Tech and Science

From Penthouse to Prison: Sam Bankman-Fried’s journey from crypto king 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 multi-billionaire living in a $35 million penthouse in the Bahamas, partying with his friends while running one of the world’s most valuable crypto 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 what he calls “one of the largest financial fraud cases in American history.” by US Attorney Damian Williams.

Bankman-Fried, the founder and former CEO of failed crypto exchange FTX, will go to federal court in downtown Manhattan on Thursday, where U.S. District Judge Lewis Kaplan will hand down his verdict. Prosecutors have recommended a prison sentence of 40 to 50 years.

The jury only needed about three hours of deliberations in November to find Bankman-Fried guilty of all seven crimes against him. In a high-profile, month-long trial involving nearly 20 witnesses and hundreds of pieces of evidence, experts said at the time that they had never seen such a quick decision. Bankman-Fried plans to appeal his conviction and sentence.

It was a steep and rapid fall for Bankman-Fried, once hailed as an industry giant and on paper with a peak fortune of about $26 billion.

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

Amr Alfiky | Reuters

Bitcoin arbitrage

It started with the kimchi swap.

In 2017, as a quant trader at Jane Street, Bankman-Fried noticed something funny while looking at Bitcoin prices on CoinMarketCap.com. Instead of a uniform price across all 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 to pocket the difference.

“That’s the lowest hanging fruit,” Bankman-Fried said CNBC in September 2022.

The arbitrage opportunity was particularly tempting in South Korea, where the listed price of Bitcoin was significantly higher than in other countries. It was called “Kimchi Premium,” a nod to the traditional Korean side dish of salted and fermented cabbage.

After a month of personally experimenting with the market, Bankman-Fried founded Alameda Research, named after the California county where his first office was located. Bankman-Fried told CNBC that the company sometimes made up to $1 million a day from Bitcoin trading.

The success of Alameda was the catalyst for the launch of FTX. In April 2019, Bankman-Fried co-founded FTX.com, an international cryptocurrency exchange that offered its customers innovative trading features, a responsive platform, and a reliable experience. FTX’s success led to a $2 billion venture fund that founded other crypto firms.

The FTX logo soon adorned everything from Formula 1 racing cars to a basketball arena in Miami. Bankman Fried talked about one day buying Goldman Sachsand he became a fixture in Washington as one of the Democratic Party’s top donors.

Then the market turned.

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

May 2022 saw the crash of the stablecoin Luna, triggering a domino effect that sent crypto prices plummeting and devastated other lenders.

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Alameda had borrowed from lenders such as Voyager Digital and BlockFi, both of which eventually went bankrupt. Alameda secured its loans with FTT tokens minted by FTX. Bankman-Fried’s empire controlled the majority of available currency, with only a small amount of financial transaction taxes actually in circulation at any one time.

Alameda has valued its entire FTT holdings at the current market price, despite it being a virtually illiquid asset. The fund also used the same method with other coins, including Solana and Serum (a token created and promoted by FTX and Alameda), and used it to collateralize billions of dollars in loans. Industry insiders called the tokens “Sam-Coins”.

Virtual bank run

When Bankman-Fried was faced with margin calls due to falling prices, Bankman-Fried resorted to billions of dollars in FTX customer deposits until mid-2022. According to the company’s own bankruptcy filings, the company had almost no record-keeping capability.

On November 2, 2022, crypto trading site CoinDesk published published details Alameda’s balance sheet, which reported assets of $14.6 billion. Over $7 billion of these assets were either FTT tokens or Bankman Fried-backed coins like Solana or Serum. Another $2 billion was locked up in stock investments.

Investors began withdrawing their holdings from FTX, creating the threat of a virtual bank run. Both Alameda and FTX were now facing a liquidity crisis.

On November 6th, four days after the CoinDesk article, Binance founder Changpeng Zhao dropped the hammer. According to Zhao, Binance was the first outside investor in FTX in 2019. Two years later, FTX bought back its stake with a combination of FTT and other coins.

Zhao wrote in tweet that, because of “the recent revelations that have come.” [sic] In order to come to light, we have decided to unwind all remaining financial transaction taxes on our books.”

On November 7, Bankman-Fried attempted to show confidence by tweeting: “FTX is fine. Assets are fine.” The post has been deleted.

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

Jane Rosenberg | Reuters

Internal discussions went differently. Bankman-Fried and other executives admitted to each other that “FTX customer funds were irretrievably lost because Alameda appropriated them.” By November 8, the customer shortfall had grown to $8 billion. Bankman-Fried sought a rescue package from external investors, but found no applicants.

FTX suspended all customer withdrawals on this day. The price of FTT collapsed by over 75%. Running out of options, Bankman-Fried turned to Zhao, who announced that he had signed a “non-binding” letter of intent to acquire FTX.com.

But a day later, on November 9, Binance said it would not proceed with the acquisition, citing reports of “mishandling of customer funds” and federal investigations.

FTX filed for bankruptcy on November 11 and Bankman-Fried resigned as CEO of FTX and affiliates. He immediately lost 94% of his personal assets.

Sullivan & Cromwell, FTX’s longtime lawyers, turned to John J. Ray, who oversaw Enron during 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. Federal prosecutors and regulators accused Bankman-Fried of perpetrating fraud “from the beginning,” an SEC filing said.

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 Stanford University campus. He was soon taken back into custody for alleged witness tampering.

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

CNBC’s Rohan Goswami contributed to this report.

REGARD: Prosecutors are recommending a prison sentence of 40 to 50 years for Bankman-Fried

Prosecutors are recommending a prison sentence of 40 to 50 years for Sam Bankman-Fried for FTX fraud

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