FTX, I Mean WTF!!!

10 minute read

Hi everyone, I’m Rick Barron, your host, and welcome to my podcast, That’s Life, I Swear

FTX was once the shining star of cryptocurrency exchanges and then in the blink of an eye, it all went to hell. In December 2022, while vacationing in the Bahamas, the SEC filed charges against Sam Bankman-Fried, and arrested him, alleging that he had defrauded investors in FTX. What happened?

Let’s jump into this 

Sam Bankman-Fried is a 31-year-old cryptocurrency entrepreneur who founded the crypto exchange FTX in 2019. FTX quickly became one of the most popular crypto exchanges in the world, with over $30 billion in daily trading volume. As I said at the beginning, Sam Bankman-Fried was placed in handcuffs in December 2022 while in the Bahamas. 

Sam Bankman-Fried handcuffed in Bahamas. Courtesy of: New York Times

The SEC filed charges against Sam, alleging that he had defrauded investors in FTX, by mixing customer funds with his own personal funds, and had used customer funds to make undisclosed investments and political donations, which included such things as using billions of dollars in customer deposits to finance lavish real estate purchases, charitable donations and crypto trading.

After arriving back in the United States from the Bahamas, Sam, was granted bail and allowed to remain under house arrest at his childhood home in Palo Alto, Calif.

Here’s some background about Sam Bankman-Fried and FTX:

·       He’s is a graduate of MIT, with a bachelor's degree in physics and a minor in mathematics. 

·       He worked as a trader at Jane Street Capital before founding FTX, which is an abbreviation for "Futures Exchange".

·       FTX was a cryptocurrency exchange that allowed users to trade various cryptocurrencies, including Bitcoin, Ethereum, and Dogecoin. 

·       In 2014 Sam co-founded Alameda Research, a quantitative trading firm that used algorithms to trade cryptocurrencies. Under his leadership, the company became one of the world's largest and most successful cryptocurrency trading firms. 
In addition to its trading activities, Alameda Research also provided liquidity to cryptocurrency exchanges, which helped stabilize prices and make buying and selling cryptocurrencies easier.

·       FTX raised over $1 billion in funding from investors, including Sequoia Capital, SoftBank Vision Fund, and Binance.

Sam Bankman-Fried has denied all of the allegations and is currently facing a court hearing scheduled for some time in October of 2023. 

It is still too early to say what will happen to Sam and FTX. The SEC's charges are a major setback for the cryptocurrency industry and could have a chilling effect on innovation in the space.

Why does this matter? 

Surprisingly, the mountain of legal charges facing Sam Bankman-Fried and his once FTX empire, may do little to dispel the regulatory fog surrounding crypto.

At first glance, the arrest, criminal indictment and civil charges, brought by the SEC and CFTC against Bankman-Fried appear to be symbolic of putting to end what the chairman of the SEC refers as the Wild West era of crypto.

Former regulators, legal scholars and defense attorneys say that even if Bankman-Fried is convicted of criminal charges and loses the civil cases, it will do little to immediately change standards in the U.S. crypto industry, where many companies don't comply with the financial regulations that other banks are held to.

Timothy Massad, former U.S. Commodity Futures Trading Commission chairman and a senior fellow at Harvard University's Kennedy School of Government, has said of Crypto broker-dealers and exchanges, and I quote, "they do not observe requirements to segregate customer assets, to prohibit conflicts of interest, to have active procedures to prevent fraud and manipulation.” 

End quote

Crypto players such as Coinbase and Binance, contend that banking financial regulations don't apply to digital assets. In short, they show their middle finger to the SEC and tell them to take a hike.

For years, efforts to regulate crypto have been debated over whether digital assets can be held under existing law, or whether new rules tailored to the technology are needed.

While researching the case against Sam, it appears at least on the surface, the criminal case against him will do little to clarify the rules, perhaps in the short term. 

Ira Sorkin, a well-known white-collar criminal defense attorney, who represented convicted Ponzi schemer Bernie Madoff, conveyed that the criminal charges against Sam Bankman-Fried, center on fairly specific allegations of fraud rather than technical questions about the nature of crypto.

Ira Sorkin with Bernie Madoff. Courtesy of: Alchetron

Ira went on to say that it's alleged that Sam used money obtained from investors and made material misrepresentations to them as to how that money would be used or invested. That's it.

However, some say the SEC's civil charges against Bankman-Fried might shed some light, at least, on whether digital assets qualify as securities and are, therefore, subject to SEC regulation, as opposed to commodities subject to CFTC oversight.

So, where are we today?

Federal prosecutors investigating the collapse of the FTX cryptocurrency exchange said in
 mid-June of 2023, that, at least for now, they would withdraw several of the charges facing, Sam Bankman-Fried.

In a court filing, the prosecutors said they would proceed to a trial in October without pursuing five of the 13 charges, a set of accusations that the government added to the indictment in the months after Sam was extradited from the Bahamas in December of 2022. Among those charges was a bank fraud count and an allegation that Mr. Bankman-Fried bribed a foreign government.

Sam’s argument is that prosecutors should not have been allowed to charge him with additional crimes after his extradition. 

However.

The withdrawal of the five charges came with a significant caveat: The prosecutors asked the judge overseeing the case, Lewis A. Kaplan of Federal District Court in Manhattan, to schedule a second trial in early 2024 on those five counts. Poor Sam, he just can’t catch a break.

So, what happens if Sam Bankman-Fried is convicted?

The guy faces a maximum of 115 years in prison, but highly doubtful he’d receive such a sentence even if convicted on all counts. Judges have discretion in deciding sentences, and after a verdict, prosecutors and the defense frequently argue over an appropriate penalty. This involves weighing mitigating and aggravating factors or reasons why a defendant deserves a lenient or severe sentence.

What can we learn from this story? What’s the take away?

Sam Bankman-Fried, the founder and CEO of FTX, is facing criminal charges in the United States for allegedly defrauding investors and misusing customer funds. 

One of the most important takeaways from the case is that even the most successful and respected crypto companies are not immune to fraud. FTX was once one of the most popular and well-regulated crypto exchanges, but it is now facing allegations of serious wrongdoing.

That said investors need to be careful when investing in cryptocurrencies, and that they should do their research before putting their money into any platform.

Having said that, various celebrities who caught up in being FTX ambassadors and endorsing FTX are now facing problems of their own. People such as Tom Brady, along with his divorced wife, Gisele Bündchen, have been sued by a group of FTX customers seeking compensation from the celebrities who endorsed the exchange. 

As part of an endorsement agreement Tom Brady signed in 2021, FTX had paid him $30 million, a deal that consisted almost entirely of FTX stock. Brady’s wife at the time, was paid $18 million in FTX stock. On top of it all, the terms of the deal would have required the former couple, who divorced last year, to pay taxes on at least some of their now worthless FTX stock.

Tom Brady & Gisele Bundchen. Courtesy of: The NY Sun

Now one celebrity apparently did her homework, Taylor Swift. The story goes she was offered $100 million to be an ambassador. Boy, that’s gotta hurt Tom Brady’s feelings. Taylor asked FTX to provide evidence FTX was legitimate, and the deal fell through. Another story is that several FTX higher-ups convinced Sam to step away for the deal for reasons unknown. 

Taylor Swift. Courtesy of: Daily Mail

Pick your story, but it’s a fair bet Swifties have Taylors back.

Another takeaway from the case is that the cryptocurrency industry is still in its early stages of development, and for the most part there is a lack of regulation. This makes it difficult for law enforcement to track down and prosecute fraudsters, and it also leaves investors vulnerable to exploitation. As the cryptocurrency industry continues to grow, it is important for regulators to step in and provide more oversight.

Finally, the case against Sam Bankman-Fried also raises questions about the future of cryptocurrency. If he is found guilty, it could damage the reputation of the entire industry and make it more difficult for legitimate businesses to operate. However, if he is acquitted, it could send a signal that the cryptocurrency industry is a legitimate investment vehicle and that it is safe for investors.

So, there you have it. Sam Bankman-Fried the once cryptocurrency billionaire king, who went from industry leader to industry villain, lost most of his fortune, saw his $32 billion company plunge into bankruptcy and became the target of investigations by the Securities and Exchange Commission and the Justice Department.

The story will unfold in court around October of this year. Stay tuned, this is going to be very interesting.

Well, there you go my friends. That's life, I swear.

For further information regarding the material covered in this episode, I invite you to visit my website, that you can find on either Apple Podcasts/iTunes or Google Podcasts, for show notes calling out key pieces of content mentioned and the episode transcript.

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