Sam Bankman-Fried faces decades in prison – verdict on Thursday

When Judge Lewis Kaplan delivers his verdict against Sam Bankman-Fried in New York on Thursday afternoon German time, the former crypto prodigy will be assured of publicity. Probably the last time for a very long time: the founder of the company faces up to 110 years behind bars. Even if the sentence for the total of seven charges is less draconian, Bankman-Fried will most likely not be a free man for a very long time.

In any case, he is a fraud. He had already been convicted as such in November. The jury found it proven that the 32-year-old embezzled billions of dollars in customer money in order to speculate and finance a luxurious lifestyle. The announcement of the punishment is now the climax in the drama surrounding the former hope of the global crypto scene. How could it come to this? Capital summarizes the most important events in five acts:

The beginning

Sam Bankman-Fried was born in Stanford (California) in 1992, his background is elitist: his parents teach ethics and utilitarianism at the city university, known as the nucleus of Silicon Valley and the alma mata of famous company founders such as Larry Page (Google), Peter Thiel ( Paypal) or Jerry Yang (Yahoo). Bankman-Fried is also considered talented: friends describe him as a math genius, and in high school he is said to have organized scavenger hunts for other number fans. Bankman-Fried then studied physics at the Massachusetts Institute of Technology (MIT), which he completed in 2014.

A little later, Bankman-Fried comes into contact with the dazzling world of cryptocurrencies. He recognizes that Bitcoins and other cryptocurrencies are traded at different prices in different countries – so the difference (also called arbitrage) can be pocketed as a profit quickly and with little risk. That’s why he founded a trading company in 2017. The qualified physicist quickly amassed a fortune worth millions.

Although financial institutions were already causing him trouble at the time because of the large amounts of money, Bankman-Fried went one step further in business. He gives up plans for a career in science. Instead, he founded the crypto exchange FTX in 2019. The focus now is primarily on trading in derivatives: instead of just buying or selling Bitcoins, they can be placed on the platform – at times with up to a hundredfold leverage.

The breakthrough

Looking back, Sam Bankman-Fried proves incredibly good timing: just a few months after FTX was founded, cryptocurrencies such as Bitcoin and Ethereum are experiencing their second spring; between the beginning of 2020 and May 2021, prices climbed to one record high after another. There is a gold rush atmosphere in the crypto scene: many FTX customers are even taking out loans to make their bets even bigger. The exchange earns a small fee from each of them – which makes Bankman-Fried even richer. At 29, his net worth is estimated at $26.5 billion.

At this time, Bankman-Fried spends the money as impulsively as his customers place crypto bets. He bought 15 penthouses in the Bahamas and a villa for his parents for $140 million. There are also office buildings and 25,000 square meters of land on which he wants to build an FTX campus; with a hotel, gym and a theater. On top of that, he is said to be buying into “hundreds” of startups as an investor, for example in the areas of artificial intelligence, organic farming and drone technology.

There’s only one thing the crypto entrepreneur doesn’t seem to have enough of: political influence. The US financial authorities have been following the crypto boom with suspicion for some time and there is a threat of strict regulations. In order to secure FTX’s business, Bankman-Fried seeks proximity to politicians. He is scheduled to be in Washington DC between 2021 and 2022. A lot of money also flows. That will be his downfall.

The bang

At the beginning of 2022, there will be a turnaround in the crypto industry: As a result of the Ukraine war and rising inflation and interest rates, uncertainty on the capital markets is increasing. Many investors are selling off their crypto holdings and Bitcoin is temporarily losing 50 percent of its value. Sam Bankman-Fried is nevertheless undeterred: That’s just how the market is, he said via video link at the Finance Forward conference in Hamburg in May 2022. Sometimes it goes up steeply, sometimes it goes down just as quickly. But he is optimistic that prices will be significantly higher in five years.

But six months later – in November 2022 – there is a big bang. The crypto exchange FTX files for bankruptcy, Sam Bankman-Fried resigns as CEO. The background: According to research by the scene portal, FTX is said to have embezzled ten billion dollars in customer funds. The focus is on Bankman-Fried’s former trading company, which shows large holdings of FTX’s own crypto token FTT on its balance sheet. Since these are not backed by other assets, confidence in the currency suddenly disappears. On top of that, a planned takeover by the rival exchange Binance falls through. Many customers then withdraw their funds from FTX in a panic. This is how the company maneuvers into a liquidity crisis.

Industry observers are now talking about one – based on the collapse of the US investment bank Lehman Brothers in 2008, which triggered the financial crisis. FTX insolvency administrator John Ray III also found memorable words in a US court document in November 2022. FTX is what he has experienced in his more than 40-year career. “Never in my career have I witnessed such a complete failure of corporate controls and such a complete lack of trustworthy financial information as I have seen here,” he writes.

For Sam Bankman-Fried, this does not remain without consequences. A good month after the bankruptcy, the FTX founder was arrested in the Bahamas in December 2022 at the request of the US government. Because of financial crimes, as they say. Bankman-Fried had previously denied any allegations of fraud. “I never tried to commit fraud,” he said in an interview with the New York Times on November 30th. He does not believe he is criminally liable.

The process

Sam Bankman-Fried will be tried in New York on October 3, 2023. The public prosecutor’s office accuses him of seven counts, including conspiracy to launder money and fraud against lenders, investors and customers. He himself pleads not guilty. Bankman-Fried previously posted $250 million in bail with the help of friends, thereby avoiding pretrial detention. He spent his arrest at his parents’ house in Palo Alto, California.

Close confidants and ex-partners of the FTX founder testified in the trial – and in some cases placed heavy burdens on him. The former boss of his trading company admits the joint fraud in her statement. The company withdrew “several billions of dollars in customer deposits” from the FTX exchange and used them for “its own investments and to repay debts”. Bankman-Fried even told her to fudge the balance sheet.

In early November, a New York jury found Sam Bankman-Fried guilty on all charges. He faces a very long prison sentence. Exactly how long he will have to go to prison will be decided on Thursday. Then Judge Lewis Kaplan announces the sentence.

The consequences

Even if the FTX case is closed – . At least investors will probably get off lightly. In January, a court hearing leaked that FTX planned to fully compensate its former customers. However, repayments should only be made at the exchange rate against the US dollar on the deadline of FTX’s bankruptcy filing. In other words: There will be no refund of the original crypto holdings – which at today’s exchange rate would be worth many times that of Bitcoin. Certainly a nuisance for many.

Above all, Sam Bankman-Fried’s crime may have caused lasting damage to the crypto scene in general. Since cryptocurrencies are already often associated with money laundering, drug trafficking and terrorist financing, regulatory and law enforcement authorities are now likely to take even tougher action against companies. This is not in the interests of many crypto supporters – after all, they have long been dreaming of the day when currencies like Bitcoin will finally be accepted as a means of payment by the general population.