Sam-Bankman-Fried, more commonly known as SBF, was convicted on the second of November on seven charges of fraud and conspiracy, in a trial that lasted over a month. SBF’s claim to fame was his multibillion-dollar cryptocurrency empire Future Exchange, FTX for short. FTX was founded in 2019 and operated as a cryptocurrency exchange and hedge fund. At its peak, in 2022, the fund had a $32 billion valuation. One notable feature of FTX was its focus on creating unique and diverse trading products. For example, FTX introduced tokenized versions of traditional assets like stocks and commodities, allowing users to trade these assets on the blockchain. This provided traders with exposure to traditional markets using cryptocurrency.
However, it all came crashing down when investigative journalists at Bloomberg decided to take a closer look at the relationship between FTX and Alameda research, another cryptocurrency firm founded by the same group. Their research revealed that Alameda research served as FTX’s market maker, acting on both sides of the market, which also meant that they would sometimes take the losing side of a trade to attract customers. According to anonymous sources quoted by The Wall Street Journal, FTX lent Alameda Research $10 billion of its customers' assets in 2022, to pay back loans that Alameda had used to make investments that manipulated the market in SBF’s favour. Caroline Ellison, CEO of Alameda, informed other Alameda employees that she, Sam Bankman-Fried, and top leadership at both firms were aware of the decision.
On November 11, FTX and Alameda Research, and more than 100 of their affiliates, filed for bankruptcy in Delaware. Anonymous sources cited by the New York Times said that the exchange owed as much as $8 billion to their investors.
As of November 12, SBF was in the Bahamas, attempting to deal with FTX crumbling around him. According to anonymous sources quoted by Reuters, as of November 12, between $1 billion and $2 billion in client funds could not be accounted for.
On November 17, John J. Ray III, the interim CEO appointed as liquidator of FTX, stated in a sworn declaration that was filed in bankruptcy court that the FTX subsidiary Alameda Research had lent $1 billion to Bankman-Fried on September 30 and more than $500 million to FTX co-founder Nishad Singh on September 30. In a November statement, Ray III stated "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
From compromised systems of integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation was unprecedented. SBF was arrested in the Bahamas soon after and commenced his trial in October 2023. Prosecutors said Bankman-Fried “misappropriated and embezzled” billions of dollars of his customers’ money for himself via Alameda Research, the hedge fund closely associated with FTX. U.S. Attorney Damian Williams also stated that “Sam Bankman-Fried perpetrated one of the biggest financial frauds in American History”. Assistant U.S. Attorney Nicholas Roos, presenting the U.S. Department of Justice's denouement, opened by noting that there was "no dispute" that billions of dollars worth of FTX customer funds were gone.
"This is a pyramid of deceit by the defendant built on lies and false promises," Roos said. Finally, the prosecution closed with the statement that "He lied to get customers' trust." The prosecution reviewed spreadsheets to dispute assertions that Bankman-Fried was unaware of Alameda's multibillion-dollar line of credit and that he felt client funds were his "piggy bank." As mentioned before, SBF was found guilty of all seven of his charges and is facing up to 115 years in prison. SBF's conviction sends a broader message to similar cryptocurrency funds, warning them against illicit market manipulation and poor organisation and oversight.