On November 2, 2023, a 12-jury panel convicted Sam Bankman-Fried, the founder and former CEO of cryptocurrency exchange FTX, of seven criminal fraud counts related to his role and connection to the collapse of FTX. Bankman-Fried, commonly called SBF, is a 31-year-old former billionaire that Forbes once named “the world’s richest 29-year-old.” After a four-week-long trial, the jury took only four hours to find SBF guilty. He faces 115 years in prison if he receives the maximum sentence. Let’s get into the details.
Who is Sam Bankman-Fried?
Sam Banman-Fried is the 31-year-old son of two Stanford Law tenured professors. He graduated from MIT in 2014 and started work on Jane Street in Boston. That’s where he met future business and romantic partner Caroline Ellison, who became CEO of one of Sam’s two companies: Alameda Research. Sam and another business partner, Tara Mac Aulay, started Alameda in 2017 while living in Berkley, California. Sam then founded FTX Cryptocurrency Derivatives Exchange in 2019. He quickly shot to fame and became one of the wealthiest billionaires on the planet. Forbes listed him as the 41 richest American in 2021, and his name brought media attention to the world of cryptocurrency.
What happened?
In Fall 2022, news outlet CoinDesk published a report casting doubt over the viability of Alameda Research and alleged that its ties with sibling company FTX were unusually close.
This report led competitor and CEO of Binance, Changpeng Zhao, to post on Twitter that his firm intended to sell its holdings of FTT, FTX’s crypto token. Allegedly, the tweet led customers to quickly pull their money from FTX, which resulted in the company being unable to meet the withdrawals. FTX filed for bankruptcy on November 11, 2022, and federal agents arrested SBF a month later in the Bahamas, the location of FTX headquarters.
What Were the Charges/Allegations?
The Department of Justice filed 13 criminal charges against SBF, 7 of which were the subject of last month’s trial. The DOJ alleged that SBF “mismanaged and misappropriated funds that were used to bankroll risky trading activities,” including loaning himself and others exuberant amounts of money to pay for investments, acquisitions, and real estate, along with below-board political donations, marketing campaigns, and service debt.
The prosecution’s case centered on the financial tie between FTX and Alameda Research. Publicly, SBF claimed that the two companies were distinct entities, with one (Alameda) focusing on trading and the other (FTX) concentrating on helping customers trade cryptocurrency.
However, CoinDesk’s report alleged this was a lie, and the two companies were inextricably intertwined. “The report hinted that large portions of Alameda’s balance sheet consisted of a highly illiquid crypto token, FTT. The token was invented and issued by FTX; holding it would give customers of the exchange discounts on trading fees and other rewards—and FTX another avenue to raise money without giving up equity. Based on the going market price, Alameda valued its FTT holdings in the billions of dollars. Still, FTX and Alameda owned almost all of the FTT, and only a few tokens were in circulation.”
When Zhao made his announcement on Twitter, panic set in with other traders who then rushed to unload their FTT tokens. This in turn led to a price decrease of 75%, further reducing the value of Alameda’s assets, leading consumers to pull their money off the FTX exchange altogether –causing the company’s crash.
The DOJ alleged that because SBF made illegal business decisions, FTX could not meet the influx of withdrawals because “it had used customer deposits to fund billions of dollars in loans to Alameda.”
As summarized by Wired, the DOJ alleged that FTX, with SBF as its leader, “failed to implement virtually any of the systems or controls necessary for a company entrusted with other people’s money. According to the DOJ, this amounted to a criminal act because SBF deliberately lied to clients and investors about asset segregation and other protections, exposing them to massive, undisclosed risk. Through a pattern of fraudulent schemes, the indictment claims, Bankman-Fried exploited the trust FTX customers placed in him to prop up his businesses, enhance his public image, and enrich himself.”
What Went on During the Trial?
The prosecution used a series of inner-circle employees of both FTX and Alameda to testify as witnesses against SBF. They exposed his fraudulent, criminal activity, which led to the collapse of FTX and billions of dollars in lost revenue from customers and investors.
“The monthlong trial was highlighted by testimony from the government’s key witnesses, including Caroline Ellison, Bankman-Fried’s ex-girlfriend and the former head of Alameda, and FTX co-founder Gary Wang, who was Bankman-Fried’s childhood friend from math camp. Both pleaded guilty [last] December to multiple charges and cooperated as witnesses for the prosecution.”
The jury convicted him on all seven charges after four hours of deliberating. US Attorney General Merrick Garland stated that Bankman-Fried “thought he was above the law. Today’s verdict proves he was wrong.”
What Happens Next?
Sam Bankman-Fried faces up to 115 years in prison if the judge sentences him to the maximum. The judge scheduled a tentative hearing on March 28, 2024, to discuss the proposed sentencing. Additionally, prosecutors now have until February 2024 to decide if they will bring the additional charges against SBF in a second trial scheduled for March 11, 2024. This process, in part depends on whether the US wins permission to do so from the Bahamas government.
Want to Know More?
The story of Sam Bankman-Fried and his fall from grace is far from over. Legal questions surrounding the cryptocurrency world remain rampant in today’s society as courts and legislators try to tackle this developing area of finance law. Interested in crypto? Want to keep track of cases involving corporate fraud and finance? Head on over to Trellis.law and search through thousands of cases regarding similar subject matter.
Sources:
https://www.wired.com/story/sam-bankman-fried-trial-explained/
https://www.reuters.com/breakingviews/sbfs-guilty-verdict-will-help-crypto-break-free-2023-11-03/
https://www.coindesk.com/policy/2023/11/07/whats-next-for-sam-bankman-frieds-legal-case/
