With Sam Bankman-Fried's trial still months off, the investigations into his FTX empire has led to an ever growing number of feuds and revelations, but even less money than believed.
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Five years ago, Sam Bankman-Fried was an unknown crypto trader who began making a fortune arbitraging the price of Bitcoin in the U.S. and Japan, where it was 10% higher.
That was 2017. By 2019, he expanded beyond his crypto trading firm — Alameda Research — to create FTX. In three years, the crypto exchange had become the second largest worldwide. He had built a $40 billion crypto empire, and $21 billion of it was his.
By 2022, the 30-year-old with an increasingly recognizable mop of curly hair and a near-absolute refusal to wear full-length pants was one of the youngest self-made billionaires in the world.
Bankman-Fried donated $5 million to Joe Biden's presidential campaign and had promised $100 million in campaign contributions by 2024. He was unofficially leading the industry's lobbying efforts to influence crypto regulations. FTX's name was on the stadium of the NBA's Miami Heat, and he was making TV commercials with legendary quarterback Tom Brady.
As recently as September, CNBC noted that Bankman-Fried was being "touted by some as the next Warren Buffett" and "the JPMorgan of crypto" for bailing out insolvent crypto lenders.
A Growing Hole
But the Bankman-Fried saga wasn't over by a longshot.
On Nov. 3, Reuters reported that some $10 billion in FTX customer funds had been transferred to Alameda in an attempt to prop up the firm after bad investments. At least $1 billion was missing. Then $432 million was abruptly drained from wallets belonging to FTX and its much smaller American cousin FTX.US as the new managers took over — a hack considered a likely inside job, although no one has suggested by who.
The FTX Debtors released a report in early March saying there were even fewer assets than expected — less than $700 million, which it called " a massive shortfall."
Originally indicted on eight charges, Bankman-Fried now faces 12 — including fraud, conspiracy, violating anti-money laundering regulations and campaign finance violations.
In a superseding indictment last month, the Justice Department alleged that Bankman-Fried engaged in a "pattern of fraudulent schemes that victimized FTX customers, investors, financial institutions, lenders, and the Federal Election Commission." It added:
"Exploiting the trust that FTX customers placed in him and his exchange, Bankman-Fried stole FTX customer deposits, and used billions of dollars in stolen funds for a variety of purposes, including, among other things, to support the operations and investments of FTX and Alameda; to fund speculative venture investments; to make charitable contributions; to enrich himself; and to try to purchase influence over cryptocurrency regulation in Washington, D.C. by steering tens of millions of dollars of illegal campaign contributions to both Democrats and Republicans."
The Fraud Allegations
The fraud charges are:
- Fraud on customers of FTX
- Fraud on customers of FTX in connection with the purchase and sales of derivatives
- Securities fraud on investors in FTX
- Wire fraud on lenders to Alameda Research
Each of those charges is paired with a similar conspiracy charge, making up the first eight charges.
A core factor in Bankman-Fried's arrest is the alleged commingling of funds owned by FTX customers and by FTX, FTX.US and Alameda Research. FTX had specifically promised customers this would not happen.
This was made possible, prosecutors and regulators have said, by a software "back door" allegedly created at Bankman-Fried's direction that allowed the transfer of FTX customer funds to Alameda while bypassing the company's internal legal and compliance teams.
Beyond that, Alameda Research had special privileges at FTX for its derivatives trades. Its accounts wouldn't be liquidated when other customers would face margin calls, providing a huge advantage — and also allowing losses to rack up.
Then there's Alameda's reliance on those FTT tokens which were at best very illiquid. Beyond that, the Securities and Exchange Commission alleged in its civil suit against FTX and Alameda that the price of FTT was manipulated by the firm to keep its value high.
The Three On-Ramping Conspiracies
The next three are conspiracy charges that don't really have anything to do with the theft of customer funds or collapse of FTX. Instead they target the various schemes FTX used in 2019 and 2020 to allow exchange customers to on and off-ramp funds when banks largely refused to work with crypto firms and would close both business and personal accounts if they found a connection — a problem that stretched far beyond FTX.
- Conspiracy to commit bank fraud
- Conspiracy to operate an unlicensed money transmitting business
- Conspiracy to commit money laundering
"Those banks that were willing to open accounts for cryptocurrency companies had extensive customer due diligence and licensing requirements, with which FTX was not compliant," the indictment said. Among those was a money services business license.
"For a period of time in or around 2019 and 2020, FTX instructed customers to wire dollar deposits to bank accounts that were owned or controlled by Alameda" — but "never informed the banks where these accounts were held that these accounts in Alameda's name were being used in this way."
The Campaign Finance Scheme
- Conspiracy to make unlawful political contributions and defraud the Federal Election Commission
The problem here, prosecutors alleged, was not that Bankman-Fried was giving a fortune to elected officials working on writing the long-awaited cryptocurrency industry regulations — which Bankman-Fried and others in the industry wanted to go a certain way.
This comes down to what crypto lobbyists tend to call an innovation-friendly approach that protects consumers with strangling businesses.
So he allegedly funded donations through two other executives, one of whom became a top GOP donor and the other a supporter of the more left-leaning, liberal candidates. These "straw man" donations are illegal.
Based on campaign finance filings, those are almost certainly Ryan Salame, former co-chief executive officer of FTX Digital Markets on the GOP side, and Nishad Singh, FTX's head of engineering, on the left. Singh's guilty plea included campaign finance charges.
A spin-off problem — though not really for Bankman-Fried — is that the new FTX management running the bankruptcy wants that money back, saying it was stolen from customers.
The DoJ had its own take on Bankman-Fried's political donations. It said:
"Bankman-Fried stole FTX customer deposits, and used billions of dollars in stolen funds for a variety of purposes, including ... to try to purchase influence over cryptocurrency regulation in Washington, D.C. by steering tens of millions of dollars of illegal campaign contributions to both Democrats and Republicans."
The Regulatory Backlash
While Bankman-Fried's donations made him popular on the lobbying circuit, he also spent more actual time on the D.C. lobbying circuit than any other CEO. In the space of a year or so, he'd effectively made himself the face of the crypto industry in many matters of policy.
Referring to Bankman-Fried by his initials, Blockchain Association Director of Government Affairs Ron Hammond said in an early January Twitter thread:
"It can't be stated enough how much damage SBF did to the industry's reputation in D.C. Trust has eroded. The contagion is still playing out. The skeptics are growing. The 'crypto savior complex' continues to fail in D.C."
FTX has put crypto "in the crosshairs of Congress," he added.
The collapse has also given the movement to create a broad, bipartisan crypto regulatory regime even more of an impetus that could be helpful in a very partisan Congress.
And while the former is now chaired by a strong crypto supporter in GOP Rep. Patrick McHenry, the latter is under Democratic Sen. Sherrod Brown, an active crypto critic.
They are, Hammond noted, "polar opposites" when it comes to crypto policy.
Saying its goals include "providing clear rules of the road among federal regulators for the digital asset ecosystem," he added:
"If we can get legal clarity, then we can have legitimate investment dollars come into this technology field. I want clear rules of the road so we don't have fraudsters like Sam Bankman-Fried leading this technology."
One question that arose in a hearing of the Senate Agriculture Committee hearing about FTX's collapse was Bankman-Fried's strong support of the Digital Commodities Consumer Protection Act as the core of a broader crypto regulatory framework.
Saying he can't imagine what Bankman-Fried or other FTX leaders were thinking when they supported the bill, Democratic Sen. Michael Bennet asked:
"One thing that's given me pause is just thinking about why FTX would have lobbied so hard for a bill that it could never comply with."
The Plea Deals
One of the biggest legal problems Bankman-Fried is facing is that three of his top lieutenants have already pleaded guilty to fraud and conspiracy charges, and are set to testify against him.
They have effectively confirmed that fraud was being committed at FTX. That really leaves the main question if Bankman-Fried knew about it and was involved in it.
Alameda Research CEO Caroline Ellison — Bankman-Fried's ex-girlfriend — has copped to seven counts of wire, securities and commodities fraud and conspiracy, as well as money laundering. She faces up to 110 years, but the plea agreement will likely bring a steeply reduced sentence.
Second is FTX co-founder Gary Wang, who reached a plea agreement on similar (but fewer) charges: wire fraud and conspiracy to commit wire fraud, conspiracy to commit commodities and securities fraud, and conspiracy to commit money laundering. He's looking at 50 years, but the same plea dynamic applies.
Those plea deals were announced in December.
The SEC and CFTC Lawsuits
The SEC's lawsuit against Bankman-Fried cited the diversion of customer funds to Alameda, special treatment of Alameda that amounted to an "unlimited line of credit" on FTX, and undisclosed risk over its use of FTT tokens. Ellison and Wang were sued for the alleged scheme to prop up the price of FTT, while Wang was accused of helping divert customer funds to Alameda Research in a way that helped prevent it from being noticed.
SEC Chairman Gary Gensler reverted to broader themes in announcing the lawsuit in December. He said:
"The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business."
The CFTC is going after FTX and Bankman-Fried for claiming "that customers' assets, including both fiat and digital assets including Bitcoin and Ether, were held in 'custody' by FTX and segregated from FTX's own assets" when in fact they were "routinely" commingled with Alameda funds. It said:
"At Bankman-Fried's direction, FTX executives created features in the underlying code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX."
There is also a class action suit launched by four creditors who want the U.S. bankruptcy court in Delaware overseeing the case to declare customers at the front of the line of creditors as their funds were supposed to have been segregated on FTX but were instead commingled with Alameda funds.
The Bail Agreement
It's hard not to look at Sam Bankman-Fried's bail agreement and the fallout from his alleged violations of it and conclude he's got a very sweet deal, a very good lawyer, a very easygoing judge, or all three.
Second, Bankman-Fried has pushed his luck very, very hard.
First, on Jan. 15, he reached out to Ryne Miller — who remains general counsel of FTX.US — on encrypted messaging service Signal, saying:
"I would really love to reconnect and see if there's a way for us to have a constructive relationship, use each other as resources when possible, or at least vet things with each other."
Which the prosecutors said could well be viewed as "witness tampering" and demanded that he be banned from using encrypted messaging apps.
Despite this, Bankman-Fried's attorneys have battled prosecutors over how and how much to limit his Internet access.
Clawing It Back
One feature of any bankruptcy of this size is clawbacks — forcing the return of funds spent by a company within 90 days of its insolvency.
That's not the biggest clawback battle coming up, however. As is to be expected when the number of exchanges and bankrupt crypto lenders whose businesses crossed paths, there are dueling clawback demands.
Among them is the FTX/Voyager Digital connection. When Bankman-Fried was still in his pre-bankruptcy "White Knight of Crypto" mode, Alameda repaid loans to then-struggling Voyager of nearly $450 million — some of them before the loans came due. Now, the FTX Debtors organization wants it back. So, the dueling bankruptcy clawbacks could involve some fireworks.
Meanwhile, bankrupt crypto lender BlockFi is doing something fairly similar, suing FTX for control of Bankman-Fried's $650 million worth of Robinhood stock, which BlockFi said was used as collateral by one of his holding companies.
The real doozy, however, is the $5 billion in withdrawals customers made during the pre-bankruptcy run on FTX, attorney Joseph Cioffi said in a Reuters column.
"We can expect that some portion of these transfers will be the subject of clawback claims."
Another battle in the offing is the Department of Justice's appeal of Judge John Dorsey's refusal to appoint an independent examiner to look into the collapse of FTX. The examiner would be able to give a more in-depth and neutral look at what happened, according to the DoJ's Trustee overseeing the FTX case.
Without criticizing the FTX Debtor management of CEO John Ray III, the Trustee said they have a fiduciary responsibility to the creditors that doesn't necessarily require a full accounting.
Not only is an examiner report required by law for a bankruptcy of this size, it is "especially important because of the wider implications that FTX's collapse may have for the crypto industry."
SBF's criminal trial is only slated to begin in October — meaning we could face another seven months of twists and turns as FTX's new management battles to do right by customers. Whether this fallen entrepreneur remains out on bail, resists the urge to write lengthy blog posts about what happened, or avoids further charges remains to be seen.
And unfortunately for FTX customers, they'll likely endure a long wait before they see any of their savings back. And even if they do, there's a real danger that it'll be pennies on the dollar.