Here’s What Sam Bankman-Fried is Charged for & Why It’s ‘One of the Biggest Financial Frauds’

“This is one of the biggest financial frauds in American history,” U.S. Attorney Damian Williams declared on Tuesday in a news conference in New York.

The mastermind behind this multibillion-dollar fraud? T-shirts-and-shorts-wearing Sam Bankman-Fried.

Founder of cryptocurrency exchange FTX, Sam Bankman-Fried, has made headlines for all the wrong reasons.

With his arrest and charges happening within mere hours of each other, the developing and escalating story of FTX (which is clearly bigger than initially realised) is one that has gripped the cryptocurrency world.

The Spectacular Crash and Burn of FTX

Valued at $32 billion, FTX was a well-respected company and one of the world’s largest cryptocurrency exchanges.

It convinced the world that it was a legitimate and safe investment—and it worked.

FTX had a long and exclusive list of clientele who all believed that their cryptocurrency holdings would be safely kept in FTX’s exchanges.

Sequoia Capital, SoftBank, BlackRock, Tiger Global, Insight Partners and Paradigm were just a few of FTX’s big-name investors.

Apart from this, FTX had reaped investments from respected venture capital firms, poured large amounts of money into its advertisements and even donated to political causes and campaigns.

In short, retail investors and clients loved FTX, it was a shining beacon of the cryptocurrency world.

Spoiler alert: it’s not now.

Collapsing in the span of a few days in November, the failure of FTX was spontaneous combustion.

Upon failing to meet customer withdrawal demands, FTX quickly became embroiled in bankruptcy proceedings, leaving egg on the faces of big players in the cryptocurrency world.

The backlash from millions of creditors that ensued was immediate and harsh–of course it was, there were billions of dollars of potential losses for them.

Concerns over FTX’s solvency surged and users withdrew around $5 billion worth of cryptocurrency assets in just one day.

Following this, Bankman-Fried stepped down as CEO and was succeeded by John Ray III (an attorney and insolvency professional who specialises in recovering funds from failed corporations).

In a House hearing, Ray reported that roughly $7 billion was lost in FTX’s collapse.

Sam Bankman-Fried’s Charges

Dominating the news with his escalating crypto drama, Bankman-Fried now faces a slew of charges from three U.S. agencies–the Justice Department, the Securities and Exchange Commission (S.E.C.), and the Commodity Futures Trading Commission.

They have accused him of wire fraud on customers, conspiracy, fraud, money laundering, defrauding his investors, securities fraud conspiracy, and violating campaign finance laws.

In total, Bankman-Fried faces eight counts.

U.S. officials allege that the case of Bankman-Fried is much larger than it appears, that Bankman-Fried was actually engineering a multibillion-dollar fraud that started the day he launched FTX.

Bankman-Fried had “built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said Gary Gensler, the S.E.C.’s chair, in a statement.

During the New York news conference on Tuesday, U.S. Attorney Damian Williams laid out the charges filed against Bankman-Fried.

He explained how Bankman-Fried and his co-conspirators started “billions of dollars” from FTX customers all the way back from 2019 till early into 2022 and that Bankman-Fried used this money for his “personal benefit”.

Bankman-Fried, using this stolen money, made personal investments and covered expenses and debts incurred from Alameda Research, his crypto hedge fund.

And if that is not bad enough, it now appears that the majority of this money is missing.

On top of this, Bankman-Fried is accused of having violated campaign finance laws by “causing tens of millions of dollars in illegal campaign contributions to be made to candidates and committees associated with both Democrats and Republicans”.

Williams said that Bankman-Fried used this “dirty money” to “buy bipartisan influence and impact the direction of public policy in Washington”.

A trial for the case is expected to commence late next year.

A Breakdown of the Charges

One of the biggest names accompanying FTX’s in this scandal is Bankman-Fried’s other company—Alameda Research.

Bankman-Fried is accused of “undisclosed diversion of FTX customers’ funds” to Alameda Research while defrauding investors in FTX out of $1.8 billion (including $1.1 billion from U.S. entities).

It was found that he had directed $8 billion worth of customer deposits from an Alameda-controlled bank into a separate account, labelled “[email protected]”, so as to avoid being charged interest.

According to the S.E.C., around four months after FTX began its operations, Bankman-Fried internally directed software code to be written in a manner which allowed Alameda to function with a negative balance in its customer account at FTX.

This meant that Alameda had an unlimited line of credit funded by customer assets.

Bankman-Fried then used these funds as his “personal piggy bank”, buying luxury condos, supporting political campaigns, and making private investments—activities all hidden and unbeknownst to investors.

This lavish lifestyle racked quite a bill, with Bankman-Fried withdrawing over $1.338 billion in loans from Alameda between March 2020 and September 2022. This included the two times when he acted as both the borrower, in his individual capacity, and the lender, in his capacity as CEO of Alameda.

And it wasn’t just Bankman-Fried.

Alameda’s co-founders, Nishad Singh and Gary Wang, also borrowed their own share of funds ($554 million and $224.7 million respectively) by executing promissory notes with Alameda in 2021 and 2022.

At this point in time, however, they have still not been charged with any crimes.

According to the lawsuit filed by the S.E.C., the loans that Bankman-Fried and others took out were “poorly documented, and at times not documented at all”.

In digging his own grave deeper, Bankman-Fried grew his multibillion-dollar liability further in May 2022 when crypto asset prices plummeted and he paid back Alameda’s demanding third-party lenders. Except, he did this from Alameda’s FTX “line of credit” and then proceeded to conceal it in Alameda’s balance sheet to avoid alarming investors.

He continued to leverage and exploit the companies for his personal expenses, and loaned himself $136 million in late July 2022, just one month after offering BlockFi (a crypto financial services company) a $250 million revolving line of credit to ease its own liquidity issues.

And while all of this was going on and financial conditions grew “tenuous”, Bankman-Fried presented a “false and misleading positive account” of the company to investors so as to not raise alarm.

We’re not done yet, because Bankman-Fried also made $40 million in donations during the midterms.

Conspiring with others to violate federal election laws, Bankman-Fried made political donations to federal candidates and other political committees between 2020 and November 2022 in excess of federal legal limits and under the names of other people.

This allegation is a major one since Bankman-Fried was one of the biggest political donors of the just-completed midterms, raising questions of legitimacy and fairness in the elections.

In fact, according to a tally by OpenSecrets (a nonpartisan organisation that tracks money in politics), Bankman-Fried was the sixth largest individual donor of the 2022 election, donating over $900,000 to candidates and nearly $39 million to outside groups in this election cycle.

Most of the funds were used to support Democrats.

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The Arrest

On Monday, in a move that surprised many (even Bankman-Fried himself), Bankman-Fried was arrested.

Up till his arrest, for several weeks, he had been living in his luxury apartment in the Bahamas by Bahamian police.

He had been scheduled to testify on Tuesday before the House Financial Services Committee.

115 Years Behind Bars

If convicted on all eight counts against him, Bankman-Fried could face a maximum of 115 years in prison.

Let’s do the maths.

He faces two counts of wire fraud, two of wire fraud conspiracy and one of money laundering—each count carries a maximum prison sentence of 20 years.

He also faces a count of conspiracy to commit commodities fraud and securities fraud, and conspiracy to defraud the United States and commit campaign finance violations–each count carries a maximum prison sentence of five years.

However, it is unlikely that Bankman-Fried will actually spend a full 115 years in prison, even if he is convicted on all counts.

Furthermore, his sentences for each crime may run concurrently, not consecutively, as it is common and also under a judge’s discretion.

Bail Denied

While Bankman-Fried was said to be willing to pay $250,000 cash bail and would not object to conditions including wearing an ankle monitor or reporting to authorities daily, he was denied bail by a judge in the Bahamas.

The chief magistrate, Joyann Ferguson-Pratt, deemed Bankman-Fried a flight risk as his access to “substantial finances” made the risk of him fleeing “so great” that he had to remain behind bars.

What Now?

As the world holds its breath for the trial, anticipations of Bankman-Fried’s line of defence are building.

In pursuing the case against him, prosecutors will need to show that he knowingly committed the alleged crimes beyond a reasonable doubt.

In relation to that, Bankman-Fried appears to be pushing the narrative that he was unaware of the extent of FTX’s problems and that he did not deliberately deceive customers and other companies FTX conducted business with.

He acknowledged that he “screwed up” but that he never tried “to commit fraud on anyone”.

In other words, Bankman-Fried’s line of defence might simply be that he was unknowing and did not intend to commit the alleged crimes.

As we await his trial, federal prosecutors in Manhattan are now seeking his extradition.

If one thing is sure in this saga, it is that more is to come.

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Featured Image: Bloomberg / Reuters