by Sam Bankman-Fried, former CEO of the bankrupt cryptocurrency exchange FTX, presided over a spectacular collapse that cost his customers billions of dollars. He insists in court filings that anyone owed money by FTX will be paid in full. The US government says it lives in a fantasy land.
Last week, FTX trustee John Ray III, who was appointed to oversee the company’s bankruptcy proceedings, reminded the court that Bankman-Fried was presiding over a “massive fraud”, that he had lived a “life of delusion”, and he asked the Bankman-Fried lawyers claim that it was. no one was harmed as being “categorically, callously, and patently false”.
Related: The rise and fall of Sam Bankman-Fried: unrepentant ex-mogul faces years in prison
Bankman-Fried will be sentenced on Thursday after being convicted of fraud and conspiracy to launder money following the collapse of his billion-dollar crypto exchange. If he were given the maximum penalty, he would spend 100 years in prison. His lawyers have asked for a six-year sentence. The US government wants the 32-year-old former CEO, who defrauded his own customers out of $8bn, to be sentenced to 40 to 50 years.
Attorneys for the Department of Justice argue that Bankman-Fried’s sentencing submission shows attempts to “reframe his crimes as mere mistakes or misunderstandings” – and that if he was released at a young age there is a “significant likelihood” he would commit further fraud.
Whatever sentence Judge Lewis Kaplan hands down to Bankman-Fried, FTX’s bankruptcy proceedings have become as controversial as the blockbuster trial of its founder. They are likely to continue long after he reports to prison.
FTX: new technology, old fashioned embezzlement
The crypto entrepreneur laid a smokescreen, spending millions of customer funds on his lifestyle, pulling in politicians and celebrities with donations and endorsement deals, and in front of a pseudo-philosophy of effective altruism that boils down to the greater profit, the greater the good.
Last year, Ray told Congress that the FTX failure was a “real old-fashioned feather. This is just taking money from customers and using it for your own purposes.” Justice Department prosecutors echoed their statements immediately after Bankman-Fried’s conviction.
At trial, the court heard from an accounting expert who said $11.3bn in customer funds were supposed to be held by Alameda Research, the hedge fund arm of FTX. But only $2.3bn could be found. The rest went towards investments, political contributions, charitable foundations and real estate purchases. It is noteworthy that FTX had almost no record of transactions left.
“It was very damaging. The regret is not there. “Effective altruism, at least as Samuel Bankman-Fried did, was a lie,” Ray said in a recent court submission, adding that he and his team “spent over a year overseeing the estate from a fire metaphorical dumpster”.
Who gets paid in an FTX bankruptcy, and how?
FTX collapsed in a ten-day event in November 2022 and soon after filed for Chapter 11 bankruptcy – a statute used to reorganize a failed company “in the public interest”. The FTX exchange, its main product, was not so much reorganized as discontinued.
On January 31, FTX announced that it would not reopen its exchange and would instead liquidate all of its assets. It promised that its account holders will pay the value of the deposited crypto in dollars.
A series of civil lawsuits have challenged decisions made regarding the handling of FTX following the Bankman-Fried event, however. The company says it will pay creditors based on the value of their cryptocurrency at the time of FTX’s bankruptcy, when Bitcoin was trading at just over $17,000. Bitcoin is currently four times more valuable, trading at over $67,000. Plaintiffs in the suits argue that FTX owes them the higher value.
Bankman-Fried invested $500m in AI startup Anthropic when it was valued at $3.4bn. It is now valued at about $ 15bn, and the issue could be worth $ 2bn if FTX had cashed out.
Related: FTX scraps plan to revive exchange and refund billions to customers
In a lawsuit filed in January, four FTX creditors said the plan to return customer funds did not reflect the company’s obligations under Chapter 11 bankruptcy law. Some objected to the conversion of its crypto holdings into dollars – “dollarization” – and the transparency that would come with it.
Last week, Ray brushed aside arguments about visibility. The CEO said he couldn’t return the crypto assets because they don’t exist. “A jury concluded beyond a reasonable doubt that Mr. Bankman-Fried stole them and turned them into other things,” he wrote in a court filing.
In addition, FTX’s bankruptcy claim has become a hot commodity, with the distressed asset investor in London buying the company’s assets at rock bottom prices. The baker is now in court in New York defending himself from the Panamanian holder of the FTX account who wants the bankruptcy claim – which is now worth more than double – back.
FTX shareholders get zilch
One class of creditor is unlikely to see any of their money back: FTX shareholders. Millions of shares were owned by Tiger Global management, the Ontario teachers’ pension plan, Sequoia Capital, New England Patriots owner Robert Kraft, NFL quarterback legend Tom Brady and his ex-wife Gisele Bündchen, who both announced to the company. Their stakes, once worth thousands, are now considered worthless.
The bankrupt FTX has also had little success reclaiming Bankman-Fried’s charitable and political donations, including $44.6m going to Democratic candidates and causes, and at least $23.9m going to Republicans in the last election cycle. In total, FTX forfeited $93m in political donations between March 2020 and November 2022. In February 2023, the exchange asked for its donations to be returned, claiming to be sued, but did not follow through on the threat
But some of the donors have returned a donation from PR largesse FTX, which designed several claims to influence regulations regarding encryption: the Metropolitan Museum of Art of New York returned $550,000 it received from FTX in 2022. legal ethics, pledges to return $5.5m donation.
Academics question FTX’s bankruptcy
A recently published academic paper claims that FTX was placed in the hands of legal counsel, Sullivan & Cromwell, who had “undisclosed potential conflicts of interest” in dealings with the company and Bankman-Fried “due to apparent errors, omissions and deception”. .
Law professors Jonathan Lipson at Temple University and David Skeel at the University of Pennsylvania argue that FTX is “a cautionary tale about the power of lawyers to invent, control and profit from claims” about the public interest and that “a market was in mind with the bankruptcy. -sales of basement assets to preferred insiders”.
In their paper, the academics asked an independent examiner to look at how the pre-trial bankruptcy was handled.
“It doesn’t appear from the public record that they made any serious attempt to restart the exchanges,” Lipson told the Guardian. “Sullivan & Cromwell had an unusually long and important relationship with FTX and Bankman-Fried prior to bankruptcy, so our concern is that the appearance of a conflict of interest has caused them to panic and mislead Bankman-Fried to control the company, which could then distort the criminal case and hurt depositors and creditors.”
‘His redemption story’
In a text exchange with Vox reporter Kelsey Piper, Bankman-Fried appeared to undermine the basis of the effective altruistic ideology she once championed.
“I feel bad for those who get fucked by him, at this dumb wake up game westerners play where we say all the right shibboleths and so everyone likes us.”
Related: Dramatic fall for Sam Bankman-Fried and ‘unkempt-looking’ persona
Last month, SBF replaced its trial lawyer with Marc Mukasey, who represents Donald Trump and Alex Mashinsky, the former CEO of the bankrupt Celsius cryptocurrency exchange Celsius, another mogul accused of fraud. Mukasey has described Bankman-Fried as a hard-working billionaire who shunned the trappings of great wealth and fame and whose “neurotic diversity” could be attributed to his brutal social manner.
In January, Yale Law professor Ian Ayres and Stanford Law professor John Donohue, two friends of the Bankman-Fried family, published an essay in Project Syndicate arguing that FTX had sufficient assets to make its customers whole.
And Daniel Chapsky, former head of data science at FTX, wrote that SBF was only interested in helping bankruptcy lawyers and was “working almost around the clock, to the point of exhaustion”.
But the government has pushed back on those efforts. “The point is that the defendant is motivated to launch his redemption narrative and is already thinking about how to spin it. It is realistic that he will set up a story, follow through on it, and convince others to part with their money based on lies and the promise of false hope,” prosecutors said in a filing.
