The Fall of a Crypto Titan: Sam Bankman-Fried Convicted of Fraud and Conspiracy

Sam Bankman-Fried, the founder of the failed FTX cryptocurrency exchange, was found guilty on Thursday of seven charges of fraud and conspiracy. The trial, which lasted for a month, exposed the rampant hubris and risk-taking that has characterized the crypto industry.

Bankman-Fried had become a symbol of the excesses of the crypto world after FTX collapsed last year, and he was charged with stealing as much as $10 billion from customers to finance political contributions, venture capital investments, and other extravagant spending. The jury, consisting of nine women and three men, deliberated for just over four hours before reaching a verdict. Bankman-Fried was convicted of wire fraud, conspiracy, and money laundering, and faces a maximum sentence of 110 years. He is expected to appeal the verdict and is scheduled to be sentenced on March 28.

The case against Bankman-Fried has come to symbolize the excesses of the volatile cryptocurrency industry. The FTX founder, with his tousle-haired appearance, had become a prominent figure in the crypto world, hailed as a genius by some and a symbol of the industry’s potential.

The trial itself was a spectacle, with Bankman-Fried taking the stand in his defense and attempting to portray himself as a victim of circumstances. The prosecution, however, painted a different picture, arguing that Bankman-Fried had knowingly and willingly engaged in fraudulent activities, stealing from customers to fund his lavish lifestyle and political ambitions. The jury ultimately sided with the prosecution, finding Bankman-Fried guilty on all counts.

SBF’s Testimony Did Not Convince The Jury

When Bankman Fried took the stand in his trial last week, he was quick to throw former colleagues under the bus, painting himself as the savior of the failing crypto sector, and suggested his firm’s downfall came down to a lack of oversight and risk management.

Bankman-Fried was charged by the SEC with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The commission says he orchestrated a long-running fraud on the FTX exchange’s investors.

During his testimony, SBF said he was unaware of much of FTX and Alameda’s key operational flows. A key factor of FTX’s and Alameda’s downfall revealed during the trial, was a feature in FTX’s software that allowed sister company Alameda to avoid having its positions liquidated and let it have a negative balance. This “bug” was apparently put in to patch FTX’s risk management but allowed Alameda to withdraw FTX customer funds and would eventually crash both firms. 

SBF says the bug arose because Gary Wang and Nishad Singh implemented it following vague guidance from SBF to fix the FTX risk management system. Wang and Singh were both key witnesses for the prosecution and each said SBF was the man behind implementing the now infamous and illegal bug. SBF says he “supervised” Wang and Singh but each had been empowered to make their own decisions. He says he was more of an adviser to them.

SBF says his biggest mistake when running FTX was not hiring a risk manager. 

Discussing former Alameda CEO and ex-girlfriend Caroline Ellison, SBF said she did not heed his advice to “get shorter”, or take some positions that would bet that crypto prices would fall. Describing their relationship he said he could not give Ellison the attention and time she demanded. Ellison’s testimony earlier in the trial has been described by many observers as ‘explosive’.

Also during his testimony, SBF described FTX as something of a superhero to the crypto industry bailing out companies that didn’t have a lender of last resort like the Federal Reserve. He mentioned BlockFi and Voyager as companies FTX had bailed out. He also said both Digital Currency Group (DCG) and Celsius asked him for emergency loans during difficult financial times.

SBF’s testimony also revealed that there were over 300 FTX groups on the Signal Messaging App with the auto-delete feature turned on, conveniently indicating that there is a great deal about the inner workings and messaging of the company that will be impossible to verify with chat logs.

Bankman-Fried will have to remain in jail for the duration of his trial and is being made available to his attorneys at 7 a.m. every trial day.

SBF is in jail after being charged by the SEC in December 2022 with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. His trial commenced on October 3rd and is scheduled to last for six weeks.

FTX’s Assets Tick Up

Parallel to SBF’s trial, the bankruptcy proceedings for FTX appear to have taken a positive turn as FTX’s bankruptcy estate is reported to now be worth US$7.3 billion and may be set to be worth even more. A useful indicator of how progress is being made to recover creditors’ claims is the over-the-counter market, where creditors can sell their FTX claims to buyers of distressed assets.

At the start of the year FTX bankruptcy claims were selling for 10 cents on the dollar, they are now selling for 37 cents on the dollar. The value has more than tripled because it appears as though FTX has more assets in its vault than initially expected.

Assets including stock in exploding AI start-up Anthropic (purchased using customer funds) and the potential restart of the exchange are fueling optimism that creditors will receive more than initially suspected. This is on top of ~US$200 million worth of property in the Bahamas and ~US$3.4 billion worth of other property sold in 2023.

Anthropic is also set to receive US$4 billion worth of funding from Amazon, which will further buoy what creditors may be set to receive. Additional boosts for creditors’ prospects may arrive from claims against crypto exchange Binance and investment firm K5.

Sam Bankman-Fried’s Bail Request Denied

SBF’s bail request was denied on September 6, 2023, by an appellate judge. The denial came after his legal team asked for a pre-trial release so that they/SBF could better prepare for his October 3rd trial.

His lawyers say internet access in the Metropolitan Detention Center (MDC) in New York are not good enough for SBF to properly review discovery documents in relation to his trial. However, the court has ruled that given Bankman-Fried’s multiple breaches of his bail conditions when he was remanded to his parent’s home in California, a bail release won’t be granted.

Bankman-Fried’s bail was initially revoked on August 11 after he was found attempting to contact and intimidate witnesses in his case. At this time he was taken from house arrest at his parent’s home in the swank suburbs of California’s Palo Alto, and moved to await trial at the MDC in Brooklyn.

At a recent court appearance, his lawyer Mark Cohen told the judge that the detention centre was "not accommodating" to his client’s diet (Bankman Fried is a vegan), and that the facility was not keeping up with SBF’s Adderall prescription. Adderall is commonly used in the US to treat ADHD and sleep disorders.