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FTX Founder Hit With Criminal, Civil Charges In Billion-Dollar Fraud; Inflation Eases To 7.1 Percent In Nov. As Fed Weighs Another Rate Hike. Aired 2-2:30p ET

Aired December 13, 2022 - 14:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

[14:00:00]

(COMMERCIAL BREAK)

BIANNA GOLODRYGA, CNN ANCHOR: Hello everyone, I'm Bianna Golodryga. Welcome to CNN NEWSROOM.

VICTOR BLACKWELL, CNN ANCHOR: I'm Victor Blackwell.

We begin with that what one lawmaker called one of the worst frauds ever committed in the U.S., the multibillion-dollar collapse of the cryptocurrency exchange FTX. Today, its founder Sam Bankman-Fried was hit with a one-two punch of charges, criminal indictments from the Justice Department, and civil charges from the Security Exchange Commission. And Bankman-Fried was in a courtroom today in the Bahamas where he was arrested and indicted on eight criminal counts.

GOLODRYGA: The charges say that he defrauded customers and lenders since 2019, funneling billions of dollars from FTX to another company of his, a hedge fund called Alameda Research. Prosecutors say Bankman- Fried paid himself and his hedge funds debts all with FTX customers' and investors' money.

The timing of his arrest is also stunning here. The disgraced founder was supposed to testify to a House committee today. Well, instead, the man who replaced him as CEO was the only witness and describe the absolute corporate chaos that he found inside the company.

(BEGIN VIDEO CLIP)

JOHN RAY II, CEO, FTX GROUP: Even in the most failed companies, you have a fair roadmap of what happened. We're dealing with literally a sort of a paperless bankruptcy in terms of how they created this company. It makes it very difficult to trace and track assets. And particularly as I've said you know in the crypto world, it's really unprecedented in terms of the lack of documentation. What we've lost? $8 billion, all right, of customer money. So, by definition, I don't trust a single piece of paper in this organization.

(END VIDEO CLIP)

GOLODRYGA: CNN's Kara Scannell is at the federal prosecutor's office in New York. CNN's Carlos Suarez is in Nassau where a court hearing is in break. So, Kara, to you first. It's stunning to hear this description from the CEO who also helped unwind Enron, for him to say he'd never seen something like this. But tell us more about the charges against this 30-year-old defendant.

KARA SCANNELL, CNN CORRESPONDENT: Hey, Bianna, and Victor. So, we're at the federal prosecutor's office waiting for this press conference to get underway. Well, they will put more meat on the bones and explain more about what these federal charges are. But what we do know is eight criminal counts, two counts of wire fraud, multiple counts of conspiracy all relating, as you say, to the misappropriation of billions of dollars of customer deposits that prosecutors say Bankman- Fried had used to cover his own personal loans.

He took up more than a billion dollars from this company. He also used it to buy luxury real estate in the Bahamas for him his family and other top executives. And he also diverted some money to go toward tens of millions of dollars in political donations. A colleague of mine had tallied the numbers and we've seen more than $900,000 in the last campaign cycle went to candidates and nearly $39 million to outside groups.

As we will -- we do expect this press conference to get underway with the U.S. Attorney for Manhattan, Damian Williams. We'll kick it off. And then we'll also hear from the FBI, the chiefs of enforcement of the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Both of those regulators levied civil charges today. And as you know that Bankman-Fried is in the Bahamas. We'll wait to see how soon he will show up in a court here in New York. Bianna, Victor.

BLACKWELL: Yes. Let's go to the Bahamas now where Carlos Suarez is. You've been following this hearing. The court right now is in a break. What's happened so far?

CARLOS SUAREZ, CNN CORRESPONDENT: Yes. So, Victor, the court is in recess right now until two o'clock -- a little bit after 15 minutes after two o'clock. That's when we're told that a judge here in Nassau could decide whether or not SBF is going to be given a bond pending his extradition back to the U.S. The magistrate out here in the Bahamas said she expressed some reservation about whether or not she was going to move forward and allow SBF to post a bond in large part because she said in her experience here on the bench, she's had a number of individuals, folks who she said left the Bahamas after posting bond, no matter the amount.

The 30-year-old, he's been in court for much of the day. He's been sitting in the front row of this courtroom here behind me, really showing no emotions throughout this hearing. He's either staring at the floor and occasionally looking over at his defense attorneys.

Now earlier in the day, SBF was asked whether or not he was going to waive his right to extradition. He said he was not going to do so. He told the judge he would not be doing that. And so, there is going to be a legal process that plays out here in the Bahamas before SBF is eventually taken back to the U.S. to face charges there. It is important to note, Victor and Bianna, that Bahamian authorities, they are also conducting their own investigation into the collapse of FTX. [14:05:02]

And, in fact, the SEC complaint that was unsealed, that this morning against SBF makes a note of the allegations that he used some of the money from FTX to buy a number of expensive pieces of property here in the Bahamas. It's worth also pointing out that the 30-year-old was arrested yesterday in a gated community, a rather wealthy part of the Bahamas. He was taken to jail around six o'clock at night. He spent the night in jail. And we're told he really did not get a chance to meet with his attorneys until this morning.

Again, the judge that is handling this case could have a decision on whether or not he's going to be given bail at 2:15 this afternoon when she comes back to hear the remaining arguments and decide whether or not to move forward with granting him bond, guys.

BLACKWELL: All right, so very active parts right now. Of course, that hearing will continue and cares there at the federal prosecutor's office as we get updated. Kara Scannell and Carlos Suarez, thank you both.

Joining us now to discuss, former federal prosecutor Renato Mariotti. He's also the host of the podcast, it's complicated. Renato, good to see you. And I wanted to speak with you because this deals right in the office in which you used to work, at the SEC Fraud Office, at the DOJ. The explanation from SBF up to this point has been I didn't know. He talks about maybe naivete or just not having the information. These charges, these claims suggest something far more nefarious and deliberate.

RENATO MARIOTTI, FORMER FEDERAL PROSECUTOR: 100 percent, you know. If you are acting as somebody who's naive or you're careless, that's civil liability. But here, that's not what was charged by the Justice Department. They charged deliberate fraud, they charge very wide- ranging fraud schemes to defraud him -- not only his customers but also investors in FTX.

They also rate charged conspiracy -- wide-ranging conspiracies to commit campaign finance violations and engage in money laundering, very serious charges. And I will just say that the early indictment here of, Victor, the fact that they indicted him basically a little over a month after the collapse of FTX tells me that prosecutors are very confident in the case.

GOLODRYGA: And we should note that there was also a civil indictment filed from the SEC at the same time as well. If we can get your reaction to just the speed with which the DOJ acted here because you had said you've never seen a case of this scope proceed so quickly. This is a company that has 100 offices and companies around the world. Are you surprised with how quickly the DOJ acted?

MARIOTTI: I'm -- actually, I'm shocked. And I have worked -- when I was a federal prosecutor, I worked on wide-ranging and complex fraud cases. I worked on cases where I had international components of those cases where I was cooperating with regulators in other countries. And on the defense side, now I defend clients sometimes who are -- who are facing problems from regulators around the world. And I have never seen a case move this quickly. And this is such a large consequential case, so it's really shocking the speed in which the United States government has acted here.

And really, the only way I can make sense of the speed here is a couple of things. One is the fraud that's been laid out by the DOJ, the SEC, and the CFTC is so brazen and wide-ranging. So, I do think that that is part of -- part of what happened here was just the fraud was so brazen. But also, Sam Bankman-Fried, himself, was talking to everyone who would listen with this in thoughts and feelings and answers to all sorts of hard-hitting questions to journalists, Twitter, and really anyone else. And I think that you know, he made the job of prosecutors much easier.

BLACKWELL: Yes. Speaking of that, let's listen to a portion of an interview he granted the BBC over the weekend. This is a portion of his pseudo-defense.

(BEGIN VIDEO CLIP)

SAM BANKMAN-FRIED, FOUNDER & CEO, FTX: I knowingly commit fraud. I don't think I committed fraud. I didn't want any of this to happen. I was certainly not nearly as competent as I thought I was.

(END VIDEO CLIP)

BLACKWELL: Yes. He again, says incompetence. So, we talked about this area being lightly regulated there -- I mean it's unregulated, in large part. Is he spared any charges because of the lack of regulation that he would face if this were a big bank if he were the head of a big bank instead?

MARIOTTI: No, absolutely not. Let me make something clear to all the viewers. If you defraud people who are in the United States, whether you just defraud them with baseball cards, tulip bulbs, or crypto, the United States Justice Department will come after you and if it involves security, the SEC will as well. So, you know that does not help him here and I think he had this false sense that because there was --

BLACKWELL: Renato, let me jump in here. We want to go into the federal prosecutor's office here in New York. Let's listen.

[14:10:03]

DAMIAN WILLIAMS, U.S. ATTORNEY FOR THE SOUTHERN DISTRICT OF NEW YORK: And that arrest was executed yesterday in the Bahamas. But let me be clear. My remarks today are going to be limited. That is by design. This investigation is very much ongoing and it is moving very quickly.

But I also want to be clear about something else. While this is our first public announcement, it will not be our last. The indictment has eight counts but effectively, it outlines four different areas of misconduct. First, we alleged that Bankman-Fried defrauded customers at ftx.com, the cryptocurrency exchange he founded. Second, we look at the place where defrauded lender to Alameda Research, his proprietary hedge fund. Third, we alleged he defrauded investors in FTX. And lastly, we alleged that he violated campaign finance laws.

Now, let me say a little bit more about what we allege in the indictment. First, we charged up from 2019 until earlier this year, Bankman-Fried and his co-conspirators stole billions of dollars from FTX customers. He used that money for his personal benefit, including to make personal investments and to cover expenses and debts of his hedge fund Alameda Research.

Secondly, and relatedly we charged that Bankman-Fried lied to Alameda's lenders about the source of the money that he was using to pay those debts. Third, we charged that earlier this year in the midst of the crypto crisis, Bankman-Fried lied to investors in FTX about the fact that he had sent billions of dollars in FTX customer money to Alameda.

And fourth, we charged that Bankman-Fried violated federal campaign finance laws by causing tens of millions of dollars in illegal campaign contributions to be made to candidates and committees associated with both Democrats and Republicans. These contributions were disguised to look like they were coming from wealthy co- conspirators when in fact, the contributions that were funded by Alameda Research was stolen customer money. In all of this dirty money was used in service of Bankman-Fried's desire to buy bipartisan influence and impact the direction of public policy in Washington.

To anyone who was watching this or heard about this prosecution, if you believe that you have been a victim of these schemes, or you have information about the conduct that we've alleged in our indictment that we've unsealed today, please let us know. To any person, entity, or political campaign that has received stolen customer money, we ask that you work with us to return that money to the innocent victims. And to anyone who participated in wrongdoing at FTX or Alameda Research and who has not yet come forward, I would strongly encourage you to come see us before we come see you.

Now, let me say a word about our partners at the FBI, the SEC, and the CFTC. The women and men of the FBI are some of the finest public servants in this country. And they had been with us since day one in this investigation, and there is no one -- no one better to work with.

I want to thank the brilliant lawyers at the SEC and the CFTC. This investigation is complex, and it's sprawling. We embrace that kind of challenge here in the Southern District of New York. And we always want the CFTC and the SEC by our side when we're doing that.

And finally, I want to thank the career prosecutors from my office handling this case, Nicholas Rose and Danielle Sassoon, and their supervisors, Scott Hartman and Matthew Podolsky, the chiefs of our securities and commodities fraud Task Force. I want to acknowledge the contributions and hard work of the prosecutors from our money laundering and transnational criminal enterprises unit, including Samuel Raymond and Thane Rehn, and their chiefs, Jessica Feinstein and Tara La Morte. And I want to acknowledge the contributions from the Chief of our Public Corruption Unit, Rebekah Donaleski.

This should be very clear, but it's an all-hands-on-deck investigation here in SDNY. And I couldn't be prouder of the team that I'm privileged to lead. I now want to invite up to the podium, FBI Assistant Director in Charge, Michael Driscoll.

MICHAEL DRISCOLL, ASSISTANT DIRECTOR-IN-CHARGE, FBI NEW YORK: Thank you, Damian. So, thank you all for joining us this afternoon for this important announcement. This case came together at great speed in such that it's only possible to be standing here today through tremendous coordination and cooperation from many people and agencies.

As the indictment, today alleges Bankman-Fried knowingly defrauded customers of FTX through the misappropriation of customer deposits to pay expenses and debts of a different company.

[14:15:02]

In addition, Bankman-Fried executed deliberate transactions designed to obscure and disguise the misuse of customer funds. He preyed on his customers, the victims of this case, abusing the trust placed not only in his company, but in himself as the leader of that company. We are determined to help the victims of this case get a sense of justice, and we will continue to make every attempt to recover as much of their funds as possible. If you're willing to deceive customers and attempt to hide your actions, we will be persistent in pursuing you and ensuring you are brought to justice.

I want to thank Damian Williams and his team at the Southern District for their cooperation and partnership on this case. I just want to thank our partners at the SEC and the CFTC for their outstanding work. A word of thanks to DEA's Aviation Division, their foreign operations group for their logistics and resource assistance over the past few days, our field offices in Boston, Miami, Washington, DC, and our legal office in Bridgetown. FBI headquarters components that fed and worked on this case from Criminal Investigative Division, our third team crisis, incident response group, and our international operations division. And, of course, Special Agents from -- and forensic accountants from our securities fraud squad, as well as the money laundering squad.

The Justice Department Office of International Affairs has been an important partner in this. And, of course, as Damian noted before, his team and securities and commodities fraud, money laundering, and transnational criminal enterprise unit has been a true partner in this case. I also want to thank our international law enforcement partners.

These kinds of cases do not have happened without that kind of coordination. And I specifically want to note the assistance provided by the Royal Bahamas police force. And I want to be clear. This case is about fraud.

Fraud is fraud. It does not matter the complexity of the investment scheme. It does not matter the amount of money involved. If you mislead and deceive to take what does not belong to you, we will hold you accountable. And I'd like to thank everyone who's been working on this case for helping us adhere to that principle today. Thank you.

GURBIR GREWAL, DIRECTOR OF ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION: Good afternoon, everyone. I'm Gurbir Grewal, the director of the SEC's Division of Enforcement. Today, in a parallel civil complaint, the SEC filed charges against Sam Backman-Fried, alleging that he orchestrated a years-long scheme to defraud equity investors in FTX Trading Limited, a company that he co-founded and led a CEO until its collapse last month.

As alleged in our complaint starting in 2019 and continuing through November 2022, Bankman-Fried raised more than $1.8 billion from equity investors on the basis of lives. You see FTX operated behind a veneer of legitimacy that Bankman-Fried created by among other things, repeatedly touting to investors that FTX is top-notch automated risk controls that he claimed protected customer assets, and by repeatedly claiming that those assets were at all times safe, segregated and secure.

But as we allege in our complaint, that veneer wasn't just thin. It was also fraudulent. Because in reality from FTX's inception in 2019, Bankman-Fried began secretly and improperly diverting FTX customer funds to his crypto hedge fund, Alameda Research. And as alleged in our complaint, he then misused those funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.

Bankman-Fried's claims about FTX as sophisticated risk controls and other customer protections were simply bogus. Similarly, his representations to FTX investors and trading customers concerning Alameda were also part of that carefully crafted veneer and were similarly false and misleading. He frequently claimed that Alameda was just another customer with no special privileges at FTX.

But in truth, Bankman-Fried directed that Alameda be exempt from the very risk management measures that he touted to FTX investors and to its customers. He also provided Alameda with a virtually unlimited line of credit, funded by FTX customers. And he also diverted billions of dollars and customer funds from FTX to Alameda. Bankman-Fried's entire house of cards started to crumble as crypto asset prices plummeted in May of 2022 and as Alameda's lenders demanded repayment on billions of dollars in loans.

[14:20:00]

But to continue propping up his empire, we alleged that Bankman-Fried diverted billions more in FTX customer assets to Alameda, even as it was increasingly clear that Alameda and FTX could not make those customers whole. In fact, through the summer of 2022, he deferred -- he diverted hundreds of millions more in FTX customer funds to Alameda, which he then used for additional venture investments, and for loans to himself and to other FTX executives. All the while, he continued to make misleading statements to investors about FTX's financial condition, and about its risk management.

And even in November 2022 faced with billions of dollars and customer withdrawal requests that FTX could not fulfill, Bankman-Fried misled investors from whom he sought to steal more money to plug the multibillion-dollar holes that he had created. This brazen multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliates filed for bankruptcy on November 11, 2022. That collapse has had far-reaching consequences for FTX customers, for its investors, and for its counterparties. And our investigation into those consequences into those individuals and entities involved remains ongoing.

But one immediate takeaway from today's announcement should be that non-compliant trading platforms pose dramatic risks to both their investors and to their customers. Among other things, they don't provide them with the same robust level of disclosures and protections against fraud and conflicts of interest. That's what traditional U.S. registered Securities Exchanges provide, so it's imperative that non- compliant platforms come into compliance. But as chair Gensler has made clear, the runway is getting shorter for them to come in and to register with us. And for those who do not, the Enforcement Division stands ready to take action.

I'd like to recognize the incredible team from our crypto assets and cyber unit and from across our division responsible for today's action. Devlin Sue, Ivan Snyder, David Brown, Brian Huchro, and Pasha Salimi investigated this matter under the supervision of Amy Hartman, Michael Brennan, Jorge Tenreiro, and David Hirsch. Amy Burkart and David D'Addio will lead the -- will lead the litigation against Bankman-Fried under the supervision of Ladan Stewart and Olivia Choe.

Finally, I want to commend our partners here at the Southern District of New York under the leadership of U.S. Attorney Damian Williams, and our partners at the FBI and the CFTC. This is yet another strong example of the collaboration that you see before you this afternoon. With that, I'll turn it back to U.S. Attorney Williams. Thank you.

WILLIAMS: I'd like to welcome Gretchen Lowe from the CFTC.

GOLODRYGA: -- From the SDNY, the FBI, and the SEC going through the criminal charges against Sam Bankman-Fried and going into detail about the scheme that he had orchestrated for years now to defraud investors. We're talking eight criminal charges against him. And we're also talking about campaign finance laws, wire fraud charges, defrauding investors, lenders, civil charges filed by the SEC as well.

I want to go back to Renato Mariotti and bring him back into the conversation. Renato, I'm curious what stood out to you because what I heard was that we heard officials say for other investors to reach out to them if they feel that they've been defrauded. I'm curious, what's the likelihood that they will get their money back even a penny's worth given that the majority of the money initially has to go back to the creditors, and we have over a million creditors involved here?

MARIOTTI: Yes. It's a very difficult situation. And it's not typical for fraud cases. Usually, the fraudster you know spends a lot of the money and there's a fraction left, and the decision about how to distribute those funds is often very difficult. At times, I've represented victims in cases like this and it's very challenging because it can sometimes pit victims against one another. I think another important thing that you heard a moment ago is a call for those who are involved in wrongdoing to come forward as well. And put to cooperate with authorities, which I thought was very interesting, as well.

BLACKWELL: Very stark line here from the U.S. attorney when he says, come see us before we come see you, to those people who might be involved. Renato, the degree of detail that is in specifically the civil document from the SEC. How much does that tell you about how many people and how much information they were already given in the last couple of weeks?

MARIOTTI: Yes. I will say, Victor.

[14:25:01]

One thing that I really gleaned from the SEC and also from the CFTC civil complaint, there's a very wide-ranging investigation going on here. I know and I've worked with many of the people whose names were mentioned a moment ago, on investigations when I was a federal prosecutor. And there's just a lot of people on this case.

This is an -- I think there's the words were all hands on deck. And I think that's revealed in the civil complaints. Just a massive amount of data and really a wide-ranging scheme that was charged here.

GOLODRYGA: It seems as if -- and we talked about the speed with which this all came together and how that stood out to you. It seems as if these prosecutors feel that they've got to establish for themselves a strong case in terms of determining what the intent was here because we've heard all of these interviews from Sam Bankman-Fried saying that this is something he didn't know was happening. He didn't mean to defraud investors. He says "I just effed up."

But from the details that are laid out in these indictments, it looked as if he specifically knew what he was doing by transferring funds regularly to Alameda Research, which is that hedge fund that he also co-founded.

MARIOTTI: Yes, that's right. I mean, you don't trip and fall and commit a fraud. It's not a mistake that you just make. It's an intentional choice. And really, the problem for Mr. Bankman-fried is by making all of the statements. The ones that are self-serving will never make it into the trial because they're going to be hearsay under the rules of evidence.

But the prosecutor is -- prosecutors are going to be able to take the bits and pieces of the statements that do incriminate him that are problematic, and they'll be able to put all those in as admissions against him. So, he's really painted his attorney into a corner.

I think his defense team is going to have a very difficult time with this case. And I think that that's one reason why they moved so quickly. It's not easy to take a team that is as big as they have. And to put something like this, put a marker down and say that they're going to take this case on this early and just weeks after the collapse of FTX. But I think it's -- it really says something about the scale of the fraud and the measure to which Mr. Bankman-Fried hurt himself via his incriminating words.

GOLODRYGA: We will continue to follow this court hearing in Nassau. Renato, thank you so much for joining us. We appreciate it.

BLACKWELL: Thanks, Renato.

A big indication today that inflation is finally easing, the consumer price index which tallies what Americans pay for goods and services, shows prices rose 7.1 percent in November year to year. Now that is still high, yes, but it's the lowest this figure has been since last December.

GOLODRYGA: And it will factor into the Federal Reserve's decision on further interest rate hikes. This morning, President Biden said this latest data is the reason for optimism.

(BEGIN VIDEO CLIP)

JOE BIDEN, PRESIDENT OF THE UNITED STATES: Inflation is rising at double digits in many major economies around the world. Inflation is coming down in America. In fact, this new report is the fifth month in a row where annual inflation has fallen in the United States. Make no mistake prices are still too high. We have a lot more work to do. But things are getting better and headed in the right direction.

(END VIDEO CLIP)

GOLODRYGA: CNN's Matt Egan is here to help break this down. So, Matt, we now have a consistent indication that inflation is cooling month after month. We are expecting that interest rate hike tomorrow from the Fed of about 50 basis points. But does the data we've seen now suggests perhaps we could see a change by 2023?

MATT EGAN, CNN REPORTER: Well, Victor and Bianna, it does suggest that there is a growing body of evidence that points to the idea that the worst of this inflation crisis may be behind us that inflation may have peaked this summer and is moving towards something closer to healthier levels. Today's report showed that consumer prices up by 7.1 percent year over year. That was cooler than expected. It is the fifth straight month of cooling inflation. It's the lowest figure for that metric all year. Core prices month over month were the lowest increase in 15 months.

But I do think we have to be careful you know and not declare victory here. We don't know for sure that this trend will continue. And we also don't know how long it's going to take to get inflation back to the 2 percent level that's considered healthy. And some parts of the economy are still running hot. Food prices have continued to rise sharply. We've seen egg prices, butter, flour, all of them up sharply. Shelter also is another sore spot.

You know it's funny because if you had told me two years ago that Wall Street and the White House would be celebrating 7 percent inflation, I would have said no way. But everything is relative. I mean inflation was above 9 percent earlier this year. The trend is certainly going in the right direction and that is good news for families who've been really hurt by the high cost of living. And it is also good news for the Federal Reserve.

The Fed has been slamming the brakes on this economy, rapidly raising borrowing costs to try to get inflation under control. Now as we speak, the Fed is meeting and debating what to do next.