The swift and messy demise of Sam Bankman-Fried’s FTX crypto empire
If there is anything peculiar about the crypto world, it is how quickly large companies and large fortunes can be spun out of nothing – and just as quickly collapse. Nowhere has that been more evident than the meteoric rise and fall of crypto exchange FTX and its CEO and founder, Sam Bankman-Fried.
Bankman-Fried founded his crypto hedge fund Alameda Research in November 2017, with FTX established in May 2019. By early 2022, it had scaled to a multibillion-dollar operation, and bankman-Fried was at the forefront of crypto executives and political donors alike. .
But when a leaked company balance sheet revealed shaky financial foundations, rival exchange Binance announced it would sell its holdings of FTT, the symbol associated with the FTX crypto exchange. That triggered the crypto equivalent of a bank run, as customers quickly moved to withdraw their money.
FTX couldn’t cover the outflows, and the $32 billion crypto empire evaporated overnight, along with Bankman-Fried’s alleged $12 billion personal fortune and his reputation as a crypto genius. The collapse sparked a series of civil and criminal investigations, and Bankman-Fried has been charged by the Department of Justice with 13 felonies.
The broad strokes of the FTX debacle may be familiar, but right now there are still some blank spots on the canvas. Some bizarre, disturbing and occasionally hilarious details have emerged in the court documents, but important questions remain unanswered.
Billions of dollars in cash and crypto assets remain unaccounted for. In an early bankruptcy filing, newly installed CEO John J. Ray III — the cleanup artist brought in to deal with this mess — wrote that there wasn’t even a verified list of FTX employees.
As a corporate disaster, FTX is almost without precedent – a sprawling global network of more than 100 companies, some of them with little apparent purpose except perhaps to shuffle money around, all run by a motley crew of supposed financial savvy from a luxury penthouse in the Bahamas.
The US government has charged Samuel Bankman-Fried, the founder of now-defunct cryptocurrency exchange FTX, with a number of financial crimes after being arrested in the Bahamas. He faces decades in prison if convicted.
It quickly scaled to a multibillion-dollar operation, and banker-Fried was vaulted into the front ranks of crypto executives and political donors alike, turning FTX into a household name backed by a host of celebrities. In the second week of November 2022, just a few years after it was founded, the FTX crypto empire had gone to ashes.
The investigation is moving as quickly as FTX’s collapse. Several FTX executives — Bankman-Fried’s friends and corporate lieutenants — have pleaded guilty to serious charges involving fraud, money laundering, campaign finance violations and other charges.
They have implicated Bankman-Fried in a series of financial crimes that could send him to prison for the rest of his life. Still, it’s all firmly in “alleged” territory: Bankman-Fried has pleaded not guilty to all charges, including a recently filed charge that he bribed $40 million in crypto payouts to Chinese officials to unlock $1 billion in funds frozen on a Chinese crypto exchange.
His trial is scheduled to begin in October, and while Bankman-Fried’s legal fate remains uncertain, his company has become an unexpectedly fascinating crime scene.
Where’s the money, Sam?
In some ways, it’s an object lesson in how not to run an alleged criminal enterprise, at least if you don’t want to get caught.
FTX’s rapid success—the huge amount of money it accumulated via venture capital, customer deposits and other sources—potentially contributed to some reckless spending. One of the major tasks of FTX’s new management has been to explain where all the money and crypto went. It has not been easy.
Perhaps $12 billion of FTX client funds were allegedly diverted to Alameda. According to government filings, this cash hoard was used to cover Alameda’s trading losses, buy real estate (including in the names of Bankman-Fried’s parents), make investments in other crypto startups, and provide billions of dollars in “personal loans” to Bankman-Fried and top executives .
Some of the money – tens of millions of dollars – may have gone to 196 Members of Congress which received donations from FTX and its executives, according to reporting from Coindesk, a crypto industry news outlet.
Like any bankrupt company, FTX left behind a messy ledger of debts and loans, covering everything from company parties to complex deals with now-bankrupt rivals. It will take years before the bankruptcy process unfolds, and unfortunately many of the private customers will not be made whole.
According to the Securities and Exchange Commission, Bankman-Fried used Alameda Research as its “personal piggy bank“, and the money was splashed around a lot.
In a November filing, the company said it owed more than $4.6 million to Amazon Web Services, but also $55,319 to Jimmy Buffet’s Margaritaville Beach Resort in Nassau.
FTX lacked sophistication
FTX’s legal afterlife – the many lawsuits, trials, bankruptcy hearings and money claims – will ultimately last much longer than the company itself was in business.
That was not the case for other infamous corporate disasters like Enron or Nortel, which Ray, the new FTX boss, was also brought in to handle after they imploded.
Nortel was a telecommunications company for more than a century, since the early days of telephones. Enron lasted about 37 years before collapsing, becoming synonymous with fraudulent financial engineering.
Bernie Madoff managed to run his Ponzi-based scam for decades, raking in billions of dollars and establishing a reputation as a financial genius with an instinctive understanding of markets.
Madoff ran a long-running, hugely successful criminal operation, and he did so in a well-regulated financial market, to the bewilderment of his peers.
Marc Litt, a former assistant U.S. attorney for the Southern District of New York who prosecuted Madoff, says the sophistication of Bankman-Fried’s alleged fraud pales in comparison to Madoff’s crimes.
“From what I know about it, it’s pretty much a backyard scam where someone has promised to do one thing with people’s money and has broken those promises and done something else.”
If the alleged FTX fraud was carried out with glitz and hype and a flood of paid endorsements, the Madoff fraud took more care and cunning. Madoff “had to do all kinds of maneuvers over the years to avoid detection, including generating all kinds of false statements,” Litt said.
Like any smart con man, Madoff kept his circle small, hired smart people who would be loyal and paid them well. Madoff didn’t care about Ivy League degrees; he wanted discretion and street smarts, not hustlers who would jump to Goldman Sachs or JP Morgan at the first opportunity.
The social network
In The Naked Emperor, the CBC podcast about the FTX drama, fraud is described as a social crime that affects people beyond its immediate victims and flows through social relationships and professional networks.
According to Litt, Madoff’s fraud was “very much based on his social circle and kind of elite access to his investment fund.”
It was considered a privilege to get into Madoff’s fund. Once you’re in the special club, you wouldn’t want to withdraw your money – with Madoff’s extraordinary returns, that would seem financially foolish.
It may be easier to get away with defrauding strangers. Most of Bankman-Fried’s alleged victims are the customers of his crypto exchange, although some venture capitalists and former business partners have also come forward as victims.
Bankman-Fried’s circle may have been small and tight-knit, but so far former company executives Nishad Singh, Caroline Ellison and Gary Wang have all pleaded guilty and promised to cooperate with prosecutors.
They were close friends with Bankman-Fried, part of the group who lived in the luxurious Albany resort in Nassau.
They have shared key details, such as how Wang allegedly coded a backdoor that would allow Bankman-Fried and his associates to move funds from FTX to Alameda without leaving a trace.
“For fraud cases like this, it’s almost always necessary to have an insider, to tell the story, to bring the documents to life, and to explain what was going on behind the scenes and what was going on in all the conversations that surrounded these money movements and solicitations ,” Litt said, noting that a fraud conviction often requires proof of intent.
Right now, Bankman-Fried’s former colleagues are telling the rest of their stories to prosecutors. These details, known only to his closest friends and colleagues, could be what convicts the former CEO of FTX at trial.
Manhattan U.S. Attorney Damian Williams says two former associates of FTX founder Sam Bankman-Fried have pleaded guilty to fraud charges and are cooperating with authorities.
