The Sam Bankman-Fried Saga: From Crypto Tycoon to Fraudster

KEY TAKEAWAYS

Sam Bankman-Fried, renowned for founding FTX Trading, emerged from MIT with a degree in physics. He propelled Alameda Research, a thriving quantitative trading firm, into the crypto space, ultimately establishing FTX in 2019. His empire would collapse in 2022. In November 2023, SBF was found guilty of seven criminal charges. He faces a maximum sentence of 110 years. A separate second trial is scheduled for March 2024.

Sam Bankman-Fried, who was once proclaimed as “The King of Crypto”, faces a maximum sentence of 110 years in prison.

On 2 November 2023, a New York District court found Bankman-Fried guilty of seven criminal charges filed against him.

A living embodiment of the Greek legend Icarus, the rise and fall of Sam Bankman-Fried is a familiar human story. Bankman-Fried’s obsession with success and fame pushes him to do the unthinkable to fulfill his ambitions.

This article delves into the intriguing story of Sam Bankman-Fried and the turmoil that now surrounds him.

Who is Sam Bankman-Fried? A Self-Made Multi-Billionaire at 29

Chapter One: Origins

Sam Bankman-Fried, popularly known as SBF, is the founder of a cryptocurrency exchange called FTX Trading. SBF was one of the richest people in the crypto world before his company declared bankruptcy in November 2022.

SBF was born in 1992. He received a bachelor’s degree in physics from the Massachusetts Institute of Technology (MIT) in 2014. After graduating, SBF joined a quantitative trading firm called Jane Street Capital, where he traded equities and exchange-traded funds. It was at Jane Capital that he met Caroline Ellison, who later go on to become the CEO of one of SBF’s crypto firms.

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SBF left Jane Street in 2017. By the end of the year, he had begun trading bitcoin (BTC) and had co-founded a quantitative trading firm focused on cryptocurrencies called Alameda Research.

Chapter Two: King of Crypto

Alameda Research became very successful in making millions out of arbitrage trading. The company was making millions a day by buying bitcoins for a lower price in the U.S. and selling high in Japan.

In 2019, SBF started his own crypto exchange after becoming frustrated with how the existing exchanges functioned at the time.

FTX was founded in May 2019 in Hong Kong. Several employees of Alameda Research played key roles in helping the new crypto exchange grow. The two companies would maintain a close relationship which would ultimately lead to their demise (more on that later).

By July 2021, FTX had attracted investors from big names such as SoftBank and Sequoia Capital and was valued at about $18 billion.

According to Forbes, SBF’s net worth peaked at an estimated $26.5 billion.

Chapter Three: Fall of FTX and Alameda Research

There were a number of forces at play that led to the demise of FTX and Alameda Research.

  • Crypto Bear Market and Rising Interest

2022 was a difficult year for the crypto industry. A severe bear market aggravated by the implosion of the Terra blockchain in May 2022 and rising global interest rates caused numerous crypto firms to collapse and file for bankruptcy.

As the crypto world looked for its white knight, in stepped SBF and FTX. The company signed a $240 million deal to buy bankrupt crypto lender BlockFi in July 2022. Later in September 2022, FTX.US bid about $1.42 billion to acquire bankrupt crypto brokerage Voyager Digital’s digital assets.

While the global corporate world was trying to shield itself from recessionary forces by postposing acquisitions and cutting costs, FTX was doing the opposite.

  • Alameda Research and FTT Token

SBF’s quantitative trading firm Alameda Research was the biggest customer of his trading firm FTX. Later it was revealed by the U.S. Securities and Exchange Commission (SEC) that Alameda Research was using FTX customer funds “from the start” for its trading activities.

It was also revealed that when cryptocurrency prices collapsed in May 2022, Alameda received margin calls from lenders as the value of its crypto collateral fell. SBF is said to have directed billions in customer assets to Alameda to save his trading firm.

FTX and Alameda ran out of options in November 2022 after CoinDesk published an article revealing that more than one-third of Alameda’s assets were held in the FTT token – a cryptocurrency created by FTX.

When Binance co-founder Changpeng Zhao tweeted that his company intends to sell its FTT holdings worth over $500 million, the price of the FTT token began to plummet.

To make matters worse, media reports revealed that Alameda had used the FTT token to collateralize its loans and trades. When the FTT token crashed over 90% in the second week of November 2023, and customers frantically began withdrawing their crypto assets from FTX,  SBF’s firms saw a massive liquidity crisis.

FTX, Alameda Research, and more than 100 affiliates filed for bankruptcy on 11 November 2023.

Charges and Accusations against Sam Bankman-Fried

U.S. SEC

The U.S. SEC has accused SBF of defrauding equity investors in FTX Trading. The U.S. SEC’s complaint pointed to more than $1.8 billion raised from equity investors since May 2019. SBF is accused of promoting FTX as a “safe, responsible crypto asset trading platform” with “ sophisticated, automated risk measures to protect customer assets.”

According to the U.S. SEC:

  • SBF orchestrated FTX to divert customer funds to Alameda;
  • FTX provided an “unlimited line of credit” funded by customers to Alameda;
  • FTX exempted Alameda from certain key FTX risk mitigation measures;
  • SBF did not disclose risk stemming from FTX’s exposure to Alameda’s multi-billion dollar holding of FTX-affiliated tokens;
  • SBF commingled FTX customers’ funds to make undisclosed venture investments, buy real estate, and make large political donations.

U.S. Attorney’s Office for the Southern District of New York

Separately, the U.S. Attorney’s Office for the Southern District of New York charged SBF with:

  • Defrauding customers of FTX.com, investors in FTX.com, and lenders to Alameda Research;
  • Wire fraud;
  • Conspiracy to commit securities fraud, commodities fraud, money laundering;
  • Conspiracy to defraud the United States;
  • Violation of campaign finance laws.

Commodity Futures Trading Commission (CFTC)

Commodities market watchdog CFTC has also filed charges against SBF. The complaints include:

  • Fraud and material misrepresentations of the sale of digital commodities;
  • Cause of loss of over $8 billion in FTX customer deposits.

Additional Charges against SBF

In March 2023, SBF was accused of trying to influence the direction of cryptocurrency regulations in the U.S. by making illegal campaign contributions to Democrats and Republicans.

Furthermore, SBF was also accused of conspiring to bribe Chinese government officials to regain access to Alameda’s frozen accounts.

What’s Next for Sam Bankman-Fried?

US Judge to decide SBF sentence in March 2024

In November 2023, SBF was convicted of:

  • Two counts of wire fraud conspiracy – a maximum of 20 years in prison each
  • Two counts of wire fraud – a maximum of 20 years in prison each
  • One count of conspiracy to commit money laundering – a maximum sentence of 20 years in prison
  • Conspiracy to commit commodities fraud – a maximum sentence of five years in prison.
  • Conspiracy to commit securities fraud – a maximum sentence of five years in prison.

SBF, 31 years old at the time of writing, faces a maximum sentence of 110 years in prison. 

US District Judge Lewis Kaplan will determine SBF’s sentence. Judge Kaplan has SBF’s sentencing for 28 March, 2024.

“Sam Bankman-Fried perpetrated one of the biggest financial frauds in American history – a multibillion-dollar scheme designed to make him the King of Crypto – but while the cryptocurrency industry might be new and the players like Sam Bankman-Fried might be new, this kind of corruption is as old as time.  This case has always been about lying, cheating, and stealing, and we have no patience for it,” read a statement from Damian Williams, US attorney for the Southern District of New York.

Second trial for bribing Chinese officials

SBF faces a separate second trial scheduled to be held on 11 March 2021. He will be tried on five counts including conspiracy to bribe Chinese government officials.

SBF has pleaded not guilty to all charges against him.

In contrast, FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison pleaded guilty to fraud charges. Wang, Ellison and other former FTX employees testified against SBF in the first trial and are expected to do so again in the next one.

The Bottom Line: Sam Bankman-Fried, a Cautionary Tale

Once celebrated for his entrepreneurial success and philanthropic endeavors, SBF’s fall from grace has hurt the crypto industry’s credibility. His journey serves as a stark reminder that innovation in the crypto world must be coupled with ethical and transparent practices.

As the legal proceedings unfold, the crypto community watches with anticipation to witness the implications of SBF’s legal battles on the broader industry.

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Mensholong Lepcha

Mensholong Lepcha is a financial journalist specializing in cryptocurrencies and global equity markets. He has worked for reputed firms such as Reuters and Capital.com. Fascinated with blockchain technology, NFTs, and the contrarian school of investing, Mensholong has expertise in analyzing tokenomics, price movement, and technical details of Bitcoin, Ethereum, and other blockchain networks. He has also written articles on a wide range of financial topics including commodities, forex, central bank monetary policies, and other economic news.