The Commodity Futures Trading Commission (CFTC) has announced the entry of a consent order in its litigation against FTX Trading (FTX) and Alameda Research and ordered FTX to pay $12.7 billion in monetary relief to FTX customers and victims of FTX’s fraud.
“The announcement sends a clear message regarding the Commission’s intent to hold fraudsters accountable,” commented CFTC Commissioner Kristin N. Johnson.
“The resolution demonstrates the Commission’s strong commitment to achieving accountability, deterring future misconduct, and promoting compliance with the CEA and Commission regulations,” she said.
“The resolution sends a clear message that fraud in the derivatives markets will not be tolerated and that wrongdoers will be held accountable,” she added.
The consent order, entered by Judge P. Kevin Castel of the United States District Court for the Southern District of New York, resolves the CFTC’s litigation against FTX and Alameda filed on December 13, 2022.
“On November 11, 2022, customers and our markets experienced the devastating effects of the precipitous collapse and shocking bankruptcy of FTX, which resulted in the loss of over $10 billion in customer funds,” Johnson said.
The order requires FTX to pay $8.7 billion in restitution and $4 billion in disgorgement, which will be used to further compensate victims for losses suffered 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 court noted that 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 while stating FTX segregated customer assets from FTX’s own assets as a general principle, when in fact customer funds were commingled and misappropriated.
“FTX’s failure and the catastrophic consequences of its collapse confirm that there is no time to waste. The time is now for the Commission to adopt a comprehensive rule addressing customer protections,” said Commissioner Johnson.
In a related settlement agreement approved by the Bankruptcy Court for the District of Delaware, the CFTC agreed not to seek a civil monetary penalty against FTX and to subordinate its monetary claims to those of victims of the FTX fraud scheme.
As described by FTX in its proposed reorganization plan filed in the bankruptcy proceeding, payments by FTX towards its CFTC disgorgement obligation will be used to further compensate victims through a supplemental remission fund. The plan remains subject to approval in the bankruptcy proceeding.
“FTX used age-old tactics to create an illusion that it was a safe and secure place to access crypto markets. But the basic regulatory tools, like governance, customer protections, and surveillance that exist to identify misconduct and ultimately prevent collapse, were simply not there,” said CFTC Chairman Rostin Behnam.
“Like countless other CFTC crypto resolutions, including major players Binance, BitMEX, and Tether, this resolution with FTX is consistent with the enforcement commitments I have long made as Chairman. But, as I have been saying for years, this is just the tip of the iceberg. In the absence of digital asset legislation to fill regulatory gaps, entities will continue to operate in the shadows without these basic tools of sound regulation, sharpening their deceptive practices and continuing to dupe customers.”
Division of Enforcement Director Ian McGinley added: “Not only is this multi-billion dollar recovery for victims the largest such recovery in CFTC history, we achieved it with remarkable speed. FTX’s massive fraud collapsed 21 months ago and in that time the CFTC investigated, 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. I commend our Chicago-based team for their tireless efforts on behalf of FTX’s victims.”
In addition, CFTC has announced a whistleblower award of over $1 million to a whistleblower who provided significant information and assistance that led the CFTC to bring an enforcement action connected to digital asset markets.
“Identifying unlawful conduct in the digital asset marketplace is a major priority for the CFTC, especially as everyday Americans are increasingly victimized by digital asset scams,” said Director of Enforcement Ian McGinley. “During the last fiscal year, digital asset cases accounted for almost 50% of the CFTC’s docket, and the majority of whistleblower tips that year were related to digital assets.”
“Whistleblowers have increasingly played a significant role in the CFTC’s enforcement actions in the digital assets space,” said Whistleblower Office Director Brian Young. “Here, the whistleblower provided sufficiently specific and credible information that assisted the CFTC in bringing a successful action.”
