
Sam Bankman-Fried tried to convince politicians and the public that he was the next J.P. Morgan. Now, he has to convince a jury that he wasn't the next Bernie Madoff.
The trial of Bankman-Fried, the founder of the failed cryptocurrency broker FTX, will begin Tuesday with jury selection. Prosecutors in the Southern District of New York are expected to outline a case against Bankman-Fried, who stole billions of dollars in FTX customer deposits and used the money to fund his hedge fund, buy real estate, and make millions of dollars of illegal campaign donations to Democrats and Republicans in an attempt to buy influence over cryptocurrency regulation in Washington.
While Bankman-Fried took money from customers and used it in ways he wasn't supposed to do, prosecutors are expected to try to boil it down to the simplest of terms for jurors.
Bankman-Fried was a highly influential leader in the cryptocurrency industry before FTX collapsed and filed for bankruptcy last November. The company had a net worth of $32 billion in the year-earlier period, at least on paper. He spoke with former presidents, politicians on both sides of the aisle, celebrities, and CEOs. When the smaller crypto firms started to implode, Bankman-Fried told the public he would help prop up the market, prompting the comparisons with J.P. Morgan.
The 31-year-old Bankman-Fried started FTX in 2019 and its expansion grew rapidly. Bankman-Fried, the son of Stanford professors, who was known to play the video game during meetings, attracted investment from the top echelons of Silicon Valley. FTX quickly became the second largest crypto broker, behind Binance.
Bankman-Fried and his inner circle of executives run their then-growing crypto empire from The Bahamas, out of the luxurious apartment complex Albany, where celebrities like Tiger Woods and Justin Timberlake have vacation homes.
FTX had effectively two lines of business: a broker where customers could deposit, buy, and sell cryptocurrency assets on the FTX platform, and a hedge fund known as Alameda Research, which took highly speculative positions in various cryptocurrency investments. As Alameda started to pile up losses during last year's cryptocurrency market declines, prosecutors allege Bankman-Fried directed funds to be transferred from FTX's customer accounts to Alameda to plug holes in the hedge fund's balance sheet.
The house of cards that Bankman and his lieutenants built came crashing down in early November, when reports surfaced about Alameda's balance sheet. After seeing numerous crypto firms collapse during the year, the spotted investors quickly pulled their money out of FTX and within days the firm was bankrupt.
John Ray III, the restructuring expert who was tasked with cleaning up FTX in bankruptcy, described the conditions inside of FTX as worse than Enron, long considered the benchmark for corporate malfeasance in popular culture.
Bankman-Fried will meet with his former lieutenants at FTX for the first time since its collapse. Several of the defendants have admitted lesser charges in exchange for testifying against him. This includes Caroline Ellison, who was the CEO of Alameda and Bankman-Fried's off-and-on girlfriend, as well as FTX co-founder Gary Wang.
Ryan Salame, another top FTX executive, pleaded guilty Sept. 7 to making illegal campaign contributions to Republicans on behalf of Bankman-Fried, who was publicly making contributions to Democrats. It is not known whether Salame will testify against Bankman-Fried.
Ellison is expected to be the prosecution's central witness. Prosecutors are likely to count on her to show that the collapse of FTX was not due to a few mistakes, as Bankman-Fried alleges, but to fraud. She has previously said that funneling FTX customers' money into Alameda was wrong.
In a distant interview with the New York Times' Andrew Ross Sorkin late last year, he said: ''It is a privilege to be on the news team, '' he said.
Bankman-Fried was extradited from the Bahamas to New York in December. Bankman-Fried had been able to live with his parents in their home in Palo Alto, California, prior to his bail being revoked, under strict regulations limiting his access to electronic devices. Bankman-Fried was sentenced Monday after Judge Lewis A. Kaplan said there was probable cause to believe he was trying to tamper with potential witnesses, including Ellison.
After FTX's collapse, the crypto industry has not recovered. The price of Bitcoin and Ethereum, the two most popular cryptocurrencies, is down two-thirds from where they were a year ago and the volume of trading in crypto is half what it was. The market for NFTs, artificially scarce digital items intended to produce unique digital versions of memorabilia or photographs, has all but evaporated. With nearly 3,000 NFTs trading hands daily, compared to over 40,000 a day a year ago, according to NonFungible.com.
Even Bankman-Fried's former competitors are facing their own legal scrutiny. The SEC has brought suit against Binance and its founder, Changpeng Zhao, similar to the accusations against FTX, that involved comminging customer funds with the firm's investments. The SEC has charged Coinbase, the widely traded cryptocurrency exchange, with securities violations.