The Texas State Securities Board has published an official notice that a hearing will commence at 9:00 AM on February 2, 2023, before an Administrative Law Judge. The hearing is being held via videoconference for the purpose of determining whether to issue a proposal for decision for the entry of a Cease and Desist Order, an order assessing an administrative fine, and an order for paying refunds against Sam Bankman-Fried.

Sam Bankman-Fried is a founder and has controlled, either directly or indirectly, various companies and businesses involved in the financial services and digital assets markets. These entities include West Realm Shires Services Inc. dba FTX US, FTX Capital Markets, LLC, and FTX US Derivatives LLC fka LedgerX.

FTX US was purportedly regulated as a Money Services Business with FinCEN and as a money transmitter with various states and touted these licenses when offering Texans the opportunity to deposit fiat or cryptocurrencies in accounts that generated yield (the “EARN accounts”).

FTX Capital Markets, LLC, is registered as a dealer with the Texas State Securities Board. Texans were able to buy and sell publicly traded stock through the firm.

FTX US Derivatives LLC is a cryptocurrency exchange purportedly regulated as a derivatives clearing organization, designated contract market and swap execution facility by the Commodity Futures Trading Commission. Texans were able to buy and sell various cryptocurrencies, such as Ethereum (ETH) and Bitcoin (BTC), through the firm.

On November 11, 2022, FTX US and more than 130 other entities tied to Respondent filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware.

Sam Bankman-Fried resigned from various roles and no longer is an officer and manager of the debtors.

On October 14, 2022, the Texas State Securities Board, through its counsel, the Texas Attorney General’s Office, objected to Voyager’s motion for entry of an order authorizing FTX US’s purchase of assets subject to the Voyager bankruptcy. In support of the objection, the Texas State Securities Board filed a Declaration of Joseph Jason Rotunda, Director of Enforcement of the Texas State Securities Board.

The Declaration described the EARN accounts and indicated the Enforcement Division of the Texas State Securities Board was investigating FTX for violations of the Securities Act in connection with its offer and sale of EARN accounts.

The EARN accounts are investment contracts, evidences of indebtedness, and notes and are therefore regulated as securities as that term is defined by Section 4001.068 of the Securities Act.

Respondent violated Section 4003.001 of the Securities Act by offering and selling securities in Texas that were not registered or permitted for sale in Texas. He also allegedly violated Section 4004.051 of the Securities Act by offering and selling securities in Texas without first being registered as a dealer or agent.

The regulator says that, in connection with the offer of EARN accounts in Texas, Respondent intentionally failed to disclose material facts, including but not limited to the amount of money or cryptocurrency devoted to permissive uses, the identity, nature, and creditworthiness of borrowers, the type and nature of transactions involving digital assets, equities, options, and futures, the risks associated with individual digital assets, equities, options, and futures, the profits and/or losses derived from transactions, and financial information reflecting the assets and liabilities and cashflow.

After filing the Objection and Declaration, the Enforcement Division communicated with FTX US and FTX US provided various representations relating to the EARN accounts. The information provided by FTX US does not impact the conclusion that the EARN accounts are regulated as securities in Texas. FTX US, moreover, has not yet provided requested information that would verify the accuracy of the information provided to the Enforcement Division.

The Enforcement Division seeks a proposal for decision for the entry of an order that Respondent immediately cease and desist violating Sections 4003.001 and 4004.051 of the Securities Act and Respondent immediately cease and desist from engaging in fraud in connection with the offer or sale of securities in Texas.

The regulator is also praying the Honorable Administrative Law Judge issue a proposal for decision that orders Respondent to pay a refund of principal to Texans who invested in unregistered EARN accounts as set forth in Section 4007.108 of the Securities Act.

The Enforcement Division is further requesting a proposal for decision for the entry of an order that assesses an administrative fine against Respondent pursuant to Section 4007.106. This prayer is for an administrative fine that does not exceed the greater of $20,000 per violation or the gross amount of any economic benefit Respondent gained as a result of violating Sections 4003.001 and 4004.051 of the Securities Act or as a result of engaging in fraud in connection with the offer or sale of securities in Texas. In any event, this prayer includes an additional amount of not more than $250,000 for each illegal and fraudulent act or practice committed against Texans 65 years of age or older.

The Enforcement Division prioritizes the payment of refunds to investors over the assessment of an administrative fine. It will therefore pray the Honorable Administrative Law Judge prioritize the payment of refunds to investors and subordinate any assessment of an administrative fine until or unless Texans receive a return of principal deposited in EARN accounts.