
Jury selection for the criminal trial of former FTX CEO Sam Bankman-Fried will begin Tuesday morning in New York. The accused stands accused of seven crimes, among them wire fraud, securities fraud and money laundering; a guilty verdict on all counts could cost Bankman-Fried as much as 100 years in prison. Bankman-Fried, whose parents are both Stanford legal scholars, has entered a plea of not guilty to all charges.
One year ago, Sam Bankman-Fried was widely considered to be a powerful figure in the industry who was living the high life in a $40 million penthouse in the Bahamas while managing a $32 billion crypto empire. However, this Tuesday morning in a federal court in Manhattan, New York, he will begin his trial facing accusations of orchestrating one of the most notable frauds to have taken place in the United States. Here is an insight into this multi-week trial and the government's case against the 31-year-old Bankman-Fried, as well as an analysis of how this situation has come to pass.
Tuesday marks the onset of the two distinct criminal proceedings against the erstwhile admired tycoon. In the first trial, Bankman-Fried faces seven criminal counts associated with his crypto firm's collapse, such as wire fraud, securities fraud, and money laundering. Prosecutors from the Southern District of New York assert that Bankman-Fried used client cash, which surpasses $8 billion, for his personal purchases, including over $200 million worth of opulent real estate in the Bahamas, and concealing losses at his crypto hedge fund, Alameda Research. The federal government has also charged him with using customer funds for over $100 million of 2022 midterm election campaign donations. If convicted on all accounts, he may be sentenced to more than 100 years in jail. Bankman-Fried previously pleaded not guilty to all charges.
The trial is slated to last for up to six weeks, beginning at 9:30 a.m. ET on Tuesday with jury selection. Over the course of four weeks, the prosecution will outline its case, and the defense will take an additional one to two weeks to present its position. It is uncertain whether Bankman-Fried will testify himself, but witnesses anticipated to take the stand include his former romantic partner, Caroline Ellison, FTX co-founder Gary Wang, and FTX and Alameda Research leaders. Ellison and Wang both pleaded guilty in December to multiple charges after cooperating with the U.S. attorney's office in Manhattan for a few months.
Since August, Bankman-Fried has been incarcerated in Brooklyn, New York due to his bail's revocation for witness tampering after distributing Ellisons' private diary entries to The New York Times. The defense is likely to take the approach of "advice of counsel," claiming that Bankman-Fried followed the guidance of FTX's legal representatives without awareness of the unlawfulness of his actions. Nonetheless, the judge has prohibited any reference to this defense in their opening statements to shield jurors from prejudiced opinions. A second criminal trial is due to take place in March 2024 at FTX's base in the Bahamas to address the additional charges introduced after his extradition.
In 2017, Sam Bankman-Fried noticed an arbitrage opportunity when he looked at the page on CoinMarketCap.com listing the price of bitcoin on exchanges around the world, noting a 60% difference in the value of the coin. Taking advantage of the disparity, known as the Kimchi Premium, Bankman-Fried founded trading house Alameda Research to scale the opportunity and work on it full time, reportedly sometimes making as much as a million dollars a day. This success led to the launch of crypto exchange FTX.com, and Bankman-Fried's personal wealth followed suit, peaking at around $26 billion. However, in 2022, when crypto prices tanked, it was revealed that Bankman-Fried had leveraged customer assets without permission for his own bets from the very start of FTX, leading to claims that he had perpetrated one of the biggest financial frauds in American history. He was arrested, remanded back into custody for alleged witness tampering, and lost 94% of his personal wealth in a single day.
Despite the appearance of being favorable towards Alameda, the hedge fund earned abysmal returns. A court filing displayed Alameda had lost more than $3.7 billion over its lifespan, in contrast to the positive statements issued by FTX about the fund's profitability. Its fiscal practices and the lending it was engaged in played a large part in the eventual demise of FTX. Not only did Alameda seemingly not take care with its customers' funds, but it also took out multiple loans from Voyager Digital and BlockFi Lending, utilizing FTT tokens minted by FTX as collateral. It had the majority of these tokens on hand, thereby reducing the available supply and leading to a decreased market value should Alameda attempt to sell them off. Alameda, despite this knowledge, marked them all at the current market price. It similarly used other coins, such as Solana and Serum (created and advanced by FTX and Alameda, which earned the nickname "Sam coins"), to obtain loans from other cryptocurrency players. In May of 2022, the crash of Luna, a stablecoin, resulted in losses for many lenders and crypto corporations and a decrease in crypto prices, leading to bankruptcies, margin calls, and loan recalls by Voyager and other lenders. Regrettably, Alameda did not have the liquidity to satisfy its loan commitments, leaving FTX's customers with no protection for their investments.
In October 2021, Bankman-Fried stepped down from his leadership position at Alameda Research, according to CFTC regulators who claim it was a calculated attempt to create a false sense of distance between FTX and Alameda. Despite his departure, he allegedly continued to exercise control, instructing Alameda to increase its utilization of customer assets, massively drawing down a credit line provided by FTX. As stated in the CFTC filing, this resulted in Alameda owing unwitting customers of FTX around $8 billion by the middle of 2022.
While Bankman-Fried had previously testified to the House about FTX's supposedly world-class risk management and compliance systems, according to the firm's own bankruptcy filings, it actually had nearly nothing to back this up. This reality was discovered by the public when CoinDesk publicized details of Alameda's balance sheet on November 2, which showed $14.6 billion in assets, most of which being FTT tokens or Bankman-Fried-backed coins like Solana or Serum. On top of that, $2 billion were locked in equity investments.
Investors reacted by quickly liquidating their FTT tokens and withdrawing their funds from FTX, a troubling situation for Bankman-Fried. Already, Alameda had difficulty meeting loan obligations without drawing upon customer money. As money began to leave the exchange and FTT's price dropped, the liquidity crunch for Alameda and FTX intensified. Bankman-Fried denied any issues in a deleted tweet, but four days later, Binance founder Changpeng "CZ" Zhao tweeted that they would liquidate any FTT remaining on their books.
With the price of FTT slipping, Bankman-Fried and FTX executives desperately sought a way to stave off the damages, and traders managed to do so until Zhao's tweet. Bankman-Fried maintained the exchange was in good standing, even going so far as to delete a tweet to this effect, but, by November 6, a further $1 billion had been lost.
The company turned to Zhao for a potential rescue package, which he initially agreed to, but then backed away from due to reports of mishandled customer funds and federal investigations. Bankman-Fried resigned two days later and FTX filed for bankruptcy on November 11. A month after that, Bankman-Fried was arrested by Bahamian authorities for fraud, conspiracy, and money laundering.
So far, John Ray's team has reclaimed $7 billion of investment funds, but $8 billion of customer money is still unaccounted for. Many customers have lost their life savings and other financial futures, an alleged price of Bankman-Fried's attempt to quantify his impact on the world. — CNBC's Rohan Goswami contributed to this report.
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