Everything you need to know about the case against Sam Bankman-Fried

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After his FTX crypto empire disappeared in November, Sam Bankman-Fried presented himself as an unfortunate but well-meaning CEO who made a series of calamitous mistakes, but never knowingly committed fraud. Regulators don’t buy it. A day after his arrest in the Bahamas, the United States Securities and Exchange Commission, the Department of Justice and the Commodity Futures Trading Commission filed civil and criminal charges against Bankman-Fried, including that he orchestrated a scheme to defraud stock investors of more than $1.8. billion. Here’s what we know so far.

It had grown into a sprawling crypto business, so much so that over 100 entities were included when FTX filed for bankruptcy. But at its heart were two organizations that mattered most: Alameda Research, the trading firm that Bankman-Fried co-founded in 2017, and FTX Trading Ltd., a Bahamas-based crypto exchange founded in 2019. It all counts In fact, it has raised more than $1.8 billion from equity investors, the SEC said.

2. How did he get so big?

Alameda initially made profits by applying traditional arbitrage techniques to the Bitcoin market. Bankman-Fried and co-founder Gary Wang found ways to buy the world’s largest cryptocurrency on Asian exchanges where it was selling a little less, and sell it on exchanges where it was selling a little 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 presented its automated risk management engine to the US Congress as superior to those used by makers. traditional market. At its peak in early 2022, FTX was valued at $32 billion by its equity investors.

3. How did he get in trouble?

According to the SEC, Bankman-Fried “from the outset” improperly misappropriated the assets clients had deposited with FTX for Alameda to use to fund its trading positions and venture capital investments, as well as to make personally “lavish real estate purchases and large political donations”. .” As the broader crypto market dwindled in value through 2022, other lenders began seeking repayment from Alameda. Even though FTX reportedly already gave Alameda billions of dollars in client funds, Bankman-Fried began giving Alameda even more money to cover those positions, the SEC alleged.

4. What led to its collapse?

FTX has issued its own token known as FTT. Alameda had begun using FTT, as well as tokens issued by entities owned or invested by FTX, as collateral for its borrowing activities, while also using FTX client funds to trade. But like most crypto tokens, FTT is not backed by substantial reserves of assets. This meant that its value was closely tied to the fortunes of FTX itself, making it worthless as collateral if either FTX or Alameda ran into trouble and needed funds urgently. When questions were asked about FTT by the chief executive of rival exchange Binance, weak oversight and risk management at FTX compounded the problem. When customers started withdrawing funds from FTX, he didn’t know where all his pots of money were or how much of his assets he could liquidate quickly, so he struggled to honor requests. This fueled customer panic and accelerated their rush to exit.

5. What did Bankman-Fried say?

Bankman-Fried argued that FTX’s funding problems were limited to FTX International Ltd., the largest entity that consolidated its operations outside the United States, including Alameda and about 100 other units. FTX US was still solvent, he said in prepared remarks for US lawmakers ahead of his Dec. 12 arrest. When the scale of the collapse became clear, Bankman-Fried also blamed himself for what he said were accounting errors caused by poor risk management. He said Alameda’s investments had been hit hard by the broader crypto meltdown, and when FTX asked for loans it had made to Alameda, the trading company was unable to respond to those. requests. He added that he did not know that Alameda was so heavily exposed to FTX.

6. Are regulators buying this?

No. According to SEC Chairman Gary Gensler, Bankman-Fried built a “house of cards on a foundation of deception while telling investors it was one of the most secure buildings in crypto.” FTX’s own terms of service stated that ownership of assets deposited on its platform remained with clients, so it was not allowed to use them elsewhere in the group as collateral to raise funds for other investments – d especially since FTX was not a regulated bank. Moreover, as the majority owner of Alameda, Bankman-Fried may have had more information about the state of his affairs than he lets on. The SEC alleged that Bankman-Fried personally ordered 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 about others in crypto?

Bankman-Fried’s claims have been met with little sympathy from his former peers, many of whom fear the series of bankruptcies triggered by the FTX collapse could crush crypto markets for years to come (if not permanently). ). Some have pointed out that a weakness of the “bad luck” argument is that FTX does not appear to have performed stress tests for a banking-like scenario. The company has marketed itself as a benchmark for stability in a volatile industry, and Bankman-Fried has frequently and loudly said that he is keen for FTX to be regulated. But in the end, the tokens he owned or invested in — like the FTT token and another called Serum — crashed.

8. What specific fees does Bankman-Fried face?

Bankman-Fried was charged in a Manhattan court with eight counts, including conspiracy and wire fraud. He is also being sued by the SEC and the CFTC for deceiving investors. One of those eight counts includes violating campaign finance laws, alleging the former billionaire conspired with other anonymous people to use company money and ghost donors from of 2020 to contribute to political campaigns. As a result, SBF-funded legislators could face reputational risk, while fundraising committees could have to return the money – plus interest – just as they try to raise money for the 2024 presidential election.

More stories like this are available at bloomberg.com

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