After the demise of his FTX crypto empire in November, Sam Bankman-Fried portrayed himself as a hapless but well-intentioned chief executive who made a series of calamitous mistakes, but never knowingly committed fraud. But a day after his arrest in the Bahamas, the US Securities and Exchange Commission, Department of Justice and Commodity Futures Trading Commission filed civil and criminal charges against Bankman-Fried, including that he had orchestrated a scheme to bilk equity investors out of more than $1.8 billion. The next week, prosecutors announced that two members of his inner circle had pleaded guilty to fraud charges.
1. What was FTX?
It had grown into a sprawling crypto enterprise, so much so that more than 100 entities were included when FTX filed for bankruptcy. But at its heart there were two organizations that mattered most: Alameda Research, the trading venture that Bankman-Fried co-founded in 2017, and FTX Trading Ltd., a crypto exchange based in the Bahamas and founded in 2019. All told, he raised more than $1.8 billion from equity investors, the SEC said.
2. How did it grow so big?
Alameda initially made profits by applying traditional techniques of arbitrage to the Bitcoin market. Bankman-Fried and co-founder Gary Wang found ways to buy the world’s biggest cryptocurrency on Asian exchanges where it was selling for slightly less, and sell it on exchanges where it was selling for slightly more, pocketing the difference. Bankman-Fried had previously been a trader at Jane Street, a mainstream hedge fund. When he founded FTX, he promoted it as a platform for financially sophisticated traders and touted its automated risk management engine to the US Congress as superior to those used by traditional market makers. At its peak in early 2022, FTX was valued at $32 billion by its equity investors.
3. How did it get into trouble?
According to the SEC, Bankman-Fried had “from the start” improperly diverted assets that customers had deposited with FTX for use by Alameda to fund its trading positions and venture investments, as well as personally make “lavish real estate purchases and large political donations.” He and Wang borrowed more than $546 million from Alameda to buy a nearly 8% stake in Robinhood Markets Inc., according to court papers. As the broader crypto market declined in value through 2022, other lenders began to seek repayment from Alameda. Even though FTX had allegedly already given Alameda billions of dollars in customer funds, Bankman-Fried began to give Alameda even more money to cover those positions, the SEC alleged.
4. What led to its collapse?
FTX issued its own token known as FTT. Alameda had begun using FTT, along with tokens issued by entities that FTX either owned or invested in, as collateral for its borrowing activities, while also using FTX customer funds to trade with. But FTT isn’t backed by substantial reserves of assets. That meant its value was tied closely to the fortunes of FTX itself, making it worthless as collateral if FTX or Alameda ran into trouble and urgently needed funds. When questions were raised about FTT by the chief executive of rival exchange Binance, weak oversight and risk management at FTX compounded the problem. As clients began to withdraw funds from FTX, it didn’t know where all its pots of money were or how much of its assets it could liquidate in a hurry, and so struggled to honor requests. That fed into customer panic, and accelerated their rush for the exit.
5. What did Bankman-Fried say?
Bankman-Fried argued that FTX’s funding problems were limited to FTX International Ltd., the larger entity that grouped its businesses outside of the US including Alameda and about 100 other units. FTX US was still solvent, he said in prepared remarks for US lawmakers prior to his Dec. 12 arrest. When the extent of the collapse became clear, Bankman-Fried also blamed himself for what he said was a series of accounting errors caused by poor risk management. He said that Alameda’s investments had been hit hard by the broader crypto meltdown, and that when FTX called in loans it had extended to Alameda, the trading outfit couldn’t meet those requests. He added that he wasn’t aware that Alameda was so heavily exposed to FTX.
6. Do regulators buy that?
No. According to SEC Chair Gary Gensler, Bankman-Fried built a “house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.” FTX’s own terms of service stated that ownership of assets deposited on its platform remained with customers, so it was not allowed to use them elsewhere in the group as collateral to raise funds for other investments — particularly as FTX was not a regulated bank. Additionally, as the majority owner of Alameda, Bankman-Fried may have had more insight into the state of its affairs than he is letting on. The SEC alleged that Bankman-Fried personally directed that FTX’s “risk engine” not apply to Alameda — in effect giving what the SEC called an unlimited line of credit funded by FTX customers — and hid the extent of the ties between the two entities from investors.
7. What specific charges does Bankman-Fried face?
Bankman-Fried was charged in a Manhattan court with eight criminal counts, including conspiracy and wire fraud. He’s also being sued by the SEC and the CFTC for misleading investors. One of those eight criminal counts includes violating campaign finance laws, alleging that the former billionaire conspired with other unnamed individuals to use corporate money and shadow donors starting in 2020 to contribute to political campaigns. FTX customers were suing in a bankruptcy court to try to recover some of the billions lost in the meltdown. After initially resisting extradition, Bankman-Fried was returned to the US and was released on a $250 million bail package. Just before his return, Manhattan US Attorney Damian Williams announced that two of Bankman-Fried’s closest associates, Wang and former Alameda Chief Executive Officer Caroline Ellison, had pleaded guilty to fraud and were cooperating with the prosecution.
8. What have they admitted to?
At a court hearing on Dec. 19, Ellison said she and Bankman-Fried knowingly misled lenders about how much Alameda was borrowing from FTX. “I knew that it was wrong,” she said, according to a transcript of the hearing. In his own plea hearing, Wang, who had been FTX’s chief technology officer, said he was “directed” to make changes to the FTX platform’s code that he knew would give Alameda special privileges, and that misrepresentations were being made to customers and investors.
9. What has been the reaction in the world of crypto?
Bankman-Fried’s assertions have been met with little sympathy by his former peers, many of whom are worried that the string of bankruptcies triggered by the FTX collapse could crush the crypto markets for years to come (if not permanently). Some have pointed out that a weakness in the “bad luck” argument is that FTX doesn’t appear to have performed any stress tests for a bank-run-style scenario. The company sold itself as a benchmark of stability in a volatile industry, and Bankman-Fried frequently and loudly said he was eager for FTX to be regulated. But in the end, tokens it either owned or invested in — such as FTT token and another called Serum — crumbled to dust.
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