Only a month has elapsed since Sam Bankman-Fried, the founder of ftx, a crypto exchange, placed the firm, along with Alameda Research, its sister hedge fund, into bankruptcy proceedings. The exchange was unable to meet customer withdrawal requests; the problem, it became clear, was that some $ 8bn of customer assets had ended up in the custody of Alameda, and were missing. In the intervening 32 days Mr Bankman-Fried has given countless interviews in which he has apologised, appeared confused by the unravelling of his empire, pleaded ignorance and generally tried to shift the blame.
He told “Good Morning America” that he “failed to have proper oversight”. In an interview with New York magazine he said: “I fucked up. I did. In multiple ways, frankly. In terms of letting a margin position get too big.” He explained to the New York Times that there were mysterious discrepancies between what “the audited financials were, the true financials, what the exchange understood…”, and said to the Wall Street Journal that he could not account for the money that was wired to Alameda: “I wasn’t running Alameda, but I can now go back and take a guess at where they were ultimately spent or used or something.”
Mr Bankman-Fried was arrested in the Bahamas on December 12th “at the request of the us Government”, said Damian Williams, the attorney for the southern district of New York, on the basis of a criminal indictment. The next day he was denied bail; he is expected to be extradited to America shortly. The indictment charges Mr Bankman-Fried with eight criminal counts, including acts of wire fraud against his customers, lenders and investors, as well as conspiracies to commit money laundering and commodities and securities fraud. For good measure, he is accused of defrauding the United States by violating campaign-finance laws. The Securities and Exchange Commission and the Commodities and Futures Trading Commission, two financial regulators, have also filed complaints.
Some of the facts in the authorities’ filings are familiar to those who have been listening to Mr Bankman-Fried’s missives over the past month. He has admitted that he told customers to route their funds directly into Alameda’s bank account—he suggested this was because ftx had not set up accounts, and that ftx lost track of the funds owing to sloppy accounting. The sec complaint argues that Alameda used the funds to make venture investments, purchase lavish properties and make political donations, and that use of them in this way means that Mr Bankman-Fried was “orchestrating a massive years-long fraud”.
Mr Bankman-Fried has said he did not pay enough attention to what Alameda was doing, and was thus unaware of what the hedge fund did with the money. The complaint alleges he was in fact well aware, and that he set up ways for Alameda to borrow customers’ funds. On multiple occasions, the sec writes, he “directed ftx to increase the amount by which Alameda could maintain a negative balance in its account”, giving it an unofficial (and in effect limitless) credit line by which it could take customer funds. The sec complaint also alleges that Mr Bankman-Fried made Alameda exempt from the processes by which customers’ trading positions were liquidated (ie, their assets sold off) when markets moved against them.
In May, as crypto markets crashed, despite having “already taken billions of dollars of ftx customer assets” when Alameda could not meet loan obligations, the sec alleges that Mr Bankman-Fried “directed ftx to divert billions more in customer assets to Alameda”. Most galling, perhaps, is the allegation that “even as it was increasingly clear that Alameda and ftx could not make customers whole”, Mr Bankman-Fried continued to make venture investments and took out personal “loans” from Alameda for himself and other ftx higher-ups.
The sum of these actions, the sec argues, is that there was no real distinction between Alameda and ftx, and that Mr Bankman-Fried used the hedge fund as his “personal piggy bank” to buy condominiums, make investments and support political campaigns, none of which was disclosed to investors or customers. In a congressional hearing on December 13th John Ray III, who was appointed boss of ftx by Mr Bankman-Fried before the company filed for bankruptcy, summarised it in a similar manner: “This is really old-fashioned embezzlement. This is just taking money from customers and using it for your own purpose.”
Mr Bankman-Fried denies any illegal activity and has sought in interviews to distance himself from criminal wrongdoing. If he was to be successfully extradited, tried and convicted, the former ftx boss might spend the rest of his life behind bars. When Bernard Madoff, a notorious financier who ran a Ponzi scheme for decades, was sentenced in 2009 the judge noted that: “The fraud loss known to date, which is greater than $ 13bn, is more than thirty-two times the baseline level of loss that would carry a sentence of life under the us Sentencing Guidelines.” The judge recommended Mr Madoff serve 150 years. The authorities put the cost of the fraud Mr Bankman-Fried is alleged to have committed at $ 8bn.
Mr Bankman-Fried seems in denial about the situation. He was unable to attend a congressional hearing on December 13th, having been taken into custody, but the contents of his intended testimony leaked. In it he claims to have been manipulated into filing for bankruptcy by his general counsel, that the team taking care of the process are mismanaging it, and that Alameda and ftx’s troubles only really began when Changpeng Zhao, the boss of a rival exchange, tweeted he would sell off tokens ftx had issued. Mr Bankman-Fried continues to insist the firms could have raised capital and made customers whole. When he put this idea to Ryne Miller, his general counsel, Mr Miller replied with an answer that is clear, seemingly, to everyone but Mr Bankman-Fried. “There’s nothing to save, Sam.” ?
