Bankman-Fried fraud verdict: Beginning of the end for crypto?

Caroline Ellison, his on-again, off-again girlfriend, served as the star prosecution witness in the trial of the would-be 'King of Crypto'

Fri, 03 Nov, 2023 - 19:00

Sam Bankman-Fried, the founder of now-bankrupt crypto exchange FTX, was found guilty on all counts of defrauding his customers by a Manhattan federal court.

The one-time mogul stood with his hands clasped facing the jury as he was found guilty on seven counts of wire fraud and conspiracy to launder money. He faces decades in prison at a sentencing hearing that US district judge Lewis Kaplan set for March 2024. The verdict, reached after just four hours of jury deliberation, brought an end to nearly a month of court proceedings that featured stunning testimony from his closest allies and the disgraced entrepreneur himself. He maintained his innocence until the end.

A young-looking white man with curly black hair, wearing a suit and being pushed through a crowd by a middle-aged white man with short white-and-gray hair and a beard.

“We respect the jury’s decision. But we are very disappointed with the result. Mr Bankman-Fried maintains his innocence and will continue to vigorously fight the charges against him,” read a statement from Bankman-Fried’s lawyer Mark Cohen.

His parents, the Stanford Law School professors Joseph Bankman and Barbara Fried, sat in the courtroom’s second row, holding each other’s hands. Mr Bankman sat with his head in his hands after the verdict was read. After Mr Kaplan left the courtroom, Mr Cohen put his arm around Bankman-Fried as they spoke at the defence table.

FTX founder Sam Bankman-Fried arrives at Manhattan federal court. He faces decades in prison. Picture: Bebeto Matthews/AP

As Bankman-Fried was led out of the courtroom by members of the US Marshals service, he turned around, looked at his parents in the courtroom audience, and nodded. Ms Fried looked toward him and crossed her arms across her chest. Following Bankman-Fried’s conviction, Manhattan US attorney Damian Williams warned that other would-be fraudsters should take note of the convicted mogul’s fate.

“Sam Bankman-Fried perpetrated one of the biggest financial frauds in American history — a multibillion-dollar scheme designed to make him the King of Crypto — but while the cryptocurrency industry might be new and the players like Sam Bankman-Fried might be new, this kind of corruption is as old as time,” said Mr Williams.

“This case has always been about lying, cheating, and stealing and we have no patience for it.

“This case is also a warning to every fraudster who thinks they’re untouchable, that their crimes are too complex for us to catch, that they are too powerful to prosecute, or that they are clever enough to talk their way out of it if caught. Those folks should think again and cut it out. And if they don’t, I promise we’ll have enough handcuffs for all of them.”

Bankman-Fried is also set to go on trial on a second set of charges brought by prosecutors earlier this year, including for alleged foreign bribery and bank fraud conspiracies. He was accused of swindling FTX customers out of some $10bn (€9.3bn). Prosecutors said that his fraud extended from 2019 to November last year, when FTX collapsed under the weight of a liquidity crisis, caused by the lending of customer funds to Alameda Research, FTX’s sister hedge fund, without telling them.

He admitted to “large mistakes” in his management of the exchange during his testimony, including never putting a risk management team in place. He attempted to evade prosecutors’ questions with many statements of “I don’t recall”, only to be confronted with on-the-record statements he had made during his extensive post-collapse media tour. When asked whether he had ever sent the message “Fuck regulators” to a journalist, he admitted: “I said that once.”

Bankman-Fried siphoned “stolen funds” to make himself rich and cover Alameda’s high-risk investments, prosecutors said. He boosted his luxury lifestyle with “exorbitant spending unrelated” to FTX operations, such as $100m in political contributions and A-list celebrity endorsements, according to the indictment. This also included footing the bill for personal expenses such as $200m in Bahamas property and repaying loans given to Alameda, which faced an $8bn budget shortfall as the crypto market cratered in 2022.

He came to court with a haircut, a significant gesture for a man whose chaotic mane became part of his signature look as a tech innovator. The prosecution grilled him on his appearance and public persona, asking him whether he used them to woo investors and customers. He likewise faced questions about his co-living arrangement with other FTX executives.

Caroline Ellison at the court. Picture: Eduardo Munoz Alvarez/AP

Caroline Ellison, his on-again, off-again girlfriend and the chief executive of Alameda, served as the star prosecution witness. Within moments of taking the stand, Ms Ellison said that Bankman-Fried “directed me to commit these crimes”. She also said his unkempt appearance was a carefully curated act.

Other members of his inner circle repeatedly implicated him in financial wrongdoing. Gary Wang, Bankman-Fried’s longtime friend and roommate at the Massachusetts Institute of Technology and a FTX co-founder, and Nishad Singh, an executive at the exchange, also testified for the government.

Ms Ellison, who pleaded guilty in December 2022 to her involvement in FTX and Alameda’s collapse, described her uneasy relationship with Bankman-Fried. She cast him as hubristic and ready to blame others for his mistakes. Bankman-Fried directed Ms Ellison to shuttle customer funds into Alameda following the spring 2022 drop in crypto, she said. Alameda was saddled with billions of dollars in open-term loans, meaning that lenders could demand their money back at any point, and started to call them that summer. But Alameda could not repay the loans, and Bankman-Fried blamed Ms Ellison for not hedging the fund’s money earlier that year.

“Sam started saying… it was a big mistake, and that it was my fault, and that I was largely responsible for the financial situation Alameda found itself in,” testified Ms Ellison.

She said it was “Sam’s decision” to use FTX customer funds to cover Alameda’s shortfall, without telling them.

Mr Wang similarly implicated his former friend. The prosecution asked: “Who are the main people you committed these crimes with?” Mr Wang replied: “Sam Bankman-Fried, Nishad Singh, and Caroline Ellison.”

Mr Wang had also told jurors that Bankman-Fried was not shocked by FTX’s massive debt. After apprising Bankman-Fried of this debt, he said “that sounds correct” and that he “had a neutral demeanor”, testified Mr Wang.

Over the course of trial, Bankman-Fried’s attorneys tried to cast him as a “math nerd” who was in over his head.

“Sam didn’t defraud anyone. Sam didn’t intend to defraud anyone,” Mr Cohen told jurors. “Sam acted in good faith in trying to build and run FTX and Alameda.”

The defence also tried to blame Ms Ellison and rival cryptocurrency exchange Binance for FTX’s collapse.

“Some things got overlooked, some things were still in progress, things a more mature company, an older company would have built out over time,” said Mr Cohen. “But at FTX they were still works in progress.”

University of Richmond law school’s chairman Carl Tobias said he was not surprised the jury returned a verdict so quickly.

“It was a compelling case that prosecutors assembled and put on,” he said. “I don’t think anything that Bankman-Fried said undermined their case or gave the jury much pause. They came in with a strong verdict.

“The southern district played it right by portraying it as a fraud case, not as a complicated cryptocurrency notion that was more complex than it needed to be. That’s clearly the way the jury saw it, and that was compelling to them.”

It was an unusually swift verdict in the US after a month-long trial in a complex white-collar case. By comparison, jurors took eight days before finding Theranos founder Elizabeth Holmes guilty of fraud in January last year after a four-month trial. A jury also took eight days to convict WorldCom chief Bernie Ebbers of accounting fraud after hearing five weeks of testimony in 2005.

The cryptocurrency exchange FTX co-founded by Sam Bankman-Fried, who was accused of swindling customers out of some $10bn. Picture: Marta Lavandier/AP

The conviction raises a deceptively simple question: What next for crypto? The former billionaire was a vocal champion of the industry but now faces decades in jail. It points to the end of an era of risky and wrongful practices, and a more regulated future of wider adoption of digital assets and blockchain technology.

Others outside the industry are taking a much tougher line.

“The guilty charges in the FTX case mark the end of an era,” said Brian Mosoff, chief executive officer of Ether Capital, which invests in crypto and blockchain projects. “The days of wild west exchanges, scammy assets, fraud, and an industry living off in the corner of the internet are over. Success, fame, and money were the early-in-the-story words to describe Sam’s empire, but the final will be deception, fraud, and justice.”

However, FTX and Bankman-Fried are not one-offs in the crypto industry, said Better Markets co-founder Dennis Kelleher.

“In fact, today’s conviction is a condemnation of the entire crypto industry and its business model which is based on breaking the law for a financial product that has no socially useful purpose.”