As Sam Bankman-Fried awaits prison, FTX customers await full payment

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The government’s presentation in the case against former FTX CEO Sam Bankman-Fried.

Source: SDNY

As Sam Bankman-Fried prepares to be sentenced next month for his criminal fraud conviction linked to the 2022 FTX crash, former customers of the crypto exchange have reasons to believe they could get their money back.

Bankman-Fried, who could spend the rest of his life behind bars, was found guilty in November on seven criminal counts after about $10 billion in client money from his firm went missing. Some of that money was paid for Bankman-Fried’s lavish lifestyle, but much of it went into other investments that, of late, have greatly appreciated in value.

Attorneys representing FTX’s bankruptcy estate told a Delaware judge last week that they expect to fully repay customers and creditors with valid claims. Bankruptcy lawyer Andrew Dietderich, who is working with FTX’s new management team, said there is still “a lot of work and risk” ahead of us in getting all the money back for clients, but that “the team has a strategy to achieve it.”

It is a welcome development for the thousands of customers (reportedly up to a million) who collectively lost billions of dollars in the FTX crash 15 months ago, when the crypto exchange went bankrupt in a matter of days. Because FTX is lightly regulated and insecure – and the crypto industry in general – these clients had the very real possibility that most of their money had evaporated. Many hedge funds and lenders lost almost everything in the crypto winter of 2022.

Bankman-Fried never believed that his company’s situation was so dire.

Even as federal regulators and prosecutors uncovered evidence showing the 31-year-old entrepreneur and his top lieutenants had been skimming billions of dollars from client wallets for years, Bankman-Fried insisted that all the money was still accessible in some way.

“FTX US is still fully resolved,” Bankman-Fried wrote in a Substack post on January 12, 2023, while under house arrest at his parents’ home in Palo Alto, California. He said the exchange “should be able to return every customer’s money.”

In some ways, his statement seems to be true.

Joseph Bankman and Barbara Fried arrive for the arraignment of their son, former FTX CEO Sam Bankman-Fried, who faces fraud charges in the fallout from the failed cryptocurrency exchange, in Federal Court in New York City, USA, October 26, 2023.

Brendan McDermid | Reuters

For months, FTX’s new CEO, John Ray III, and his team of restructuring advisors have been bringing back cash, luxury real estate, and crypto, as well as searching for missing assets. . They have already collected more than $7 billion, and that does not include such valuables as $26 million in gifts and property to Bankman-Fried’s parents, or the $700 million donated to K5 Global and founder Michael Kives, who invested FTX money in companies. like SpaceX. Some of these investments have seen significant increases in value.

FTX had been negotiating with bidders about a possible restart of the company, but those efforts were scrapped last month.

Braden Perry, who was once a senior trial attorney for the Commodity Futures Trading Commission, the only official regulator of the US FTX, told CNBC that the decision to pay users back in total after that.the abandonment of efforts to restart the crypto exchange FTX,” in favor of “focusing on liquidating assets to make customers whole.”

Getting real cash back into the hands of customers remains a challenge. Although much of the value has been recovered and more to come, dividing large sums of money is a complex process in bankruptcy, especially when so much of the money is in non-traditional and non-traditional assets. .

Even Ray was skeptical at the start of the process, noting in late 2022, “At the end of the day, we’re not going to be able to recover all the losses here.”

‘Sam coins’ are going up

What Ray wasn’t banking on was the market. When he made these comments, crypto was smothered in a bear market, with bitcoin to buy for 16 000 US dollars. It is now over $47,000.

In September, the breakout team released a status report showing that FTX had $3.4 billion worth of digital assets, with more than $1.1 billion coming from the Solana investment.

Solana fits into a category called “Sam’s Coins”, a group that also includes Serum, a token created and promoted by FTX and its sister hedge fund Alameda Research. After the dust settled from the FTX breakout, Solana saw a big run in its price, and continued to rally after the September report. Since the end of that month, it has been spiced up fivefold.

Meanwhile, FTX’s bitcoin stash, which was worth $560 million at the time of the September report, is worth north of $1 billion today.

Bankman-Fried’s investments were not limited to crypto. It also used customer funds to back startups like Anthropic, the artificial intelligence company founded by former OpenAI employees. FTX invested $500 million in Anthropic in 2021, before the rise of the AI ​​generation. Anthropic’s valuation hit $18 billion in December 2023, which would value about 8% of FTX at about $1.4 billion.

During the Bankman-Fried criminal trial in New York, Judge Lewis Kaplan denied the defendant’s request for permission to say that FTX’s investment in Anthropic was a smart bet. The bankruptcy estate of FTX has been looking to sell its Anthropic stake, according to a court filing this month.

Sam Bankman-Fried stands as a poet reading the verdict to the court.

Artist: Elizabeth Williams

In his biography of Bankman-Fried titled “Going Infinite,” Michael Lewis said he was told by an investor interested in bidding for the venture portfolio that “if sold intelligently, that it should go for at least $2 billion.” Lewis, who published his book late last year, wrote that the $7.3 billion that Ray’s team had generated did not -in Serum, large refunds and other venture investments that had been in. appreciated in value.

For FTX customers, being made whole, according to a judge’s decision, means receiving cash equal to their crypto value in November 2022. In other words, no they are not seeing the upside of FTX investments or acquiring virtual coins that would allow them to cash out at higher valuations.

However, some investors have found a way to participate in the ongoing odyssey of the FTX. The market for FTX IOUs increased last year as it was clear that the brokerage estate was amassing a lucrative portfolio. One financial firm that had initially lost about $100 million sold its FTX debt for 6 cents on the dollar in a new secondary market out of concern that it might never get a better deal. As of December, those claims were going for more than 70 cents on the dollar.

If customers are eventually made whole, that could play a big role in Bankman-Fried’s appeal, possibly after his sentencing, which is scheduled to take place in Brooklyn on March 28. place

“Under federal sentencing guidelines, and even assuming no monetary loss, SBF still faces a minimum of 70 months in prison based on the underlying offense, number of victims, sophisticated methods, and career leadership,” Perry said.

The large losses expected at first would suggest 30 to years of life, Perry said.

Renato Mariotti, a former prosecutor in the U.S. Department of Justice’s Securities and Commodities Fraud Division, told CNBC that judges typically consider the amount of restitution paid to shippers. -suffering during sentencing.

“If the victim is made whole, that’s a huge win for the defendant,” Mariotti said. He noted, however, that the level of fraud coupled with Bankman-Fried’s false testimony and breach of bond covenants to limit the reduction.

“I usually advise clients to pay restitution before sentencing if possible,” Mariotti said.

Watch: Former SEC Chari discusses Bankman-Fried guilty verdict

fmr.  SEC Chairman Jay Clayton: SBF trial 'one of the biggest corporate finance problems in history'
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