The collapse of Sam Bankman-Fried’s $40 billion crypto empire shocked the world with its speed and scale. In mere days, the company he founded, FTX, fell from its perch as a top cryptocurrency exchange and filed for Chapter 11 bankruptcy. Customers who deposited funds on FTX — sometimes their life savings — learned that billions had gone missing. A viral tweet from a crypto executive read: “The insanity of Theranos, speed of Lehman and scale of Enron.”
What are Bankman-Fried’s charges and his alleged criminal conduct?
Next week, Bankman-Fried will finally face the music. His criminal trial is scheduled to begin Tuesday, October 3 in New York’s Southern District, the same courthouse that prosecuted famed Ponzi schemer Bernie Madoff. Bankman-Fried faces seven felony counts, including conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering. The first of potentially two trials is expected to run approximately four to six weeks. Bankman-Fried is tentatively scheduled to stand trial again in March 2024, where he may face an additional four counts, including conspiracy to commit bank fraud and conspiracy to bribe a foreign government official.
Prosecutors have alleged Bankman-Fried “misappropriated and embezzled” FTX customer deposits. They also allege he used billions of dollars in stolen funds to enrich himself and to fund speculative investments. Such investments include the $460 million stake Bankman-Fried purchased in the retail trading app Robinhood. Prosecutors also say Bankman-Fried funneled over a hundred million dollars in campaign contributions to both Democrats and Republicans in an attempt to influence cryptocurrency regulation. Additionally, they claim Bankman-Fried made “false and fraudulent statements” to FTX’s investors, including falsifying financial documents. If convicted of all counts, 31-year-old Bankman-Fried could face up to 115 years in prison. He has pleaded not guilty.
How did FTX collapse?
Just a year ago, FTX seemed unstoppable. Bankman-Fried amassed an estimated $26 billion fortune according to Forbes, and regularly appeared at Congressional hearings advocating for customer protections in the crypto industry. The secretive crypto hedge fund he founded, Alameda Research, appeared to be making a killing in the crypto markets. FTX had also purchased the naming rights to the Miami Heat’s basketball stadium and even bankrolled a Super Bowl commercial starring comedian Larry David. It hired celebrities Tom Brady, Gisele Bundchen, Naomi Osaka, and Shaquille O’Neal to advertise its platform and lure retail customers into buying crypto.
How did Bankman-Fried end up in such spectacular shambles? Last November, FTX suffered a massive run on customer deposits after a report circulated that Alameda Research held billions of dollars worth of FTT tokens, a cryptocurrency issued by FTX. Rival crypto exchange founder Changpeng Zhao, known as “CZ” tweeted that his company, Binance, would be selling a large swath of FTT tokens. Customers raced to cash out their funds. Amid the run on deposits, Bankman-Fried, in a since-deleted tweet, said, “FTX is fine. Assets are fine.” Customer funds were not fine, and FTX had a $8 billion hole in its balance sheet. FTX halted withdrawals on November 8 and filed for bankruptcy three days later.
Who are the key witnesses?
Over the past several months, prosecutors have built up a case against Bankman-Fried and are expected to come armed with several key witnesses. One such witness is Caroline Ellison, the CEO of Alameda Research and a former girlfriend of Bankman-Fried’s. Just days after Bankman-Fried was indicted, Ellison pleaded guilty to a set of seven counts that are nearly identical to the charges Bankman-Fried faces. The Wall Street Journal reported that Ellison told colleagues that Bankman-Fried had been aware of the use of customer deposits to pay back Alameda creditors, as were top FTX executives Gary Wang and Nishad Singh.
Along with Ellison, Wang and Singh have also pleaded guilty. Wang, a FTX co-founder and its chief technology officer, has pleaded guilty to four counts, including wire fraud, conspiracy to commit wire fraud and conspiracy to commit securities fraud. Prosecutors allege Bankman-Fried and his co-conspirators “secretly introduced special features into FTX’s computer code, which permitted Alameda to spend and withdraw unlimited amounts of money from FTX.” Bankman-Fried directed Wang to alter FTX’s computer code to allow Alameda to borrow unlimited customer funds from FTX, according to prosecutors.
Two months after Wang and Ellison entered into guilty pleas, FTX co-founder and head of engineering, Singh, also joined their ranks. Singh pleaded guilty to charges of wire fraud, commodities fraud, securities fraud, money laundering and campaign finance violations. Prosecutors allege Bankman-Fried “misappropriated customer money” to help fund over $100 million in political donations, misrepresenting the source of the funds by making the contributions in the name of other FTX executives, including Singh. “By directing donations through Singh and another FTX executive, Bankman-Fried was able to evade restrictions on certain types of political contributions, and thereby maximize FTX’s political influence,” according to his indictment.
The three guilty pleas ramp up the pressure for Bankman-Fried, who will see his former friends and ex-girlfriend testify against him. Ellison, Wang, and Singh all lived with Bankman-Fried in a $40 million penthouse in the Bahamas. It’s a real-life prisoner’s dilemma and the alleged co-conspirators have defected.
What has Bankman-Fried been up to since FTX filed for bankruptcy?
After FTX declared bankruptcy on November 11, Bankman-Fried remained holed up in his penthouse, embarking on a bizarre apology tour. Bankman-Fried spoke with the New York Times, Good Morning America, the Wall Street Journal, Bloomberg, Forbes, Puck, among others. He also spoke in several Twitter Spaces. He admitted that he had “fucked up,” but maintained that he hadn’t intentionally commit fraud. In one such interview, he claimed FTX’s failure was “a massive failure of oversight of risk management.”
After the media blitz, Bahamian authorities came knocking. On December 12, Bankman-Fried was arrested and thrown in a Bahamas prison for several days before he was willingly extradited to the United States under the custody of the FBI. A New York judge granted him bail and he entered into house arrest at his parents’ Palo Alto home under a $250 million bond.
Bankman-Fried’s stint under house arrest was anything but quiet. He continued to make public statements proclaiming that the U.S. arm of his exchange was solvent, and also invited reporters to his home and published a Substack blog. In his blog, Bankman-Fried claimed that the law firm overseeing the bankruptcy was misleading the public. He also pushed the boundaries of his bail conditions. In February, a judge gave him a warning for using a VPN, a secure internet network which obfuscates to the authorities which websites he accesses. (His lawyers claim it was to watch the Super Bowl.) A judge also barred Bankman-Fried from using the encrypted messaging app Signal after he reached out to former FTX general counsel Ryne Miller to “vet things with each other.” He later leaked the private writings of former girlfriend Ellison to the New York Times, presumably in an effort to discredit her. In August, a judge ruled it as witness tampering and revoked his bail.
Since then, Bankman-Fried has been jailed at Brooklyn’s Metropolitan Detention Center. His lawyers have repeatedly pushed for his release, saying the jail conditions did not not allow for Bankman-Fried to properly prepare for his defense. With the trial mere days away, Bankman-Fried’s next hope is a sympathetic jury.