US Securities Regulator Probes FTX Investors' Due Diligence -sources

The U.S. Securities and Exchange Commission (SEC) is seeking details about FTX investors' due diligence, according to two sources familiar with the inquiry, as fallout from the crypto firm's collapse spreads.

The SEC has so far brought charges against three of FTX's top executives, accusing them defrauding investors in the crypto trading platform that has since filed for bankruptcy.

The SEC is now asking financial firms what diligence policies and procedures they have in place, if any, and whether they followed them when choosing to invest in FTX, the sources said.

The sources declined to be identified as the inquiries are not public.

Reuters was not able to determine how many firms were fielding such queries from the regulator. The SEC has alleged the Bahamas-based crypto exchange raised more than $1.8 billion from equity investors, including 90 U.S.-based investors, since May 2019.

The SEC inquiries do not indicate wrongdoing and Reuters could not ascertain if the firms are targets of the probe. But the sources said the SEC inquiries may mean the venture capital firms and investment funds that invested in FTX could face regulatory scrutiny even if they are considered victims of Bankman-Fried's alleged scheme. At issue would be whether the firms met their fiduciary duties to their own investors, they said.

Reuters and others previously reported that U.S. authorities sent document requests to investors and potential investors in FTX, seeking details on their communications with FTX officials.

Those inquiries predated last month's SEC charges against FTX founder Sam Bankman-Fried for allegedly defrauding such investors. The SEC's inquiries to investors have continued after SEC filed those charges, and the agency has now shifted its focus to the firms' diligence, the sources said.

A spokesperson for the SEC declined to comment.

FTX, once deemed a white knight for the crypto industry, crumbled in less than a fortnight due to a liquidity crunch. FTX filed for bankruptcy in November amid what its new CEO later described as a "complete failure of corporate controls".

The SEC as well as the Justice Department and Commodity Futures Trading Commission have filed fraud charges against FTX founder and former CEO Sam Bankman-Fried. On Tuesday, he pleaded not guilty to criminal charges including wire fraud and money laundering on Tuesday.

Two former top associates, former Alameda chief executive Caroline Ellison and former FTX chief technology officer Gary Wang, have both pleaded guilty.