Why Sam Bankman-Fried has been convicted of fraud
IT TOOK A jury just four hours to deliberate on the seven, complicated charges of financial fraud facing Sam Bankman-Fried, the founder of FTX, a cryptocurrency exchange. They had to parse what would make him guilty of defrauding his customers and his lenders; and of conspiring with others to commit securities fraud, commodities fraud and money-laundering. After 15 days of testimony they had clearly heard enough. They convicted him of each and every count. He faces a maximum sentence of 110 years in jail.
Only one year has elapsed since FTX imploded. In its heyday the exchange was one of the world’s largest, with millions of customers and billions of dollars in customer funds. It was seen as the future of the crypto industry—a high-tech offering from a brilliant wunderkind who wanted to play nicely with regulators and usher in an era in which crypto could really go mainstream. But on November 2nd 2022, exactly one year before a jury would decide his fate, CoinDesk, a crypto news outlet published a leaked balance sheet. It showed that Alameda, FTX’s sister hedge fund also founded by Mr Bankman-Fried, held few assets apart from a handful of illiquid tokens Mr Bankman-Fried had invented. Spooked customers began to pull assets from the exchange. By November 7th it had become an all-out run, and FTX had stopped meeting withdrawal requests. Customers still had $8bn deposited on the exchange. On November 11th, after a week spent frantically trying to raise funds, Mr Bankman-Fried placed FTX into bankruptcy.
Over the last year various accounts of what went wrong have emerged. Many came from Mr Bankman-Fried himself, who spoke with dozens of journalists in the weeks following FTX’s collapse. Michael Lewis, an author who was “embedded” with Mr Bankman-Fried for weeks before and after it failed, has published a book about him. Snippets have emerged from people tracing the movement of tokens on blockchains. The government revealed its theory of the case in several indictments. But little compares with the reams of evidence that have been divulged by former FTX insiders since his trial began on October 3rd, some of whom are testifying in co-operation with the government, having pleaded guilty to fraud already.
Some of the story remains the same regardless of the narrator. Mr Bankman-Fried was a gifted mathematician, who graduated from the Massachusetts Institute of Technology (MIT) in 2014 before taking a job as a trader at Jane Street Capital, a prestigious quantitative hedge fund. In 2017 he spied an opportunity to set up a fund that would take advantage of arbitrage opportunities in illiquid and fragmented cryptocurrency markets, which were, per his telling, “a thousand times as large” than those in traditional markets. He enlisted an old friend, Gary Wang, a coder he had met at maths camp, to help set up the fund, which he named Alameda Research. He hired Nishad Singh, another coder and friend, as well as Caroline Ellison, a trader he had met at Jane Street.
The tales begin to diverge from here. Ms Ellison, Mr Singh and Mr Wang all testified for the prosecution in the trial, speaking for hours about their version of the dizzying ascent and devastating collapse of Alameda and FTX.
The way Ms Ellison described it, Mr Bankman-Fried was frustrated by how little capital Alameda had. He was “very ambitious”. In 2019 he described FTX to Ms Ellison as “a good source of capital” for Alameda. Mr Wang testified that he wrote code that allowed Alameda to have a negative balance on FTX—to withdraw more than the value of its assets—as early as 2019. Alameda was given a line of credit, which started small but ultimately increased to $65bn. Mr Wang also said that he overheard a conversation in which a trader asked Mr Bankman-Fried if Alameda could keep withdrawing money from the firm. Fine, as long as withdrawals were less than FTX’s trading revenues, came the reply. But less than a year after FTX was founded, when Mr Wang went to check its balance, Alameda had already withdrawn more than that.
Customer deposits are supposed to be sacred, able to be withdrawn at any time. But even months in, Alameda already seemed to be borrowing that money for its own purposes. Mr Bankman-Fried said that he set up FTX because he thought he could create an excellent futures exchange, rather than to satisfy a desire for capital. He explained away Alameda’s privileges by saying he was only vaguely aware of them and had thought them necessary for FTX to function, especially in the early days when Alameda was by far the largest marketmaker on the exchange and there were sometimes bugs in the code that liquidated accounts. If Alameda was liquidated it would be catastrophic. Mr Bankman-Fried did not want this to happen, and he wanted the fund to be able to make markets.
This might have been an excuse a jury could have swallowed, even though, by last year, Alameda was just one of perhaps 15 major marketmakers on the exchange and the others did not get such benefits. But two lines of argument undermined it. The first is how the privileges were used. The second is how Mr Bankman-Fried described FTX and its relationship with Alameda.
Start with how Alameda used its privileges. Ms Ellison, whom Mr Bankman-Fried made co-chief executive of Alameda in 2021, when he stepped back to focus on his exchange, described the many times Alameda withdrew serious money from FTX. The first was when Mr Bankman-Fried wanted to buy a stake in FTX that Binance, a rival, owned. His relationship with the boss of Binance had soured and he was worried that regulators would not like its involvement. It was going to cost around $1bn to buy the stake, around the same amount of capital FTX was raising from investors. Ms Ellison said she told Mr Bankman-Fried “we don’t really have the money” and that Alameda would need to borrow from FTX to make the purchase. He told her to do it—“that’s okay, I think this is really important.”
Borrowing to cover venture investments that were illiquid made the hole deeper. By late 2021 Mr Bankman-Fried nevertheless wanted to make another $3bn of investments. Before doing so he asked Ms Ellison what would happen if the value of stocks, cryptocurrencies and venture investments collapsed and, in addition, FTX and Alameda struggled to secure more funds? She calculated that it would be “almost impossible” for Alameda to pay back everyone they had borrowed from. He told her to go ahead with the investment. Ms Ellison’s calculations were pretty much confirmed by the next summer.
Mr Singh testified at length about “excessive” spending. Around $1bn went on marketing, including Super Bowl adverts and endorsements from the likes of Tom Brady, an American footballer—around the same as FTX’s revenue in 2021. By the end, Alameda had made some $5bn in “related party” loans to Mr Bankman-Fried, Mr Wang and Mr Singh to cover venture investments, property purchases and personal expenses. At one point, under cross examination, Danielle Sassoon, the prosecutor, asked Mr Bankman-Fried to confirm whether he had flown to the Super Bowl on a private jet. When he said he was unsure, she pulled up a picture of him reclining in the plush interior of a small plane. “It was a chartered plane, at least” he shrugged.
The prosecution often used Mr Bankman-Fried’s own words against him. Ms Sassoon would get Mr Bankman-Fried to say whether he agreed with a statement, such as whether he was walled off from trading decisions at Alameda. Mr Bankman-Fried would obfuscate, but eventually she would pin him down. “I was not generally making trading decisions, but I was not walled off from information from Alameda,” he admitted. Ms Sassoon then played a clip of him claiming he “was totally walled off from trading at Alameda”. Ms Sassoon did this over and over. Like an archer she would string her bow by asking a question, then release the arrow of evidence to prove a lie. At one point his lawyer slowed the pace of evidence by interrupting and asking if a document was being offered for its truth. “Your honour, it’s the defendant’s own statements,” the prosecutor said. “No, it’s not being offered for its truth.”
Perhaps the most convincing moments of the trial were emotional ones. Ms Ellison was in tears as she told how, in the week of FTX’s collapse, “one of the feelings I had was an overwhelming feeling of relief.” Meanwhile, Mr Singh described a cinematic confrontation with Mr Bankman-Fried in September last year, when he realised how big “the hole” was. He described pacing the balcony of the penthouse (cost: $35m) where many FTX employees lived, expressing horror that some $13bn of customer money had been borrowed, much of which could not be paid back. In response, Mr Bankman-Fried, lounging on a deck chair, replied “Right, that. We are a little short on deliverables.”
As customers rushed to take their money in the week that FTX collapsed, employees resigned en masse. Adam Yedidia, one of Mr Bankman-Fried’s friends and employees, who has not been charged with any crimes and appears to have been in the dark, texted him: “I love you Sam, I am not going anywhere.” Days later, when he had learned the reality of what had gone on, he was gone. Many of those who were close to Mr Bankman-Fried and knew what was going on foresaw how this would end—those who did not were horrified when they found out. So was the jury. ■
