Crime and Punishment: Crypto Billionaire Sam Bankman-Fried Found Guilty of Fraud

It was a stunning fall following a meteoric rise. The US Department of Justice found Sam Bankman-Fried, the pioneering cryptocurrency billionaire, guilty of seven charges on 11 November 2023.

These include wire fraud, conspiracy to commit wire fraud, and money laundering. The founder of failed cryptocurrency exchange FTX and trading firm Alameda Research faces up to 110 years in prison, pending sentencing in March 2024.

The case has made headlines across the world. It cast doubt upon the cryptocurrency industry, sparking debate about how white-collar crimes are dealt with and exposing the fragility of tech billionaires and their empires.

We take a deep dive into the case to understand how a man hailed as crypto's biggest success story became a cautionary tale.

The rise and fall of Sam Bankman-Fried's crypto empire

It was a finance entrepreneur's fairy tale. Sam Bankman-Fried's parents were both Stanford professors. He graduated from the Massachusetts Institute of Technology (MIT) with a degree in Physics. He then went on to work at a high-value, boutique Wall Street investment firm called Jane Street.

In 2017, he founded a hedge fund, Alameda Research. The firm traded in crypto arbitrage. This means the different prices at which cryptocurrencies are sold in different jurisdictions.

But his real rise started in 2019 when he co-founded the crypto exchange FTX with former Google employee Gary Wang. Crypto saw a boom during the pandemic. This propelled FTX towards great profits.

FTX put Bankman-Fried on the Forbes billionaires list in only two years. By the end of 2021, at the age of 29, Forbes estimated his net worth at $26bnx. This cemented his reputation as a financial whiz-kid and crypto whisperer.

In its heydays, FTX seemed invincible. The company even hosted a conference called Crypto Bahamas, a high-profile industry event. Attendees included former US President Bill Clinton and former UK Prime Minister Tony Blair.

FTX enabled traders to trade digital assets like Bitcoin and Ethereum. It soon attracted prolific Silicon Valley investors like Sequoia Capital, Softbank, and Coinbase Ventures.

On 22 September 2022, Sequoia also published a glowing profile of the entrepreneur on its website. The long feature did not skimp on praise for the billionaire or his company. "FTX—a company that may very well end up creating the dominant all-in-one financial super-app of the future. Nothing is a sure bet in crypto, but just the possibility that FTX could join—or even eclipse—the big four of American banking (JPMorgan Chase, Bank of America, Wells Fargo, and Citibank) means it's already valued at $32 billion." the profile said, as Sequoia invested $214 million in FTX.

On 11 November 2022, FTX filed for bankruptcy, and FTX founder Sam Bankman-Fried resigned as CEO.

The Sam Bankman-Fried case

The FTX empire crumbled after Coindesk published a damning article in November 2022. This was exactly one year before the jury found Bankman-Fried guilty. The article revealed a confidential balance sheet of Alameda Capital that aroused suspicions of foul play and collusion with FTX.

Though November 2022 was a breaking point, prosecutors and the SEC charged that the operation was a fraud “from the start.”

The initial suit, filed by the SEC, states that Bankman-Fried raised more than $1.8 billion from investors. They believed that FTX had appropriate controls and risk management procedures in place. But it alleges fraud, saying, “Unbeknownst to those investors (and to FTX's trading customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform's customer funds for his own personal benefit and to help grow his crypto empire.”

The irony is that Sam Bankman Fried was praised for wanting to be an "ethical billionaire" not too long ago. An article in Forbes detailed his approach to "effective altruism"- a new-age theory of philanthropy and impact. "He's a mercenary, dedicated to making as much money as possible (he doesn't really care how) solely so he can give it away (he doesn't really know to whom, or when)," the article summarized.

The SEC wasn't buying it. The lawsuit details how Bankman-Fried's image of an ethical and responsible leader of the crypto community was crafted to mislead investors. This rhetoric was intended to make customers trust the FTX exchange and encourage them to invest billions through the platform.

"But from the start, Bankman-Fried improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research LLC, and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations." the lawsuit alleges.

He apparently also misrepresented the relationship between his two businesses, FTX and Alameda Research. 

According to the SEC, "He told investors and prospective investors that FTX had top-notch, sophisticated automated risk measures in place to protect customer assets, that those assets were safe and secure, and that Alameda was just another platform customer with no special privileges. These statements were false and misleading. In truth, Bankman-Fried had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited "line of credit" funded by the platform's customers."

When crypto asset prices started to fall in May 2022, Alameda's lenders demanded repayment on billions of dollars of loans. But even with the billions that Alameda had taken from FTX, it was unable to repay these loans.

"Even in November 2022, faced with billions of dollars in customer withdrawal demands that FTX could not fulfill, Bankman-Fried misled investors from whom he needed money to plug a multi-billion-dollar hole. His brazen, multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliated entities filed for bankruptcy on 11 November, 2022."

What does the Sam Bankman-Fried case mean for the future of crypto?

Sam Bankman-Fried's conviction has cast a harsh spotlight on the poorly regulated, often unruly inner workings of financial industries like crypto.

Alameda Research CEO Caroline Ellison testified at the trial about how unethical practices had become the norm at Alameda Research. She said that lying and even stealing were permitted as "the only moral rule that mattered would be maximal utility. " She went on to admit, “When I started working at Alameda, I don't think I would have believed you if you told me I would be sending false balance sheets to our lenders, or taking customer money, but over time, it was something I became more comfortable with.”

Later, Bankman-Fried leaked her diaries to The New York Times and was sent to jail for witness tampering.

The Justice Department issued a statement from Attorney General Merrick B. Garland on the jury conviction in the trial:

“Sam Bankman-Fried thought that he was above the law. Today's verdict proves he was wrong. This case should send a clear message to anyone who tries to hide their crimes behind a shiny new thing they claim no one else is smart enough to understand: the Justice Department will hold you accountable. I am grateful to the US Attorney's Office for the Southern District of New York and the FBI for their outstanding work in bringing Mr. Bankman-Fried to justice.”

In March 2024, Judge Lewis Kaplan of the Southern District of New York will decide how much time in prison Sam Bankman-Fried will be sentenced to. The maximum sentence could go up to 110 years.

Few other cases have brought down the wrath of the law on white-collar crimes like this. The last was Bernie Maddof's case in 2009. Bernie Madoff pleaded guilty to 11 criminal counts for a $64 billion fraud that played out over 30 years. This was the infamous Ponzi scheme. He was sentenced to 150 years in prison and died in custody in 2021.

This is a grim precedent, but it means that Sam Bankman-Fried perpetrated one of the biggest financial frauds in history. Not quite a fate people had expected for crypto's blue-eyed boy.