Sam Bankman-Fried, former CEO of the bankrupt cryptocurrency exchange FTX, presided over a spectacular collapse that cost his customers billions of dollars. He argues in court filings that anyone owed money by FTX “will eventually be paid in full”. The US government says he’s living in a fantasy land. He was sentenced to 25 years in prison on Thursday.
Last week, FTX’s caretaker, John Ray III, appointed to oversee the company’s bankruptcy proceedings, reminded the court that Bankman-Fried had masterminded a “colossal fraud”, lived a “life of delusion”, and called Bankman-Fried’s lawyers’ claim that no one had been harmed as “categorically, callously, and demonstrably false”.
Bankman-Fried was sentenced after being convicted of fraud and conspiracy to launder money in the multibillion-dollar collapse of his cryptocurrency exchange. If given the maximum penalty, he would have faced 100 years in prison. His lawyers asked for a six-year sentence. The US government wanted to see the 32-year-old ex-CEO, who defrauded his own customers out of $8bn, sentenced to 40 to 50 years.
Attorneys for the Department of Justice argued that Bankman-Fried’s sentencing submission shows attempts “to reframe his crimes as mere mistakes or misunderstandings” – and if released at a young age there is “significant likelihood” he would commit another fraud.
Judge Lewis Kaplan doled out two and a half decades to Bankman-Fried. But even as the hubbub over the founder of FTX crests and then subsides, the bankruptcy proceedings of the cryptocurrency exchange are heating up, becoming as contentious as Bankman-Fried’s blockbuster trial. 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, drawing in politicians and celebrities with donations and endorsement deals, and fronting a pseudo-philosophy of effective altruism that boiled down to the greater the profits, the greater the good.
Last year, Ray testified to Congress that FTX’s collapse was “really old-fashioned embezzlement. This is just taking money from customers and using it for your own purposes.” Justice department prosecutors echoed his statements in the immediate aftermath of Bankman-Fried’s conviction.
At trial, the court heard from an accounting expert who said that $11.3bn in customer funds were supposed to be held at Alameda Research, FTX’s hedge fund arm. But only $2.3bn could be located. The rest had gone toward investments, political contributions, charity foundations and real estate purchases. FTX, remarkably, had left almost no records of transactions.
“The harm was vast. The remorse is non-existent. Effective altruism, at least as lived by Samuel Bankman-Fried, was a lie,” Ray said in a recent court submission, adding that he and his team had spent “over a year stewarding the estate from a metaphorical dumpster fire”.
At Bankman-Fried’s sentencing hearing, Kaplan agreed. He said FTX’s customers had lost some $8bn and that its investors had lost $1.7bn.
Who gets paid in FTX’s bankruptcy, and how?
FTX collapsed over 10 days in November 2022 and soon after filed for Chapter 11 bankruptcy – a statute used to reorganize a failing company “in the public interest”. FTX’s exchange, its main product, was not so much reorganized as shut down.
On 31 January, FTX announced it would not reopen its exchange and would instead liquidate all its assets. It has promised to pay its account holders the value of the deposited crypto in dollars.
A series of civil lawsuits have challenged decisions made in the handling of FTX after Bankman-Fried’s departure, 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 – one of the main reasons FTX’s representatives say they can pay customers back. Plaintiffs in the suits argue FTX owes them the higher value, though.
Bankman-Fried invested $500m in the AI startup Anthropic when it was valued at $3.4bn. It’s now valued at about $15bn, and FTX plans to sell the stake for some $884m.
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 have objected to their crypto holdings being converted to dollars – “dollarization” – and the transparency that would come with it.
Last week, Ray pushed contentions about visibility aside. The CEO said he could not return the crypto assets because they don’t exist. “A jury has concluded beyond a reasonable doubt that Mr Bankman-Fried stole them and converted them into other things,” he wrote in a court filing.
Kaplan also rejected Bankman-Fried’s argument that customers could be paid back, and compared the former billionaire to “a thief who takes his loot to Las Vegas”, saying that Bankman-Fried was not entitled to leniency by trying to use his winnings to pay back what he stole.
Moreover, FTX bankruptcy claims have become a hot commodity, with the London-based distressed asset investor Attestor buying up the company’s assets at rock bottom prices. Attestor is now in a New York court defending itself from a Panamanian holder of an FTX account who wants the bankruptcy claim – now worth more than double – back.
FTX shareholders get zilch
One class of creditor is unlikely to see any of their money returned: FTX shareholders. Millions of shares were held 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 advertised for the company. Their stakes, once valued at tens of millions, are assumed to be worthless.
The bankrupt FTX has likewise had little success clawing back the charitable and political donations Bankman-Fried made, including $44.6m to Democratic candidates and causes, and at least $23.9m to Republicans in the last election cycle. In total, FTX dished out of $93m in political donations between March 2020 and November 2022. In February 2023, the exchange asked for its donations to be returned, claiming it would sue, but has not followed through with the threat.
But some of the beneficiaries of FTX’s PR largesse, designed some claim to influence regulations around crypto, have returned their donations: New York’s Metropolitan Museum of Art returned $550,000 it received from FTX in 2022. Stanford, where Bankman-Fried’s parents work as law professors, pledged to return a $5.5m donation.
Academics raise questions about FTX’s bankruptcy
A recently published academic paper claims that FTX was placed in the hands of legal counsel, Sullivan & Cromwell, which had “undisclosed potential conflicts of interest” in its dealings with the company and Bankman-Fried “due to apparent errors, omissions and deceptions”.
Law professors Jonathan Lipson at Temple University and David Skeel at the University of Pennsylvania contend that “FTX is a cautionary tale about the power that lawyers have to frame, control, and profit from” claims about the public interest and that the bankruptcy included “bargain-basement asset-sales to favored insiders”.
In their paper, the academics called for an independent examiner to look at how the precipitous bankruptcy was handled.
“It doesn’t appear from the public record that they made any serious effort to restart the exchanges,” Lipson told the Guardian. “Sullivan & Cromwell had an unusually long and important relationship with FTX and with Bankman-Fried before bankruptcy, so our concern is that the appearance of a conflict of interest caused them to panic and mislead Bankman-Fried into giving up control of the company, which then may have distorted the criminal case and hurt depositors and creditors.”
‘His redemption narrative’
In a text exchange with the Vox reporter Kelsey Piper, Bankman-Fried appeared to diminish the underpinnings of the effective altruism ideology he once championed.
“I feel bad for those who get fucked by it, by this dumb woke game westerners play where we say all the right shibboleths and so everyone likes us.”
Last month, Bankman-Fried replaced his trial lawyer with Marc Mukasey, who has represented Donald Trump, and Alex Mashinsky, the former CEO of the bankrupt cryptocurrency exchange Celsius, another mogul accused of fraud. Mukasey has described Bankman-Fried as a hard-working billionaire who avoided the trappings of great wealth and fame, and whose brusque social manner could be ascribed to “neurodiversity”.
In January, the Yale Law professor Ian Ayres and the Stanford Law professor John Donohue, two friends of the Bankman-Fried family, published an essay in Project Syndicate making the argument that FTX had sufficient assets to make its customers whole.
And Daniel Chapsky, the former head of data science at FTX, wrote that Bankman-Fried was only interested in helping bankruptcy lawyers and had “worked 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 has already been thinking about how to spin it. It is realistic that he will settle on a narrative, lean into it, and convince other people to part with their money based on lies and the promise of false hope,” prosecutors said in a filing.
At his sentencing, Bankman-Fried’s redemption narrative was unsuccessful. He said he was “sorry about what happened” and that he had made “a series of bad decisions”, but Judge Kaplan still called him remorseless, castigating him for “never a word of remorse for the commission of terrible crimes”.
