Disgraced crypto tycoon Sam Bankman-Fried (SBF), a young man with Promethean ambitions, has been arrested for his role in the collapse of FTX, the virtual trading app he founded. Prosecutors allege that he orchestrated “one of the biggest financial frauds in U.S. history,” using customers’ money to pay the expenses and debts of his hedge fund, Alameda Research.
The episode again raises troubling questions about the effectiveness of government regulators and the lack of regulatory oversight, despite many promises to bring crypto under their regulatory purview and avoid financial fraud.
Americans have gotten used to financial chicanery. They witnessed Bernie Madoff, who ran a multi-billion-dollar Ponzi scheme that wiped out the life savings of thousands of investors. Then there was the 2008 financial meltdown that cost millions of Americans their jobs, homes, life savings, and hopes for decent retirements. Many Americans never recovered from this cataclysm.
A grand jury in the Southern District of New York indicted Bankman-Fried on eight counts, including securities fraud, money laundering, and making illegal political contributions. In total, the 30-year-old faces a combined maximum sentence of 115 years.
Following extradition from the Bahamas and his release on a record breaking $250 million bail bond, he has holed up at his parents’ $4 million Palo Alto home with an electronic monitoring bracelet while he awaits trial.
Bankman-Fried is also facing a civil case brought by the SEC, and possible civil actions by the Commodity Futures Trading Commission (CFTC) and state banking and securities regulators.
The house of cards collapsed when FTX filed for bankruptcy protection on November 11 with a reported $32 billion in debt. At the heart of the scandal lies a system for defrauding investors. Billions of dollars in customer assets have vanished, used to plug losses at Alameda Research, finance SBF’s lavish lifestyle, massive political contributions and bankroll his speculative’ investments.
FTX was a platform that let users buy and trade crypto currencies, such as bitcoin. The firm also minted its own digital currency called FTT and was big on environmental, social, and governance investments. SBF was a leading proponent of so-called “effective altruism,” a theory that advocates using “evidence and reason” to do societal good. He told the media he planned to give most of his wealth away to make the world a better place.
SBF donated almost $40 million to political candidates and political action committees in the 2022 congressional midterm elections. He was the second-largest individual donor to Democrats, trailing only billionaire businessman George Soros in the 2022 election cycle.
Prosecutors said one reason he made those contributions was to influence policies and laws affecting the cryptocurrency industry. There may not be a criminal trial until late 2023, legal experts say, because the government will need to build an extraordinary case.
Legions of criminal and civil defense attorneys will make bank by the time the dust settles. Case in point, angry investors have already filed class action suits against prominent endorsers such as Tom Brady, Larry David, Steph Curry and Naomi Osaka, who all received equity in the company for failing to do due diligence before marketing FTX to the public.
The firm’s blue-chip investors included Sequoia Capital, Black Rock Third Point LLC, Tiger Global Management, the Ontario Teachers’ Pension Plan, SoftBank Group Corp. and Singapore’s investment company, Temasek Holdings.
Can there be any wonder why public trust is on the wane? The plain truth is that regulators exist to protect the interests of the regulated. Surely another special counsel is needed.
Closely related, American should be asking questions of politicians in Washington who sit on key financial oversight committees that were beneficiaries of SBF’s generosity. But that may be wishful thinking. Insulated from oversight and accountability, they will not be performing surgery on themselves anytime soon.
All of which brings to mind Honore de Balzac’s insight that “Behind every great fortune, there is a crime.”