meT TOOK A jury just four hours to deliberate on the seven complex charges of financial fraud facing Sam Bankman-Fried, founder FTX, a cryptocurrency exchange. They needed to understand what would make him guilty of defrauding his customers and lenders; and conspiring with others to commit securities fraud, commodity fraud and money laundering. After 15 days of testimony it was clear they had heard enough. They condemned him on all counts. He faces a maximum prison sentence of 110 years.
Only a year has passed since then ftx imploded. At that time the exchange was one of the largest in the world, with millions of customers and billions of dollars in customer funds. It was seen as the future of crypto – a high-tech offering from a brilliant wunderkind who wanted to play nice with regulators and consumers at a time when the industry had gone mainstream. But on November 2, 2022 CoinDesk, a crypto news outlet, published a leaked balance sheet. It showed that Alameda, ftxA sister hedge fund founded by Mr. Bankman-Fried also had very few assets, apart from a bunch of obscure tokens he created. Spooked buyers began withdrawing holdings from the exchange. Within days it had become an outdoor run and ftx stopped meeting withdrawal requests. Customers still owed $8bn on the exchange. After frantically trying to raise money, Mr. Bankman-Fried settled ftx into bankruptcy.
Various accounts of what went wrong have since emerged. Many came from Mr Bankman-Fried himself, who spoke to dozens of journalists in the weeks that followed. FTXin his fall Michael Lewis, an author who “fixed” Mr Bankman-Fried for weeks before and after his failure, has published a book about him. Pieces have come from people tracking the movement of tokens on blockchains. The government presented its theory of the case in several charges. But there is not much compared to the series of evidence that was revealed during the trial by the first one FTX insiders, some of whom were testifying in cooperation with the government, after they had already pleaded guilty to fraud.
Some of the story remains the same, regardless of the narrator. Mr. Bankman-Fried was a gifted mathematician, who graduated from the Massachusetts Institute of Technology (MIT) in 2014 before taking a job as a trader at Jane Street Capital, a prestigious arithmetic hedge fund. In 2017 he had the opportunity to set up a fund that would take advantage of arbitrage opportunities in opaque and fragmented cryptocurrency markets, which, according to his words, were “a thousand times greater” than those in traditional markets. He found an old friend, Gary Wang, a coder he met at a math camp, to help set up the fund, which he named Alameda Research. He hired Nishad Singh, another coder and friend, as well as Caroline Ellison, a trader he met at Jane Street.
The stories start moving from here. Ms. Ellison, Mr. Singh and Mr. Wang all testified for the prosecution in the trial, speaking for hours about their version of Alameda’s harrowing climb and devastating fall and FTX.
As Ms. Ellison described it, Mr. Bankman-Fried was frustrated by how little capital Alameda had. He was “very ambitious”. In 2019 he reported it FTX to Ms. Ellison as a “good source of capital” for Alameda. Mr. Wang testified that he wrote code that allowed Alameda to have a negative balance FTX– to withdraw more than the value of its assets – as early as 2019. Alameda was given a line of credit, which started small but eventually grew to $65bn. Mr. Wang also said he overheard a conversation in which a trader asked Mr. Bankman-Fried if Alameda could continue to withdraw money from the company. Well, as long as withdrawal was less than FTXtrading income, came the answer. But less than a year later FTX established, when Mr. Wang went to balance his investigation, Alameda had already withdrawn more than that.
Customer deposits are supposed to be sacrosanct, withdrawable at any time. But even months later, it seemed that Alameda was already borrowing that money for its own purposes. Mr. Bankman-Fried said that he established FTX because he thought he could create an excellent future exchange, rather than satisfy a desire for capital. He explained Alameda’s privileges by saying that he was only vaguely aware of them and that he thought they were necessary. FTX to work, especially in the early days when Alameda was the biggest market maker on the exchange and sometimes there were bugs in the code that spread accounts. If Alameda were freed it would be terrible. Mr. Bankman-Fried did not want this to happen, and he wanted the fund to be able to make markets.
This was probably an excuse a jury could swallow, even though, before last year, Alameda was just one of maybe 15 major marketers on the exchange and the others didn’t get such benefits. But two lines of argument derailed it. The first is how the benefits were used. The second is as explained by Mr. Bankman-Fried FTX and his relationship with Alameda.
Start with how Alameda used its privileges. Ms. Ellison, who Mr. Bankman-Fried made co-CEO of Alameda in 2021, when he stepped down to focus on his exchange, described the many times Alameda withdrew large amounts of money from FTX. The first was when Mr. Bankman-Fried wanted to buy a share FTX which Binance had, a competitor. His relationship with the head of Binance had soured and he was worried that regulators would not like his involvement. It was going to cost about $1bn to buy the stake, about the same amount of capital FTX raising from investors. Ms. Ellison said she told Mr. Bankman-Fried “we don’t really have the money” and that Alameda would have to borrow from FTX to buy them. He told her to do it – “that’s fine, I think this is very important. “
Borrowing for venture investments that were unclear deepened the hole. By the end of 2021 however Mr Bankman-Fried wanted to make another $3bn of investments. He asked Ms Ellison what would happen if the value of stocks, cryptocurrencies and venture capital fell and, furthermore, FTX and Alameda struggled to get more money. She figured it would be “almost impossible” for Alameda to pay back what they had borrowed. However, he told her to go ahead with the investment. By the next summer, Ms. Ellison had been right.
Mr Singh testified at length about “excessive” spending. About $1bn went on marketing, including Super Bowl ads and endorsements from the likes of Tom Brady, the American football player – about the same as FTXrevenue in 2021. In the end, Alameda had made about $5bn in “related party” loans to Mr Bankman-Fried, Mr Wang and Mr Singh to finance venture investments, real estate purchases and cover personal expenses. At one point, under cross-examination, Danielle Sassoon, the prosecutor, asked Mr. Bankman-Fried to confirm whether he had flown to the Super Bowl on a private plane. When he said he was unsure, she took a picture of him sitting inside a small plane. “It was a registered plane, anyway,” he said.
The prosecution often used Mr Bankman-Fried’s words against him. Ms. Sassoon would have Mr. Bankman-Fried say whether he agreed with a statement, such as whether he was blocked from business decisions at Alameda. Mr. Bankman-Fried would tease him, but eventually she would put him down. “Usually I wasn’t making business decisions, but I wasn’t separated from information from Alameda,” he admitted. Ms. Sassoon then played a clip of him saying he was “totally banned from trading in Alameda”. Ms. Sassoon did this again and again. Like an archer she would string her bow by asking a question, and then release the arrow of evidence to prove a lie. At one point his lawyer slowed the pace of the evidence by interrupting and asking if a document was being offered for its truth. “Your honor, it’s the defendant’s own statements,” said the prosecutor. “No, it’s not offered for the truth.”
Emotional moments are perhaps the most defining moments of the exam. Ms Ellison was in tears as she described how, in the week of FTXin the fall, “one of the feelings I had was to feel a great relief.” Meanwhile, Mr Singh described a cinematic confrontation with Mr Bankman-Fried last September, when he realized how big “the hole” was. He described packing the lighthouse balcony (cost: $35m) where many FTX workers were alive, expressing horror that around $13bn of customer money had been borrowed, much of which could not be paid back. In response, Mr Bankman-Fried, sitting on a deck chair, replied: “Right, that. We’re a little short on deliverables.”
As customers rushed to collect their money that week FTX collapse, workers resigned in large numbers. Adam Yedidia, one of Mr Bankman-Fried’s friends and staff, who has not been charged with any crime and appears to have been in the dark, texted him: “I love you Sam, I’m not ‘ go anywhere. ” Days later, when he learned the truth of what had gone on, he was gone. Many of those who were close to Mr Bankman-Fried and knew what was going to happen predicted how this would end – those who were not shocked when they found out . So was the jury. ■
