The stolen funds “will be used to further compensate victims for the losses they incurred as a result of the massive fraudulent scheme orchestrated by Samuel Bankman-Fried, his now bankrupt FTX group of companies, and a core group of FTX insiders,” the CFTC said.
In addition, the order finding that FTX violated derivatives laws and regulations provides injunctive relief and trading and registration bans against the defendants in the case, and also requires FTX and Alameda to cooperate with the CFTC in the ongoing litigation.
“The court found that FTX touted itself as ‘the safest and easiest way to buy and sell cryptocurrencies’ and that customer assets, including digital assets such as bitcoin and ether, were ‘custodial’ by FTX, while stating that FTX essentially segregated customer assets from FTX’s own assets, when in reality customer funds were commingled and misappropriated,” the CFTC said.
According to Ian McGinley, CFTC enforcement director, this order is the largest compensation the CFTC has ever obtained for investors.
“FTX’s massive fraud collapsed 21 months ago, and in that time the CFTC investigated the incident, filed a complaint, and achieved what many thought was impossible at the time of the collapse – a resolution to compensate victims for the losses they suffered,” he said in a press release.
In a related settlement approved by the U.S. Bankruptcy Court in Delaware, the CFTC agreed not to seek a civil monetary penalty against FTX and to subordinate its claims against the companies to the claims of victims of the FTX fraud scheme.
The consent order concluded the CFTC’s litigation against FTX, it said. Proceedings are still pending against four individual defendants, including Bankman-Fried.
In this ongoing litigation, the CFTC is seeking restitution, disgorgement of profits, fines and permanent trading and registration bans, the regulator said.
“FTX used age-old tactics to create the illusion that it was a safe place to access crypto markets. But the basic regulatory tools like governance, customer protections and oversight that exist to identify misconduct and ultimately prevent a collapse were simply not in place,” CFTC Chairman Rostin Behnam said in a press release.
Behnam also stressed that regulatory enforcement actions in the crypto sector are “just the tip of the iceberg.”
“Without digital asset legislation that closes the regulatory gaps, companies will continue to operate in secret, escalate their fraudulent practices and continue to defraud customers without these fundamental tools of sound regulation,” he said.
CFTC Commissioner Kristin Johnson echoed Behnam’s call for greater regulation of the crypto sector.
“Customers and the public have not been made aware of FTX’s ongoing misconduct due to the lack of critical digital asset regulation needed to establish appropriate risk management mechanisms to address conflicts of interest and other related issues, as well as a lack of transparency and inadequate oversight,” she said in a statement.
“Going forward, we must prioritize protecting customers in markets with regulatory gaps, where customers may be at higher risk due to a lack of adequate safeguards,” she said.
