The trial of disgraced crypto tycoon Sam Bankman-Fried is set to open on October 3 in New York after a whirlwind year.
Since the collapse of his cryptocurrency exchange FTX and its partner hedge fund Alameda Research in November last year, ex-CEO Bankman-Fried was quickly investigated by federal prosecutors and the United States Securities Exchange Commission (SEC) before he was extradited from the Bahamas in early January.
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Bankman-Fried now faces multiple money laundering and fraud charges, but prosecutors also allege that he used his $32bn empire to influence the US political establishment, Hollywood and even Chinese officials.
Initially allowed to live with his parents in California on a $250m bail, that privilege was revoked after he was accused of witness tampering in August, and he has been lodged in a Brooklyn jail since.
What are the charges against Bankman Fried?
As he heads into court tomorrow, Bankman-Fried, 31, faces seven counts of wire fraud, securities fraud and money laundering or conspiracy to commit these crimes. Prosecutors will also present evidence that Bankman-Fried violated campaign finance laws as he used stolen funds to pay for $100m in political donations.
If found guilty, Bankman-Fried faces over 100 years in federal prison, where inmates do not get massive sentence reductions for “good behaviour”.
Following further investigation, Bankman-Fried is now facing a second trial in March 2024 on five additional charges. Among them is an allegation that Bankman-Fried violated the US Foreign Corrupt Practices Act by paying a $40m bribe to one or more Chinese officials to unfreeze Alameda Research accounts.
What was FTX and what was its relationship with Alameda Research?
FTX was a cryptocurrency exchange founded in 2019 by Bankman-Fried and Gary Wang, the company’s chief technology officer, after raising $1.8bn from investors.
While crypto fans can choose from several exchanges, FTX was promoted as a “safe, responsible crypto asset trading platform”, according to an SEC complaint, with Bankman-Fried “specifically touting FTX’s sophisticated, automated risk measures to protect customer assets” like a “proprietary ‘risk engine’”.
Prosecutors, however, allege that FTX’s real purpose was to prop up Bankman-Fried’s other company, Alameda Research, a cryptocurrency hedge fund he founded in 2017.
FTX allegedly supplied Alameda with a “virtually unlimited line of credit” secretly funded with billions of dollars diverted from FTX customers as well as FTX’s “overvalued” token, FTT.
Following the charges in December, SEC Chair Gary Gensler said Bankman-Fried “built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto”.
Both companies filed for bankruptcy in November 2022, wiping out billions in FTX customer assets.
What went wrong?
Bankman-Fried and his associates may have carried on their activities for much longer if it weren’t for a few key moments in 2022.
First came the global downturn in the crypto industry that began when the US Federal Reserve started raising interest rates at the start of 2022 to tame inflation. As a string of cryptocurrencies, including so-called low-risk “stablecoins” went bust, Alameda was forced to borrow more money from investors to stay afloat.
While it is not unusual for companies to borrow additional funds from investors when times get tough, in this case, the company also diverted FTX customer funds without permission through a secret backdoor to create a $65bn credit line.
But Bankman-Fried and his associates didn’t just use the money to avoid margin calls when investors would demand the company show they could pay their debts or risk a selloff. They were also paying for a massive spending spree throughout 2021 and 2022 that included $200m in luxury real estate in the Bahamas, $100m in US campaign contributions, and millions more on travel, food and hotels
Then came the cryptocurrency trade publication CoinDesk, which managed to get its hands on one of Alameda Research’s balance sheets in late 2022. The CoinDesk reporter and editor duo later said they initially did not know what they had gotten their hands on, but their series of scoops revealing the “shaky foundations” of Alameda Research unleashed an avalanche of reporting and multiple investigations.
Finally came Bankman-Fried rival, Changpeng Zhao, the CEO of the massive Binance crypto exchange, who sold the company’s share in FTX within days of the CoinDesk reports. As other customers, too, tried to cash out, FTX ran out of funds to pay back investors.
While it had appeared for a moment that Binance might bail out FTX, Binance changed its mind and both FTX and Alameda were forced to file for bankruptcy.
In total, FTX reportedly lost nearly $9bn in customer assets, of which a reported $5bn has been recovered so far during its bankruptcy.
The scandal has not only hit the cryptocurrency and venture capital world but also Washington, DC, where Bankman-Fried lobbied “members of Congress and other high-level government officials to promote cryptocurrency regulation that would favour his business and personal interests”, according to his indictment.
The case has also embarrassed numerous celebrities like comedian Larry David, supermodel Gisele Bundchen, and A-list athletes like Naomi Osaka, Stephen Curry and Tom Brady, who all signed on to endorse FTX and are facing legal action for not disclosing their financial ties. They may also be required to return their payments.
In addition to Bankman-Fried’s trial, which starts October 3, his closest deputies are also facing their own legal drama. They include FTX co-founder Gary Wang, top FTX executive Ryan Salame, FTX head of engineering Nishad Sing, and Alameda Research CEO Caroline Ellison, who was also Bankman-Fried’s romantic partner.
Unlike Bankman-Fried, the four pleaded guilty and negotiated deals with the prosecution that included restitution of payments and assets.
In a recent turn of events, Bankman-Fried’s parents are also now under scrutiny. The two Stanford Law professors, Joseph Bankman and Barbara Fried, are being sued by FTX, now under the leadership of CEO and bankruptcy specialist John J Ray, in a bid to recover millions of dollars in gifts and misappropriated funds channelled to them.
Ray told a Delaware bankruptcy court last year that FTX was the worst case of corporate governance and oversight in a 40-year career that included a stint at Enron – once the watchword for corporate malfeasance – recovering investor assets.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said in a court filing.
“From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”