The swift and messy demise of Sam Bankman-Fried's FTX crypto empire
FTX quickly went from multibillion-dollar operation to total collapse, with its CEO facing felony charges
If there's something distinctive about the world of crypto, it's how fast big companies and big fortunes can be spun out of nothing — and just as swiftly collapse. Nowhere has that been more apparent than the meteoric rise and fall of crypto exchange FTX and its CEO and founder, Sam Bankman-Fried.
Bankman-Fried founded his crypto hedge fund Alameda Research in November 2017, with FTX established in May 2019. By early 2022, it had scaled to a multibillion-dollar operation, vaulting Bankman-Fried to the front ranks of both crypto executives and political donors.
But when a leaked company balance sheet exposed a shaky financial foundation, rival exchange Binance announced it would sell its hoard of FTT, the token associated with the FTX crypto exchange. That sparked the crypto equivalent of a bank run, as customers hastily moved to withdraw their funds.
FTX couldn't cover the outflows, and the $32-billion crypto empire vaporized overnight, along with Bankman-Fried's purported $12 billion personal fortune and his reputation as a crypto genius. The collapse triggered a range of civil and criminal investigations, and Bankman-Fried has been charged by the Department of Justice with 13 felonies.
The broad strokes of the FTX debacle may be known, but right now, there are still some blank spots on the canvas. Some bizarre, troubling and occasionally hilarious details have emerged in court filings, but important questions haven't been answered.
Billions of dollars of cash and crypto assets remain unaccounted for. In an early bankruptcy filing, newly installed CEO John J. Ray III — the corporate cleanup artist brought in to manage this mess — wrote that there wasn't even a confirmed list of FTX employees.
As a corporate calamity, FTX is almost without precedent — a sprawling global network of more than 100 companies, some of them with little apparent purpose except perhaps to shuffle money around, all of it run by a motley group of supposed financial savants from a luxury penthouse in the Bahamas.
It quickly scaled to a multibillion-dollar operation, vaulting Bankman-Fried to the front ranks of both crypto executives and political donors, and making FTX a household name endorsed by numerous celebrities. By the second week of November 2022, just a few years after it was founded, the FTX crypto empire had turned to ashes.
The investigation is proceeding just as quickly as FTX's collapse. Several FTX executives — Bankman-Fried's friends and corporate lieutenants — have pleaded guilty to serious charges involving fraud, money laundering, campaign finance violations, and other charges.
They have implicated Bankman-Fried in a range of financial crimes that could send him to prison for the rest of his life. Still, it's all firmly in "allegedly" territory: Bankman-Fried has pleaded not guilty to all charges, including a recently introduced charge that he authorized bribes of $40 million in crypto to be paid to Chinese officials to unlock $1 billion in funds frozen on a Chinese crypto exchange.
His trial is scheduled to begin in October, and even as Bankman-Fried's legal fate remains uncertain, his company has become an unexpectedly fascinating crime scene.
Where's the money, Sam?
In some ways, it's an object lesson in how not to run an alleged criminal enterprise, at least if you don't want to get caught.
FTX's rapid success — the huge amount of money it accumulated via venture capital, customer deposits and other sources — potentially contributed to some reckless spending. One of the great tasks of FTX's new leadership has been to account for where all the money and crypto went. It hasn't been easy.
Perhaps $12 billion of FTX customer funds were allegedly diverted to Alameda. According to government filings, this hoard of cash was used to cover Alameda's trading losses, buy real estate (including in the names of Bankman-Fried's parents), make investments in other crypto startups, and provide billions of dollars of "personal loans" to Bankman-Fried and top executives.
Some of that money — tens of millions of dollars — may have gone to the 196 members of Congress who received donations from FTX and its executives, according to reporting by Coindesk, a crypto industry news outlet.
Like any bankrupt company, FTX left behind a messy ledger of debts and loans, covering everything from company parties to complex deals with now-bankrupt rivals. It will take years for the bankruptcy process to play out, and unfortunately many of its retail customers will not be made whole.
According to the Securities and Exchange Commission, Bankman-Fried used Alameda Research as his "personal piggy bank," and the money was splashed around widely.
In a November filing, the company said it owed more than $4.6 million to Amazon Web Services but also $55,319 to Jimmy Buffet's Margaritaville Beach Resort in Nassau.
FTX lacked sophistication
FTX's legal afterlife — the many lawsuits, trials, bankruptcy hearings and monetary claims — will ultimately last far longer than the company itself was in business.
That wasn't the case for other infamous corporate disasters like Enron or Nortel, which Ray, the new FTX CEO, was also brought in to handle after they blew up.
Nortel was a telecommunications company for more than a century, since the early days of telephones. Enron lasted about 37 years before it collapsed, becoming synonymous with fraudulent financial engineering.
Bernie Madoff managed to run his Ponzi scheme-driven fraud for decades, pulling in billions of dollars and establishing a reputation as a financial genius with an instinctive understanding of markets.
Madoff ran a long-lasting, enormously successful criminal operation, and he did it in a well regulated financial market, to the bafflement of his peers.
Marc Litt, a former assistant U.S. attorney in the Southern District of New York who prosecuted Madoff, says the sophistication of the alleged fraud by Bankman-Fried pales in comparison to Madoff's crimes.
"From what I know about it, it's simply garden variety fraud where somebody has promised to do one thing with people's money and has violated those promises and done something else."
If the alleged FTX fraud was perpetrated with glitz and hype and a torrent of paid endorsements, the Madoff fraud took more care and cunning. Madoff "had to do all kinds of manoeuvres over the years to avoid being detected, including generating all kinds of false statements," said Litt.
Like any smart fraudster, Madoff kept his circle small, hired smart people who would be loyal and paid them well. Madoff didn't care about Ivy League degrees; he wanted discretion and streetwise intelligence, not strivers who would jump to Goldman Sachs or JP Morgan at the first opportunity.
The social network
In The Naked Emperor, the CBC podcast about the FTX drama, fraud is described as a social crime that affects people beyond its immediate victims and flows through social relationships and professional networks.
According to Litt, Madoff's fraud "was very predicated on his social circle and sort of elite access to his investment fund."
It was considered a privilege to get into Madoff's fund. Once inside the special club, you wouldn't want to take your money out — with Madoff's extraordinary returns, it would seem financially foolish.
It might be easier to get away with defrauding strangers. Most of Bankman-Fried's alleged victims are the customers from his crypto exchange, although some venture capitalists and former business partners have presented themselves as victims, too.
Bankman-Fried's circle may have been small and close-knit, but so far, former company executives Nishad Singh, Caroline Ellison and Gary Wang have all pleaded guilty and pledged to co-operate with prosecutors.
They were close friends with Bankman-Fried, part of the cohort living in the luxe Albany resort in Nassau.
They've shared important details, like how Wang allegedly coded a backdoor that would allow Bankman-Fried and his collaborators to move funds from FTX to Alameda without leaving a trail.
"For fraud cases like this, it's almost always necessary for there to be an insider, to tell the story, to bring the documents to life, and to explain what was going on behind the scenes and what was going on in all the conversations that surrounded those money movements and solicitations," said Litt, noting that a fraud conviction often requires evidence of intent.
Right now, Bankman-Fried's former colleagues are telling prosecutors the rest of their stories. Those details, known by only his closest friends and colleagues, may be what dooms the former CEO of FTX at trial.
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