FTX founder Sam Bankman-Fried presided over the largest crypto collapse in history. Now he is about to start fighting to stay out of prison for the rest of his life.
On Tuesday, a criminal trial begins in Manhattan that will decide whether the 31-year-old entrepreneur embezzled billions in customer funds to prop up his ailing crypto hedge fund, committed money laundering, and misled investors and lenders. Bankman-Fried has pleaded not guilty to the charges.
He also faces a separate set of criminal charges in another trial scheduled to begin in March. Convictions on all counts could mean a sentence of more than 100 years in federal prison.
The legal standoff that begins Tuesday inside a New York City courtroom is expected to expose the murky details of FTX’s 2022 collapse, a sudden unraveling that rattled the financial world and punctured the confidence of investors who had bet big on digital assets.
Bankman-Fried was indicted in December and arrested at his apartment complex in the Bahamas.
"The trial of SBF will be a tale of two very different views of reality," said Martin Auerbach, a lawyer with law firm Withersworldwide who specializes in cryptocurrencies and white collar defense.
Federal prosecutors, Auerbach said, will argue that Bankman-Fried committed straightforward fraud by lying to customers, investors, and government agencies.
Bankman-Fried, he expects, will seize on the crypto industry’s lack of regulation to argue he and even former colleagues testifying against him didn't know at the time that they mishandled customer assets.
Whichever story is true, "it's not a great picture for crypto," Auerbach said.
Some details of FTX’s demise are likely to come from Bankman-Fried’s former allies, including Caroline Ellison, the former CEO of Bankman-Fried's hedge fund Alameda Research and a one-time romantic partner, as well as two former FTX executives: co-founder Gary Wang and chief engineer Nishad Singh.
All three have pleaded guilty to criminal charges and agreed to testify against Bankman-Fried.
Rise and fall
Bankman-Fried’s fall was as swift as his rise. The MIT graduate started his career at New York trading firm Jane Street Capital and first leapt on to the crypto scene in 2017 when he and Tara Mac Aulay co-founded Alameda, a hedge-fund firm that specialized in quantitative crypto trading.
Alameda capitalized on spreads between higher cryptocurrency prices in Korea and Japan, and lower prices in the US. Bitcoin, the firm's primary asset, then traded in Asia at a 10-20% premium. Mac Aulay quit in 2018; the firm was owned by Bankman-Fried and Wang.
Bankman-Fried and Wang expanded their empire in 2019 when they founded FTX.com in the Bahamas. The pair quickly built it into one of the world’s largest crypto exchanges, while also starting an exchange for US customers called FTX US.
In early 2022, FTX.com touted a valuation of $32 billion; its US counterpart said it was worth $8 billion.
FTX became part of popular culture and sports for a time as the value of digital assets surged. It attached its name to an arena in Miami that played host to the NBA team Miami Heat and even tapped Seinfeld co-creator Larry David to star in an ad that ran during the 2022 Super Bowl.
Several star athletes, including Tom Brady, were given equity stakes in exchange for their public support of FTX.
It didn’t take long for FTX to come undone. It started in November of 2022 when a report from Coindesk revealed that a bulk of FTX.com's assets were held in its relatively illiquid proprietary token FTT.
The report spurred a run on customer deposits. Over a five-day period, FTX lost 87% of its assets on deposit as customers asked to cash out of their positions. That pushed the exchange into bankruptcy. In its petition for Chapter 11 protection, the company reported a balance sheet shortfall of nearly $9 billion.
The bankruptcy fueled a crypto downturn that had started before the filing. Crypto lender BlockFi collapsed and filed for bankruptcy two weeks later. Crypto banking firm Silvergate, which suffered $8 billion in customer withdrawals in the wake of FTX’s filing, announced in March that it would liquidate.
'Concentration of control'
Bankman-Fried's legal peril began last December when a federal grand jury charged him with committing wire fraud and wire fraud conspiracy against FTX customers and lenders, as well as conspiring to commit commodities fraud, securities fraud, and money laundering.
The eight-count indictment further accused him of failing to report political donations that exceeded campaign finance law limits.
The government has since dropped the campaign finance allegations and added accusations of bank fraud as well as a claim that the FTX chief paid Chinese officials $40 million to unfreeze one of this company's accounts.
A key claim prosecutors will try to make in the case starting this week is that Bankman-Fried and others knew as early as 2019 that customer funds on deposits with FTX were being moved illegally to the hedge fund, Alameda.
That money was then used to make investments for the hedge fund and to cover its expenses and debts.
They will also argue the group defrauded lenders by providing them false and misleading information concerning Alameda's financial condition.
"The FTX group's collapse appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced, non-sophisticated individuals, who failed to implement virtually any of the systems or controls that are necessary for a company entrusted with other people's money or assets," said John Ray, who took over as FTX’s CEO after Bankman-Fried resigned.
'One of the most hated people in the world'
Even before his trial began, this year proved to be a challenging one for Bankman-Fried.
Like most white collar defendants, Bankman-Fried was afforded an opportunity to remain out of custody to await trial. His bail conditions required living with his parents at their $4 million California home, staying off the internet, and avoiding contact with trial witnesses.
But that arrangement ended after the judge overseeing his case, Lewis Kaplan, ordered Bankman-Fried to await trial at a Brooklyn administrative prison known for grueling conditions.
Kaplan did so because he agreed with a claim made by prosecutors that Bankman-Fried had engaged in witness tampering by leaking diary-like writings made by Ellison to the New York Times, hoping to cast her in a negative light before the trial.
Prosecutors cited other conversations Bankman-Fried had with journalists before the trial, including Michael Lewis, who wrote a book about Bankman-Fried titled "Going Infinite" that is set to be published Tuesday.
Bankman-Fried has complained since entering prison of subsisting on bread and water in the crowded facility that reportedly denied his request for vegetarian meals.
Little is known about his defense strategy, though part of it may have been revealed in a series of his unsent Twitter posts and writings that Bankman-Fried shared with crypto blogger Tiffany Fong while on house arrest.
He claimed in those writings that Ellison refused his recommendations to hedge Alameda's cryptocurrency bets, according to The New York Times.
"She continually avoided talking about risk management — dodging my suggestions — until it was too late," Bankman-Fried wrote, according to The New York Times. He went on to say that at the time of running FTX he did what he thought was "right."
"I’m broke and wearing an ankle monitor and one of the most hated people in the world," he wrote, according to the Times. "There will probably never be anything I can do to make my lifetime impact net positive."
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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