How FTX’s Sam Bankman-Fried went from crypto king to convicted fraudster

Two years ago, Sam Bankman-Fried was a 30-year-old multi-billionaire living in a $35 million penthouse in the Bahamas, partying with his friends while running one of the world’s most valuable crypto companies.

Today, he is a 32-year-old inmate at the Metropolitan Detention Center in Brooklyn, waiting for a judge to tell him how much time he will spend behind bars for masterminding “one of the largest financial frauds in American history,” according to U.S. Attorney Damian Williams.

Bankman-Fried, the founder and former CEO of failed crypto exchange FTX, will head to federal court in midtown Manhattan on Thursday, where US District Judge Louis Kaplan will hand down his sentence. The prosecution proposed a sentence of 40 to 50 years in prison.

Jurors needed only about three hours of deliberations in November to find Bankman-Fried guilty on all seven counts against him. In a high-profile month-long trial that involved nearly 20 witnesses and hundreds of pieces of evidence, experts said at the time that they had never seen such a swift resolution. Bankman-Fried plans to appeal her conviction and sentence.

It was a sharp and rapid fall from grace for Bankman-Fried, which was once hailed as an industry titan and had a peak net worth — on paper — of an estimated $26 billion.

It started with the Kimchi Swap.

In 2017, as a quantitative trader on Jane Street, Bankman-Fried noticed something funny when he looked at Bitcoin pricing on CoinMarketCap.com. Instead of a single price across exchanges, Bankman-Fried sometimes sees a 60% difference in the value of the digital currency. His immediate instinct, he said, was to engage in arbitrage trading — buying bitcoins on one exchange and selling them back on another, pocketing the difference.

“It’s the lowest hanging fruit,” Bankman-Fried told CNBC in September 2022.

The FTX logo soon graced everything from Formula 1 race cars to a Miami basketball arena. Bankman-Fried talk about a day buying Goldman Sachsand he has become one of the biggest donors to the Democratic Party in Washington.

Then the market turned.

The so-called crypto winter of 2022 has devastated hedge funds and lenders across the crypto universe. Bankman-Fried boasted that he and his enterprise were immune. Behind the scenes, Alameda was borrowing money to invest in failing digital asset firms to keep the industry afloat.

May 2022 brought the Luna stablecoin crash, creating a domino effect that sent crypto prices crashing, devastating other lenders.

Alameda took out loans from lenders including Voyager Digital and BlockFi, which eventually went bankrupt. Alameda secured its loans with FTT tokens minted by FTX. The Bankman-Fried empire controls the vast majority of currency in existence, with only a small amount of DFT actually circulating at any one time.

Alameda marks its entire DFT hoard at the prevailing market price, despite being a virtually illiquid asset. The fund used the same methodology with other coins, including Solana and Serum (a token created and promoted by FTX and Alameda), using them to back billions of dollars in loans. Industry insiders have dubbed the tokens “Sam Coins.”

On November 2, 2022, crypto trading site CoinDesk details released from Alameda’s balance sheet, which shows $14.6 billion in assets. Over $7 billion of these assets were either FTT tokens or Bankman-Fried backed coins like Solana or Serum. Another $2 billion was locked in equity investments.

Investors began pulling their holdings out of FTX, creating the threat of a virtual bank run. Alameda and FTX now face a liquidity crisis.

On November 6, four days after the CoinDesk article, Binance founder Changpeng Zhao dropped the gavel. Binance was the first outside investor in FTX in 2019. Two years later, FTX bought back its stake with a combination of FTT and other coins, according to Zhao.

Zhao wrote in a a tweet that because of “the latest revelations that have come [sic] to be clear, we have decided to liquidate all remaining FTXs on our books.” FTX executives struggled to contain the damage, and Alameda traders were able to stave off the outflows for several days.

On Nov. 7, Bankman-Fried tried to sound confident, tweeting, “FTX is fine. Assets are fine.” The post was deleted.

Internal discussions were different. Bankman-Fried and other executives admitted to each other that “FTX’s customer funds were irretrievably lost because Alameda misappropriated them.” By November 8, the customer deficit had grown to $8 billion. Bankman-Fried courted outside investors for a bailout, but found no suitors.

FTX has paused all customer withdrawals that day. The price of FTT has collapsed by over 75%. With no options, Bankman-Fried turned to Zhao, who announced that he had signed a “non-binding” letter of intent to acquire FTX.com.

But a day later, on November 9, Binance said it would not go through with the acquisition, citing reports of “misappropriated customer funds” and federal investigations.

FTX filed for bankruptcy on Nov. 11, and Bankman-Fried resigned as CEO of FTX and its affiliates. He immediately lost 94% of his personal wealth.

Sullivan & Cromwell, FTX’s longtime attorneys, approached John J. Ray, who led Enron through its bankruptcy, to take over Bankman-Fried’s previous position.

On December 12, Bankman-Fried was arrested by Bahamian authorities and extradited to the United States, where he was detained. Federal prosecutors and regulators accused Bankman-Fried of committing fraud “from the beginning,” according to a Securities and Exchange Commission filing.

Bankman-Fried was released on $250 million bail and initially lived under house arrest with a court-ordered ankle monitor at his parents’ home in Palo Alto, California, on the Stanford University campus. He was soon taken back into custody for alleged witness tampering.

As Bankman-Fried awaited trial, many of his closest friends and confidants became key witnesses for the prosecution, leaving the former crypto billionaire to defend himself. Less than a year after his arrest, a 12-person jury found Bankman-Fried guilty of all criminal charges against him.

— CNBC’s Rohan Goswami contributed to this report.