How FTX’s Sam Bankman-Fried went from crypto kingpin to convicted fraudster

Samuel Bankman-Fried’s poster in downtown San Francisco.

MacKenzie Sigalos | CNBC

Two years ago, Sam Bankman-Fried was a 30-year-old multibillionaire living in a $35 million penthouse in the Bahamas, partying with his friends while running one of the world’s most valuable cryptocurrency companies.

Today he is a 32-year-old inmate at the Metropolitan Detention Center in Brooklyn, waiting for a judge to tell him how long he will spend behind bars for masterminding “one of the largest financial frauds in American history,” as he puts it. by US Attorney Damian Williams.

Bankman-Fried, the founder and former CEO of failed cryptocurrency exchange FTX, will appear in federal court in midtown Manhattan on Thursday, where U.S. District Judge Lewis Kaplan will issue his sentence. Prosecutors recommended a prison sentence of 40 to 50 years.

It took jurors only about three hours of deliberations in November to find Bankman-Fried guilty on all seven criminal counts against him. For a high-profile month-long trial involving nearly 20 witnesses and hundreds of exhibits, experts said at the time they had never seen such a quick decision. Bankman-Fried intends to appeal his conviction and sentence.

It was a steep and rapid fall from grace for Bankman-Fried, who was once hailed as an industry titan and had a peak net worth – on paper – of around $26 billion.

Indicted FTX founder Sam Bankman-Fried leaves the U.S. courthouse in New York City, July 26, 2023.

Amr Alfiky | Reuters

Bitcoin arbitrage

It all started with the Kimchi Swap.

In 2017, as a quant trader at Jane Street, Bankman-Fried noticed something funny when she looked at bitcoin prices on Instead of a uniform price across exchanges, Bankman-Fried sometimes saw a 60% difference in the value of the digital currency. His immediate instinct, he said, was to get into arbitrage trading: buying bitcoin on one exchange and selling it on another, pocketing the difference.

“This is the low hanging fruit,” Bankman-Fried he told CNBC in September 2022.

The arbitrage opportunity was particularly interesting in South Korea, where the exchange-traded price of bitcoin was significantly higher than in other countries. It has been nicknamed Kimchi Premium, in reference to the traditional Korean side dish of salted, fermented cabbage.

After a month in the market himself, Bankman-Fried launched Alameda Research, named after the California county that was home to his first office. Bankman-Fried told CNBC that the company sometimes made up to a million dollars a day trading bitcoin.

The success of Alameda spurred the launch of FTX. In April 2019, Bankman-Fried co-founded, an international cryptocurrency exchange that offered customers innovative trading features, a responsive platform and a reliable experience. FTX’s success led to the creation of a $2 billion venture fund that seeded other cryptocurrency companies.

The FTX logo soon adorned everything from Formula 1 race cars to the Miami basketball arena. Bankman-Fried talked about one day buying Goldman Sachs, and became a fixture in Washington as a major donor to the Democratic Party.

Then the market changed direction.

The so-called cryptocurrency winter of 2022 has wiped out hedge funds and lenders across the cryptocurrency universe. Bankman-Fried boasted that he and his company were immune. Behind the scenes, Alameda was borrowing money to invest in failing digital asset companies to keep the industry afloat.

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Alameda had borrowed from lenders including Voyager Digital and BlockFi, both of which ended up in bankruptcy. Alameda secured its loans with FTT tokens, minted by FTX. Bankman-Fried’s empire controlled the vast majority of available currency, with only a small amount of TTF actually in circulation at any time.

Alameda priced its entire hoard of FTTs at the prevailing market price, despite it being a virtually illiquid asset. The fund has also used the same methodology with other coins, including Solana and Serum (a token created and promoted by FTX and Alameda), using them to secure billions of dollars in loans. Industry insiders have called the tokens “Sam coins.”

Virtual bank runs

Sam Bankman-Fried, the jailed founder of bankrupt cryptocurrency exchange FTX, takes the oath as he appears in court for the first time since his November fraud conviction, in a courtroom in New York, United States, on February 21, 2024 in this courtroom sketch.

Jane Rosenberg | Reuters

The internal discussions were different. Bankman-Fried and other executives admitted to each other that “FTX client funds were irretrievably lost because Alameda misappropriated them.” By November 8, the customer deficit had grown to $8 billion. Bankman-Fried had been courting outside investors for a rescue package but found no suitors.

FTX suspended all customer withdrawals that day. The price of FTT has fallen by more than 75%. Out of options, Bankman-Fried turned to Zhao, who announced that he had signed a “non-binding” letter of intent to acquire

But the next day, Nov. 9, Binance said it would not go through with the acquisition, citing reports of “mismanaged client funds” and federal investigations.

FTX filed for bankruptcy on Nov. 11, and Bankman-Fried resigned as CEO of FTX and associated entities. He immediately lost 94% of his personal wealth.

Sullivan & Cromwell, FTX’s longtime lawyers, turned to John J. Ray, who oversaw Enron during its bankruptcy, to take over Bankman-Fried’s former position.

On December 12, Bankman-Fried was arrested by Bahamian authorities and extradited to the United States, where he was taken into custody. According to an SEC document, federal prosecutors and regulators accused Bankman-Fried of perpetrating fraud “from the beginning.”

Bankman-Fried was released on $250 million bail and initially lived under house arrest with a court-ordered ankle monitor at his parents’ home in Palo Alto, California, on the campus of Stanford University. He was soon taken back into custody for alleged witness tampering.

As Bankman-Fried awaited trial, many of his closest friends and confidants turned into key witnesses for the prosecution, leaving the former crypto billionaire to defend himself. Less than a year after his arrest, the 12-person jury found Bankman-Fried guilty of all criminal charges against him.

CNBC’s Rohan Goswami contributed to this report.

CLOCK: Prosecutors are recommending a 40- to 50-year prison sentence for Bankman-Fried

Prosecutors Recommend 40-50 Year Prison Sentence for Sam Bankman-Fried for FTX Fraud

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