The Spectacular (and ongoing) collapse of Sam Bankman-Fried.
27 February 2023
Editor’s Note: The FTX story is yibba-mama-bat-sh*t-crazy, and it’s still unfolding, with new developments weekly. Hollywood is fighting for the rights to the story and a book already being written (By none-other than Michael Lewis — ‘The Big Short’), and If like us, you’re obsessed with tales of great financial ruin-you’re in for a ride.
Spoiler Alert: They say the higher they come, the harder they fall. At the time of writing, SBF is living with his parents in their home in Palo Alto. They’ve also graciously put up their home as security to pay his $250 million bond. He’s had to surrender his passport, is under home confinement and location monitoring. His two closest accomplices Caroline Ellison and Gary Wang have admitted guilt, entered into plea deals and are working with authorities to strengthen the case against SBF.
Let’s rewind to before the fall: Meet Sam Bankman-Fried (aka SBF) — a frizzy-haired MIT whiz-kid (b.1992) and often seen as a savior figure by the financial and political establishment. He used to be a generous bundler for Joe Biden’s democratic party, and a deep-pocketed crypto friend to the likes of superstar athlete Tom Brady and supermodel Gisele Bündchen. All very glam.
SBF was crypto’s golden boy, a poster child who championed regulation, met with presidents, interviewed on daytime TV, and symbolized the industry’s hope to go mainstream. At his peak, Bloomberg reported he was worth $26 billion.
Riches to rags.
But within one fateful week in November 2022, his net worth plummeted to zero. History is filled with spectacular collapses, but SBF’s financial collapse was described by some as one of the most significant losses of personal wealth of our time. A staggering 94% of his personal wealth evaporated in one single day. From a net worth of around $15.5 billion to a mere $991.5 million a couple of days later.
But records are made to be broken, and soon Gautam Adani stepped up to the plate and took a mega-dive that makes SBF’s loss seem like chump change: Coming into 2023, Asia’s wealthiest man was worth over $100 billion. After a damning financial report caused investor panic, his personal wealth dropped by $61 billion and his firms lost $110 billion in value. But, hey, the big story here is crypto megaminds and no upstaging by industrialist businessmen will be allowed. So let’s get back to the story of the wunderkind gone rogue.
It all started with a Tuesday afternoon tweet back in November 2022:
“A *huge* thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem and creating a freer economic world.”
By Wednesday, CZ backed out (as quickly as humanly possible) of the deal, citing “issues beyond our control.” Two days later, Bankman-Fried stepped down as FTX CEO and by the following day, the company had filed for Chapter 11 bankruptcy proceedings in the U.S. — FTX had completed a spectacularly swift collapse. And, once again, investors were left to stew in their own juices with their worthless FTX tokens as seasoning.
Bahama Boogaloo.
On Thursday, the vegan gamer’s private jet became the most searched flight path on Google. SBF was headed back to his Nassau home
(a massive villa now up for sale for $40 million), where the 30-year-old who claimed to sleep four hours a night on a BEANBAG ran FTX.
His roomies included his on-again, off-again girlfriend, Caroline Ellison (who also happened to be Alameda research’s CEO — SBF’s hedge fund and second company), and a gang of tight-knit twenty-somethings that ran the multi-billion dollar companies from what was essentially a Bahamas frat house.
By the time SBF made it home, FTX was no more, and a gushing stream of news stories came pouring out from every hole of the internet: Tales of betrayal, deception and nepotism. Stories of fiefdoms, strange romantic entanglements, and corporate malfeasance on a massive scale. Stories that have shocked even ENRON’s corporate restructuring officer (who coincidentally became FTX’s corporate restructuring officer). Crazier and crazier.
Here’s what he (John Ray) had to say after one day at the helm:
“I have over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history. I have supervised situations involving allegations of criminal activity and malfeasance (Enron) …Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented.”
Bankman-Fried’s roommates or as they were often described ‘the inner circle’ ran the now-defunct crypto exchange and trading giant Alameda Research, from the $40 million Bahamas penthouse — “the Orchid” is a 12,000-square foot, five-bedroom residence located in Albany, an exclusive private community in Nassau. For those of us who don’t live in the rarefied world of private jets and multimillion mansions, Nassau is in the Bahamas.
Many were former co-workers he met at quantitative trading firm Jane Street, (the company behind the ‘Fearless-Girl’ statue on Wall Street, a beloved #metoo monument on Wall Street), others he met while studying at MIT. All ten roommates are, or used to be, paired up in romantic relationships with each other, including Alameda CEO Caroline Ellison, whose firm played a central role in the FTX collapse.
“Multi-year scheme to defraud investors”.
Both Caroline Ellison and Zixiao (Gary) Wang (former CTO of FTX) were charged by both the SEC (Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission).
As reported by the New York Times Ellison has since pleaded guilty to the following charges:
Conspiracy to commit wire fraud on customers of FTX.
Conspiracy to commit wire fraud on lenders of Alameda Research. Conspiracy to commit wire fraud on lenders of Alameda Research. Conspiracy to commit commodities fraud.
Conspiracy to commit securities fraud.
Conspiracy to commit money laundering.
That’s a lot or conspiracy, and a lot of fraud, which all ads up to potential jail time of 110 years for Ellison. FTX co-founder Gary Wang also pleaded guilty to several charges, which could also land him more than 100 years in prison if convicted.
SBF will head back to court in February 2023 after the court rejected pleas from his lawyers for changes to his bail package. He’s also being suspected of trying to influence a witness in the trial as reported in February by CNBC.
His trial date is set for 2 October 2023. In the mean time, the list of charges seems to be growing as fast as his Afro, with his corresponding jail time if convicted jumping up to 155 years as reported here on 24 February by Associated Press.
The true meaning of Trustless.
In blockchain, trustless means that there is no need to rely on trust in a third party because of the the decentralized network. But, looking at the more traditional meaning of the word, even with the current bear market and SBF’s billion-dollar shenanigans, one surprising but undeniable fact often gets overlooked:
CRYPTO USE REMAINS RESILIENT GLOBALLY.
Why! How! What! Crazy but true and there’s a lot more interesting analysis and trendsBut, just in case you’re a lazy reader, we3 puts it in a nutshell here: Trust in crypto dropped sharply across major global markets in 2022. Crypto usage remains relatively high.
Low trust + high usage = Potential increased legislation. And this, ironically, might not be a bad thing for the entire industry, and might help the sector regain some much-needed trust.
