Sam Bankman-Fried, Cryptocurrency Poster Boy Convicted On Seven Charges

The trial, United States v. Bankman-Fried, began on 3 October this year at the Manhattan federal court. Over a dozen witnesses gave testimony for the prosecution, including three FTX staffers who had accepted plea deals. The case revolved around the unlimited line of credit Alameda Research could access from FTX customer funds, a provision that software engineers had created under Bankman-Fried’s directive. Bankman-Fried, represented by Mark Cohen and Christian Everdell of the law firm Cohen & Gresse, relied upon claims that he was unaware of the specifics of how borrowing, processing funds and access to customer funds took place. The jury, however, was not convinced and ultimately found him guilty on all seven counts.  

A second trial is scheduled for 11 March 2024 involving five charges brought by federal prosecutors after Bankman-Fried’s December 2022 extradition. Bankman-Fried has requested that these charges be dismissed because they were not part of the extradition agreement between the Bahama authorities and the US. Those charges relate to bank fraud and bribing Chinese officials. 

The poster boy for crypto’s rapid rise to fame 

Bankman-Fried founded Alameda Research with Tara Hedley in November 2017, a hedge fund specialising in cryptocurrency. In April 2019, he subsequently founded FTX, the cryptocurrency exchange platform that enabled the trade of crypto assets. Bankman-Fried had moved to Hong Kong in late 2018, but he and the staff of FTX moved from Hong Kong to the Bahamas in September 2021, ostensibly to avoid the harsh lockdowns in Hong Kong and because of a growing hostility there towards cryptocurrency.  

At its peak, FTX held deposits worth billions of dollars, and Bankman-Fried was duly listed at 41 in the Forbes 400 list of richest Americans in 2022. However, by 9 November 2022, FTX had collapsed into bankruptcy. The resulting bailout knocked Bankman-Fried’s extraordinary $US15 billion value to $US1 billion overnight.  

For journalists observing and reporting on Bankman-Fried’s exponential rise to become a billionaire, often in glowing profiles, the fraud-riddled FTX became a much more fascinating story and an education in being blinded by charisma. “The Devil in Nerd’s Clothes” (according to one Forbes headline) Bankman-Fried seemed blinded by his own charisma or deluded about his motivations. On 16 April 2021, The Wall Street Journal published “This Vegan Billionaire Disrupted the Crypto Markets. Stocks May Be Next”. The article revealed that Bankman-Fried gave $US5.2 million to Joe Biden’s campaign in September 2021 and that he intended to donate significant amounts altruistically. 

In October 2023, Caroline Ellison, the tech executive who ran Sam Bankman-Fried’s hedge fund (and dated him), testified under a plea deal that Bankman-Fried had instructed her to commit fraud and money laundering while also convincing her that he may one day be president of the United States. Rather than altruism, Ellison claimed that Bankman-Fried had donated to Biden’s campaign and made other strategic donations with the aim of influencing cryptocurrency regulation in the United States. 

Bankman-Fried has been jailed since August this year, the result of Judge Lewis Kaplan determining that Bankman-Fried was attempting to influence trial witnesses, including Ellison, and the $US250 million bond and confinement to his parent’s California home was not sufficient to prevent his influencing witnesses. 

Convicted this month on seven counts of fraud and conspiracy 

On 2 November, Bankman-Fried was found guilty by the Southern District’s Judge Lewis Kaplan of seven counts of fraud and conspiracy in a New York federal court for his role in stealing over $US10 billion from the thousands of customers and investors in FTX. His sentence will be confirmed by Judge Kaplan on 28 March 2024, but The New York Times has reported that the charges are likely to result in a sentence of 100 years, of which he is likely to serve 50. The most recent and likely precedent is Bernie Madoff, who, in 2019, was sentenced to 150 years upon being found guilty on 11 charges of fraud valued at $US64 billion. In 2021, 82-year-old Madoff died in prison. Then, there is also the other high-profile, charismatic Silicon Valley CEO whose empire crashed spectacularly. Elizabeth Holmes, founder of blood testing firm Theranos, was given an 11-year sentence by federal judge Edward Davila in November 2022 after being convicted on four counts of defrauding investors in January 2022.  

In her testimony, Ellison claimed Bankman-Fried had strategised systems that allowed Alameda, the hedge fund he co-founded and owned 90 per cent of, to withdraw unlimited funds from FTX accounts, which FTX staff were also permitted to draw from to “repay our loans”. It was money withdrawn from FTX that paid political donations of, according to Ellison, $US35 million to Republican candidates and $US10 million to Joe Biden. Under a plea agreement, like Ellison, FTX cofounder Gary Wang testified that Bankman-Fried had requested him to set up “software loopholes” that enabled Alameda to withdraw funds from FTX without limits. According to CNBC, documents made public by prosecutors revealed that FTX funds were used to finance over $US100 million in political donations during the 2022 midterms via “dark money” organisations or political groups that maintain secrecy over donors. Those included the American Action Network, American Prosperity Alliance, Majority Forward and One Nation (not aligned with the Australian organisation). Many of the donations were made in the names of FTX staff who were given directions by Bankman-Fried, including Ryan Salame (CEO of FTX’s digital markets division) and Nishad Singh (FTX’s former head of engineering).  

Customers were convinced with false promises 

Bankman-Fried, like Madoff and Holmes, had seemingly fooled investors into believing their products and services were so futuristic and high-tech that they were beyond the comprehension of regulators. They built their empires on enigmatic strategies, designed to be confounding enough to deter investors and customers from asking too many questions but promising countless benefits.  

Bankman-Fried had the credentials to support his claims, after all. Both of his parents were lawyers, and he had worked as a trader for Jane Street Capital, first as an intern in 2013 and post-graduation in 2015 to 2017. Following a brief stint between October to November 2017 as director of development at the Centre for Effective Altruism in California, Bankman-Fried and Tara Hedley co-founded Alameda Research with generous funding from billionaire Estonian computer programmer Jaan Tallinn and investor Luke Ding before going on to found FTX. 

Bankman-Fried, either intentionally or misguided by narcissism, openly invited journalists, bloggers, and authors to visit and interview him. He charmed them with his availability and candidness but ultimately raised red flags in his ill-considered responses to questioning. In November 2022, he told Vox that his prior claims of wanting greater regulations over cryptocurrency were not sincere and that regulators “make everything worse”. This interview took place on Twitter, which was also the site of Bankman-Fried’s ultimate downfall.  

Overnight crash led to current conviction 

On 9 November 2022, The Wall Street Journal reported that global cryptocurrency business Binance had declined its original plan to buy FTX because due diligence had revealed pending investigations of FTX and mishandling of customer funds. Binance had published its intentions on Twitter, publicly denigrating FTX. On 10 November, the Securities Exchange Commission and Commodity Trading Commission were reported by Bloomberg to be investigating FTX. A day later, FTX and Alameda Research declared bankruptcy, and Bankman-Fried resigned as CEO of FTX. A month after an interview with the Royal Bahamas Police Force on 12 November, he was arrested by them on 12 December to be extradited to the United States. The same day, he had been charged by the Southern District of New York with wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering.  

On 3 January 2023, he gave a “not guilty” plea to all charges. Four additional charges were announced on 23 February relating to illegal political donations, and in March, an indictment claimed Bankman-Fried of directing at least $US40 million in cryptocurrency to Chinese government officials to influence them to unfreeze Alameda Research accounts. Bankman-Fried, far from being humbled, provided written correspondence of a personal nature from Caroline Ellison to a reporter in July, resulting in Kaplan revoking Bankman-Fried’s bail on 11 August on the basis of witness tampering. The same month, Bankman-Fried faced an additional charge of illegal campaign financing owing to the over $US100 million of FTX customer funds that were directed to “dark organisations” during the US elections of 2022.  

US authorities claim a crackdown on crypto 

As for cryptocurrency, there’s likely to be a greater crackdown on regulation and international cooperation between authorities. 

On 6 October 2021, US Deputy Attorney General Lisa O. Monaco announced the formation of a National Cryptocurrency Enforcement Team (NCET), to tackle “complex investigations and prosecutions of criminal misuses of cryptocurrency”. NCET is a collaborative effort between the Department of Justice Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), Computer Crime and Intellectual Property Section (CCIPS) and specialists from within the U.S. Attorneys’ Offices.  

In a statement, Monaco said, “Today we are launching the National Cryptocurrency Enforcement Team to draw on the Department’s cyber and money laundering expertise to strengthen our capacity to dismantle the financial entities that enable criminal actors to flourish, and quite frankly to profit, from abusing cryptocurrency platforms” Deputy Attorney General Monaco said. “As the technology advances, so too must the Department evolve with it so that we’re poised to root out abuse on these platforms and ensure user confidence in these systems.” 

The first major win for the Department of Justice is undoubtedly the very public, very embarrassing collapse of FTX and the conviction of Sam Bankman-Fried.  

The US SEC has ongoing lawsuits against cryptocurrency exchanges Coinbase (COIN) and Binance. 

D&O Insurance Battles 

Bankman-Fried’s woes extend to his ability to pay his lawyers. There is an ongoing dispute between Bankman-Fried, former FTX general counsel Daniel Friedberg and the several directors and officers (D&O) insurers that covered the defence costs of FTX staffers. FTX’s D&O insurance was layered so that four different insurers each provided $US5 million of coverage in tiers. 

Bankman-Fried dropped his federal court case against Continental Casualty (CNA) on 6 November 2023 (Samuel Bankman-Fried v. Continental Casualty Co.), having originally claimed that CNA was improperly refusing to pay claims submitted by his criminal defence lawyers.  

Friedberg, after paying $US800,000 of his own legal fees, filed a motion to intervene in the case against CNA, claiming that Bankman-Fried had received an undue portion of the $10 million insurance payouts already issued by two other insurance carriers (Beazley and GBE Insurance Co. respectively).  

The insurers have been paying out defence costs as they are received, meaning that former FTX employees who were previously unaware they had insurance coverage did not apply early enough to claim a fair share of the insurance money. To date, Bankman-Fried has received $US5.7 million in insurance payouts, the lion’s share.  

A fourth insurer, Hiscox, has attempted to leave the division of the final $US5 million insurance coverage to the court registry rather than be held responsible for choosing which FTX claimants to pay. In August this year, Hiscox filed an interpleader action in Oakland federal court (Hiscox Syndicates Ltd. v. Samuel Bankman-Fried et al.). 

The insurers cannot refuse coverage, despite the D&O policy having an exclusion for claims connected to criminal fraud. That provision requires a non-appealable conviction in order to be enforced. Bankman-Fried can exercise his right to seek insurance payments until all appeals are exhausted, meaning that even with his conviction, the insurers are still liable to pay costs. 

“Crypto is for everyone” 

On 13 May 2022, even as Bankman-Fried was withdrawing from customer funds, FTX posted to Twitter that “Crypto is for everyone”. 

Bankman-Fried’s lawyer, Mark Cohen, acknowledged in his opening statement in October, however, that his client’s industry was a volatile one and that “crypto was not for everyone.” He attempted to portray his client as a well-intentioned entrepreneur who “overlooked” significant business requirements. 

Bankman-Fried will have plenty of time to reflect on those oversights far from the Bahamas, though. He will likely remain in Brooklyn’s Metropolitan Detention Centre until sentencing in March 2024. 

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