Commission tailored its accusations to focus largely on Bankman-Fried allegedly defrauding FTX investors out of almost $2 billion in a multi-year scheme. The complaint highlighted various representations the now-arrested executive allegedly made to investors.

A large part his fraud was concealing risks and FTX’s relationship with his trading firm Alameda Research, the agency said.

It was a conservative approach by the SEC, lawyers said. The agency steered clear of allegations that would raise questions of whether FTX-traded cryptocurrencies are securities that would fall under the agency’s oversight, avoiding a hot-button issue that would complicate and slow down the case.

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“The SEC could have brought a more far-ranging complaint; for example, they could have argued that SBF manipulated the market in various coins, and that these coins were in fact securities,” Moses & Singer LLP partner and former SEC attorney Howard Fischer said.

The SEC “chose a simpler case, based on failing to disclose their financial shenanigans to investors,” Fischer said.

Bankman-Fried is facing criminal charges from the Justice Department, which brought a more aggressive case. The indictment includes allegations of wire fraud, campaign finance violations, and securities and commodities fraud.

The Commodity Futures Trading Commission also sued Bankman-Fried, FTX.com, and Alameda Research in a civil suit.

When multiple agencies bring claims against a defendant, the civil actions are typically stayed pending the resolution of the criminal case, according to Fischer.

The SEC’s complaint, filed Tuesday in the US District Court for the Southern District of New York, alleges Bankman-Fried defrauded investors out of $1.8 billion, including $1.1 billion from about 90 US-based investors.

Investors bought an equity stake in FTX based on the belief that the company had appropriate controls, the complaint said. But FTX had “poor controls and fundamentally deficient risk management procedures,” the SEC said.

All signs suggest there was also a fraud on people trading cryptocurrencies, Tulane law professor Ann Lipton said. But the SEC, whose jurisdiction is limited to fraud in securities sales, kept its focus trained on investors in FTX.

“Even under the broadest possible reading of what is a security, not all crypto assets are the same,” Lipton said. “You have to look at each one of them individually and analyze whether it counts as a security.”

SEC chair Gary Gensler has said he thinks most digital coins are securities, but there remains a lot of ambiguity. The agency has been fighting with various defendants over the question in court, including in a closely watched case that accuses Ripple Labs.

“Given that there is no shortage of prosecutions of Bankman-Fried, the SEC might have calculated that a simpler approach would suffice,” Fischer said.

Due Diligence

In displaying Bankman-Fried’s representations to investors, the SEC’s complaint highlighted mostly FTX’s general advertising, statements made to Congress, or news media interviews, rather than statements specifically to investors.

Lipton called the SEC’s choice of evidence a “quirky legal aspect” to the case. It might be a reflection of the complaint being quickly put together. It could also suggest that investors weren’t doing due diligence, making “it hard for the SEC to find representations to them,” Lipton said.

“It is emblematic, I think, of the lack of due diligence and speed with which a lot of the private markets have been operating,” Lipton said.

But the case “should not trouble the SEC,” which doesn’t have to show that investors acted reasonably, Fischer said.

“I would not be surprised if the SEC has specific documentation backing up their claims, as well as the testimony of cooperating witnesses,” Fischer said.