If there’s anything distinctive about the world of crypto, it’s how quickly big corporations and big fortunes can be created out of thin air – and crumble just as quickly. Nowhere has this been more apparent 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 grown into a multi-billion dollar operation, putting Bankman-Fried at the forefront of the leaders of the crypto and political donors. .
But when a leaked corporate balance sheet revealed a shaky financial foundation, rival exchange Binance announced it would sell its hoard of FTT, the token associated with crypto exchange FTX. This triggered the crypto equivalent of a bank run, as customers rushed to withdraw their funds.
FTX couldn’t cover the exits, and the $32 billion crypto empire vaporized overnight, along with Bankman-Fried’s alleged $12 billion personal fortune and reputation as a cryptography genius. The collapse sparked a series of civil and criminal investigations, and Bankman-Fried was charged by the Justice Department with 13 crimes.
The outline of the FTX debacle may be known, but at the moment there are still a few empty spots on the canvas. Some bizarre, disturbing and sometimes hilarious details have surfaced in court filings, but important questions have not been answered.
Billions of dollars in cash and crypto assets remain untraceable. In an initial bankruptcy filing, newly installed CEO John J. Ray III — the corporate cleanup artist brought in to handle this mess — wrote that there wasn’t even a confirmed list of FTX employees.
As a corporate calamity, FTX is almost unparalleled – a sprawling global network of over 100 companies, some of them with little apparent purpose except perhaps to mix money, all run by a ragtag group of supposed financial savants 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 host of financial crimes after he was arrested in the Bahamas. He faces decades in prison if convicted.
It quickly turned into a multi-billion dollar operation, putting Bankman-Fried at the forefront of crypto executives and political donors, and making FTX a household name endorsed by many celebrities. By the second week of November 2022, just a few years after its founding, the FTX crypto empire had turned to ashes.
The investigation is moving as fast as the collapse of FTX. Several FTX executives — friends and corporate lieutenants of Bankman-Fried — have pleaded guilty to serious charges of fraud, money laundering, campaign finance violations and other charges.
They implicated Bankman-Fried in a series of financial crimes that could land him in jail for the rest of his life. Still, it’s all firmly in “so-called” territory: Bankman-Fried has pleaded not guilty to all charges, including a the recently introduced accusation of having authorized bribes $40 million in crypto to be paid to Chinese authorities to release $1 billion in frozen funds on a Chinese crypto exchange.
His trial is due to begin in October, and while Bankman-Fried’s legal fate remains uncertain, his business has turned into a surprisingly fascinating crime scene.
Where’s the money, Sam?
In some ways, it’s an object lesson in how not to run a suspected criminal enterprise, at least if you don’t want to get caught.
FTX’s rapid success – the huge amount of money it has accumulated through venture capital, customer deposits and other sources – has potentially contributed to reckless spending. One of the big tasks for the new management of FTX has been to account for where all the money and crypto goes. This has not been easy.
Perhaps $12 billion in FTX client funds may have been diverted to Alameda. According to government documents, this silver hoard was used to cover Alameda’s business losses, buy real estate (including on behalf of Bankman-Fried’s parents), make investments in other crypto startups, and provide billions of dollars in “personal loans” to Bankman-Fried and senior executives.
Some of that money — tens of millions of dollars — may have gone to 196 members of Congress which received donations from FTX and its executives, according to reports from Coindesk, a crypto industry outlet.
Like any bankrupt company, FTX left behind a messy debt and loan ledger, covering everything from parts of the business to complex deals with now-bankrupt rivals. It will take years for the bankruptcy process to unfold and unfortunately many of its retail customers will not be cured.
According to the Securities and Exchange Commission, Bankman-Fried used Alameda Research as its “personal piggy bank“, and the money was widely scattered.
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 numerous lawsuits, lawsuits, bankruptcy hearings and monetary claims – will ultimately last much longer than the company itself was in business.
This was not the case for other infamous corporate disasters like Enron or Nortel, which Ray, the new CEO of FTX, also had to deal with after their explosion.
Nortel has been a telecommunications company for over a century, since the early days of the telephone. Enron lasted about 37 years before collapsing, becoming synonymous with fraudulent financial engineering.
Bernie Madoff successfully managed his Ponzi scheme for decades, attracting billions of dollars and earning a reputation as a financial genius with an instinctive understanding of the markets.
Madoff ran a long-running and hugely successful criminal operation, and he did it in a well-regulated financial market, to the amazement 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.
“As far as I know, it’s just a garden variety cheat where someone promised to do one thing with people’s money and broke those promises and did something else.”
If the so-called FTX fraud was perpetrated with glitz and hype and a torrent of paid endorsements, the Madoff fraud took more care and trickery. Madoff “had to do all kinds of maneuvers over the years to avoid detection, including generating all kinds of false claims,” Litt said.
Like any smart fraudster, Madoff kept his circle small, hired smart people who would be loyal and well paid. Madoff didn’t care about Ivy League degrees; he wanted stealth and street smarts, not cutthroats who would jump at Goldman Sachs or JP Morgan at the first opportunity.
The social network
In The Naked Emperor, CBC’s podcast about the FTX drama, fraud is portrayed as a social crime that affects people beyond its immediate victims and cuts across social relationships and professional networks.
According to Litt, Madoff’s fraud “was very much based on his social circle and some sort of elite access to his investment fund.”
It was considered a privilege to enter Madoff’s fund. Once inside the special club, you wouldn’t want to withdraw your money – with Madoff’s extraordinary returns, that would seem financially insane.
It might be easier to get away with scamming strangers. Most of Bankman-Fried’s alleged victims are the clients of his crypto exchange, although some venture capitalists and former business partners have also posed as victims.
The Bankman-Fried 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 pledged to cooperate with prosecutors.
They were close friends of Bankman-Fried, who was part of the cohort living at the luxury Albany resort in Nassau.
They shared important details, like how Wang allegedly coded a backdoor that would allow Bankman-Fried and his associates to transfer funds from FTX to Alameda without a trace.
“For fraud cases like this, it is almost always necessary that there is 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.
At this time, Bankman-Fried’s former colleagues are telling prosecutors the rest of their stories. These details, known only to his closest friends and colleagues, could be what condemns the former CEO of FTX to trial.
Manhattan U.S. Attorney Damian Williams said two former associates of FTX founder Sam Bankman-Fried have pleaded guilty to fraud charges and are cooperating with the government.