FTX

By Rosario (Roy) Girasa and Emilio Collar, Jr.

The United States (US) federal indictment and subsequent trial and conviction of Sam Bankman-Fried will not be forgotten in a hurry. It has all the markings of a Hollywood blockbuster with privileged protagonists, one or two geniuses, huge sums of money, and publicized arrests. In this two-part series, Rosario (Roy) Girasa and Emilio Collar, Jr. discuss the fall of the “Crypto-King” and the revelations that brought him down.

It is commonplace to speak of a particular lawsuit, whether based criminally or civilly, as the “Trial of the Century” although the expression represents a current, heavily publicized litigation. Nevertheless, the United States’ (US) federal indictment and subsequent trial and conviction of Sam Bankman-Fried (SBF) may well be a suitable commentary for the 21st century. The case features individuals with highly enviable scholarly backgrounds, enormous sums of invested monies that were fraudulently converted, substantial contributions to charitable and liberal political causes, mixtures of greed and intended actions in good faith, additional felonious violations, and other elements that are the substance of media exploitation.

The Stanford Connection

SBF is the firstborn son of brilliant parents, Joseph Bankman and Barbara Fried, both of whom were famed Stanford University Law School scholars. Joseph Bankman combined his background as a clinical psychologist and tax expert, whose primary focus was the betterment of society through reformation of tax laws including governmental oversight of tax shelters and simplification of tax filings. In addition, he exhibited additional proficiency in teaching mental health law and anxiety psychoeducation (Bankman, 2024). Barbara Fried, with several degrees from Harvard, focused her scholarship on legal ethics. Her writings included a well-publicized and utilized volume “The Progressive Assault on Laissez-Faire”, which is a critique of capitalism, particularly concerning distributive justice as applicable to tax policy and political theory. She was politically active in the US Democrat Party causes as a co-founder of Mind the Gap, which is a political action committee (PAC) in support thereof.

FTX was based in the Bahamas having been incorporated in Antigua and Barbuda. The exchange ostensibly enabled customers to engage in cryptocurrency purchases and sales, exchanges to other crypto formats, or simply hold them.

SBF was born on March 6, 1992 (age 32) on the Stanford University campus and was educated at the Massachusetts Institute of Technology (MIT) with specializations in physics and mathematics. From an early age, he exhibited mathematical skills that people with inherited genes such as his almost inevitably display. An important event in SBF’s educational development was attendance at a Canada/USA Mathcamp, which describes itself as “an immersive summer experience for mathematically talented students ages 13-18 from all over the world” (Mathcamp, 2024). It was at the camp that SBF attended when in the ninth grade, he met the future co-founder of Futures Exchange (FTX), Gary Wang. After graduating from MIT, SBF became employed at Jane Street Capital wherein he met another of those charged in the later filed indictments, Caroline Ellison, whose parents were MIT professors. A fourth named defendant, Nishad Singh, joined the other defendants in the creation of Alameda Research. It appears each of the individuals intended to both benefit themselves and contribute substantially to the welfare of less abled persons by donations to various charities.1

Pensive in Charcoal

FTX

The cryptocurrency exchange and allied firm at the heart of what later happened at the federal criminal trial was FTX. It was founded and controlled by SBF, together with Gary Wang. The said cryptocurrency exchange and crypto hedge fund was known as FTX Trading Ltd., and the quantitative cryptocurrency trading firm was Alameda Research (Alameda). FTX was based in the Bahamas having been incorporated in Antigua and Barbuda. The exchange ostensibly enabled customers to engage in cryptocurrency purchases and sales, exchanges to other crypto formats, or simply hold them. Given the background of the founders and endorsements by major celebrities such as Tom Brady, and other star athletes, and advertisements, including a Super Bowl ad featuring Seinfeld’s creator Larry David, the use of the exchange mushroomed by well over a million customers. US customers engaged in said trades through its US subsidiary, FTX.US.

Bloomberg and CoinDesk Revelations

Bloomberg.com is a famed US-based news organization specializing in reporting financial news and analyses. On September 14, 2022, it described the relationship between Alameda and FTX as one in which the former acted as a “market maker” for FTX (Bloomenthal, 2024 Jul 6). It further noted that the said relationship appeared to be violative of traditional regulatory regulations (Massa et al., 2022 Sep 14). The Wall Street Journal and CoinDesk2 followed up with sources indicating the extent of loans from FTX to Alameda and that the key players in both firms knew of the monetary transfers. With the rapid decline in value (now mainly recovered) in which many crypto companies experienced significant downturns and bankruptcies in cryptocurrencies that occurred in 2022, CoinDesk noted there were financial issues pertaining to Alameda Research and its relationship to FTX. It questioned the transactions taking place between FTX and Alameda that may have artificially inflated their value, thereby causing many investors to withdraw their investments. The report expressed concern that Alameda’s balance sheet was composed of FTT tokens issued by FTX, its sister firm, rather than independent assets such as fiat monies or other crypto assets (Osipovich & Berwick, 2023 Oct 5). Alameda’s assets thus included $3.66 billion of FTT and $2.16 billion of FTT collateral. It noted the lack of managerial oversight and other discrepancies attributable to the said firms. As stated later by the current CEO of FTX, John J. Ray III, who years earlier had participated in uncovering and attempted recovery of funds from the ENRON debacle, “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” (Roth, 2022 Nov 30).²

The dizzying expansion by SBF and FTX included the acquisition for $150 million, of Blockfolio, a portfolio trading app using mainly FTT tokens to accomplish the purchase; investments by the trading company head of Binance, Changpang Zhao, for $100 million; a $2 billion venture fund commenced with the issuance of bonds which had an ostensible valuation of $32 billion; and numerous other acquisitions and creations. As a result of adverse publicity and inquiries concerning the risks attributable to FTX, SBF resigned as CEO of FTX and a Chapter 11 reorganization bankruptcy filing was made on behalf of FTX, Alameda, and 130 affiliated companies. In the voluntary petition, FTX stated it had over 100,000 creditors, assets of $10-$30 billion, and liabilities of $10-$50 billion (Sigalos, 2022 Nov 11).

Alameda Research

Alameda, acting through a small number of employees, became participants in mainly bitcoin trades noting that the price of bitcoin was higher in Japan than elsewhere and, thus, made early profits of multiple millions by the said small but highly rewarding differences of such trades.

The second key player that precipitated the Chapter 11 bankruptcy filings that later occurred is Alameda Research. It was initially founded in September 2017 by SBF and Tara MacAulay in Berkeley, California. It derived most of its income from “arbitrage” trading whereby sophisticated investors take advantage of differing values of securities from one financial market to another and engage in simultaneous trades therein. Thus, Alameda, acting through a small number of employees, became participants in mainly bitcoin trades noting that the price of bitcoin was higher in Japan than elsewhere and, thus, made early profits of multiple millions by the said small but highly rewarding differences of such trades. SBF, who owned most of Alameda’s shares, profited handsomely from the said trades. With the success of Alameda, FTX was created as a cryptocurrency exchange with Alameda Research acting as a market maker. The problem arose when Alameda began experiencing significant losses and FTX was called upon secretly to fund and pay investors in Alameda. The CEO of Alameda when most of the transactions took place was Caroline Ellison.

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The Indictment

The initial US federal indictment occurred on December 9, 2022, wherein SBF was charged with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission, and commission of campaign finance violations (US v. Samuel Bankman-Fried a/k/a “SBF”, 22 Cr. 673, 2022 Dec 9). Eight days later, there were several superseding indictments, the last of which was filed on August 14, 2023, in which the indictment omitted campaign finance violations. SBF pled “Not Guilty” to the said charges. The 18-page indictment, consisting of seven counts, was prefaced by an overview wherein it was alleged that SBF, from the year 2019 through November 2022, corrupted the operations of cryptocurrency companies he founded through a pattern of fraudulent schemes. It was further alleged that SBF defrauded customers and investors of FTX, and lenders to Alameda. He misappropriated and embezzled FTX customer deposits and utilized billions of dollars from the said funds for personal self-enrichment, support of FTX operations, funding speculative venture investments, and over $100 million in political donations to both political parties to influence cryptocurrency regulation and pay for Alameda operating costs. In doing so, it was alleged, that he engaged in the making of fraudulent misrepresentations and false financial information to FTX’s investors and Alameda’s lenders.

Bahamas Extradition

The Commonwealth of the Bahamas has an Extradition Treaty with the United States dated March 9, 1990, which superseded a comparable treaty between the US and Great Britain which had governed the Bahamas, and which was originally signed on December 22, 1931 (102nd United States Congress, 1994). SBF consented to extradition requested by the US from the Bahamas government in accordance with the initial federal indictment (Jones et al., 2022 Dec 21). A legal question arose before the Supreme Court of the Bahamas for judicial review proceedings against the Minister of Foreign Affairs and Public Service and the Attorney General of the Bahamas, questioning the validity of the extradition. It was concerned that the extradition was based on initial charges against SBF and not those arising out of the two superseding federal indictments that would have added additional counts for new offenses of commodities fraud, bank fraud conspiracy, unlicensed money transmitting conspiracy, and conspiracy under the Foreign Corrupt Practices Act (Congress, 1977) which charges were not part of the extradition request to the Bahamas by the US. The Bahamas court concluded that SBF’s request for judicial review be granted and that an injunction be granted against the Bahamas government defendants to consent to the additional charges brought subsequently by the US government (Samuel Bankman-Fried v The Honourable Frederick Audley Mitchell, 2023 Jun 9). Thereafter, the US agreed not to pursue the additional charges. There is some evidence of alleged “cozy relationship” between SBF and the Bahamas government’s regulators consisting of free basketball tickets to the then FTX Bahamas sports stadium, payment of the national debt of the Bahamas, and dinner with the Bahamas Prime Minister together with the former US president, Bill Clinton, and the former UK prime minister, Tony Blair (Verdai, 2023 Nov 1).

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Federal Indictment

Counts of the Federal Indictment

The specific allegations consisted of: Count One – “Wire Fraud on Customers of FTX” in violation of 18 U.S.C.§§ 1343 and 23 whereby it was alleged that commencing about 2019 through November 2022, SBF with others schemed to defraud FTX customers by misappropriation of their deposits  to pay expenses and debts of Alameda, to make investments, and other purposes; Count Two, “Conspiracy to Commit Wire Fraud on Customers of FTX”, in violation of 18 U.S.C. §1349,4 which added a conspiracy count to Count One; Counts Three and Four consist of “Wire Fraud on Lenders to Alameda Research” and conspiracy thereof on lenders to Alameda Research  in violation of the said 18 U.S.C. §§1343 and 13495 that alleged SBF, with others, schemed to defraud lenders to Alameda by providing false and misleading information with reference to the firm’s financial condition in order to stall lenders from recalling their loans and, in fact, to extend new loans.

The trial before US District Court judge, Lewis Kaplan, occurred over a four-week period that featured a number of former executives and participants testifying against SBF, due mainly to lessen their culpability outcome in their individual cases and attempts to receive greatly reduced sentences.

Count Five, “Conspiracy to Commit Securities Fraud on Investors in FTX” in violation of  15 U.S.C § 78j(b), 78 ff, and 17 Code of Federal Regulations §240.10b-5,6 whereby it was alleged that SBF engaged in a manipulative and deceptive device with reference to the purchase and sale of a security by making false statements and other devices particularly concerning communications with investors that contained false and misleading information about FTX’s financial condition and misappropriating FTX customer deposits to satisfy obligations owed by Alameda Research. The last count, Count Seven, “Conspiracy to Commit Money Laundering” in violation of a multitude of statutes in conspiring and agreeing with other persons to violate 18 U.S.C. “Monetary Transactions in Property”7 derived from specified unlawful activity consisting of monetary transfers in excess of $10,000 resulting from proceeds constituting wire fraud and their concealment. The indictment concluded with a request to the court, with respect to the stated counts, that all property derived therefrom as enumerated in substantial detail be forfeited to the US.

The trial before US District Court judge, Lewis Kaplan, occurred over a four-week period that featured a number of former executives and participants testifying against SBF, due mainly to lessen their culpability outcome in their individual cases and attempts to receive greatly reduced sentences. The defendant SBF, somewhat surprisingly, decided to waive his US Constitution’s Fifth Amendment privilege to remain silent nevertheless testified, apparently knowing that a guilty outcome was a virtual certainty unless he could sway the jury by his denial of knowledge that vast sums of investors’ monies were misappropriated but were accomplished by others in FTX. He did admit to making errors in lack of supervision over FTX and Alameda’s use of FTX’s money (Morena et al., 2023 Oct 31).

The jury took less than five hours to convict SBF on all seven counts as charged. As stated below, SBF was given a 25-year sentence of imprisonment. Whether the parents of SBF will also face civil and/or criminal charges is left to the discretion of the US Attorney General or his US Attorney for the Southern District of New York (encompasses US counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan). The 12 jurors who rendered the decision came from highly diverse backgrounds. Annexed as Appendix A, they included 9 women, among them a nurse, physician assistant, social worker, stay-at-home mom, and a special education instructor. It would appear from their backgrounds that they would instinctively be more sympathetic to the very youthful defendant, but the quick verdict exhibited the opposite result in light of the overwhelming evidence presented at the trial.

Key Players Who Accepted Plea Deal

law book with chain

SBF did not act alone, having acted as head of a youthful team composed of Caroline Ellison, Zixiao (Gary) Wang, and Nishad Singh whom he had met in Canada at a Canada/USA Mathcamp for mathematically gifted students before SBF’s entry into MIT. Ellison is the daughter of Glenn Ellison, who chaired the economics department at MIT and Sara Fisher Ellison who also lectured in economics at the university. She attended Stanford University and later became the head of Alameda Research, which was at the apex of the scandal due to its highly risky investments and attempted bailout by FTX. At the university, Ellison exhibited a desire to use monies gained from future earnings for charitable causes as illustrated by her acting as vice-president of Stanford’s Effective Altruism Club (Varanasi et al., 2023 Oct 9).

Ellison, Wang, and Singh agreed to plead “Guilty” to all seven counts of the indictment, signed waivers of their constitutional rights to remain silent, agreed to testify at the trial and agreed further to forfeit all property derived from the said offenses.

A Portrait in Detail Art of Portraiture

Zixiao (Gary) Wang was another math genius, who met SBF at the Mathcamp and later became co-founder of FTX. Born in China, he and his parents emigrated to the US where he exhibited his math skills, attended and graduated from MIT, and became chief technology officer for FTX. Nishad Singh became head of engineering at FTX and became intertwined with the other defendants by his knowledge and participation in wrongfully using FTX monies to pay for Alameda’s indebtedness. He programmed systems to transfer FTX user accounts to Alameda’s bank accounts. He apparently knew of some $8 billion of overstatements of user deposits and built computer systems that would give Alameda unique “special privileges” and access to FTX funds (Kessler et al., 2023 Oct 17).

Ellison, Wang, and Singh agreed to plead “Guilty” to all seven counts of the indictment, signed waivers of their constitutional rights to remain silent, agreed to testify at the trial and agreed further to forfeit all property derived from the said offenses. The counts consisted of conspiracy to commit wire fraud and actual wire fraud on FTX customers and lenders of Alameda Research, commodities fraud, conspiracy, and money laundering. The maximum sentence for the commission of the stated crimes is 100 years imprisonment. Although the Department of Justice (DOJ) made no promises regarding prosecution for the offenses, it agreed that any testimony rendered by the said persons would not be used in any further criminal proceedings. It did agree not to prosecute for the said criminal counts except for possible criminal tax violations dependent on the degree of cooperation rendered by them in further proceedings. Sentencing for any other crimes not covered by the said counts is not binding upon the court but the court would be informed of the cooperation by the said persons in the pending criminal proceeding.

An additional defendant was Ryan Salame, who was a former FTX executive and co-CEO of FTX’s Bahamian affiliate, FTX Digital Markets Ltd., who, on or about October 2021, was also head of Alameda’s settlements team with responsibilities of processing customer fiat deposits and withdrawals. He was indicted on two counts of conspiracy to make unlawful political contributions, using his and the names of other persons to conceal the source of the contributions, and a second count of conspiracy to operate an unlicensed money transmission business. The alleged purpose was to conceal the relationship between a newly formed SBF corporation, North American, and Alameda (Williams, 2023). Salame contributed millions of dollars in his name to influence political campaigns, but the contributions actually were funds from Alameda Research. As part of the guilty plea deal, Salame agreed to forfeit $1.5 billion, $6 million in fines, forfeiture of homes he possessed in Lenox, Massachusetts, and other assets. On May 28, 2024, Judge Kaplan, who previously sentenced SBF to 25 years in prison, imposed a sentence of 90 months (7½ years) in federal prison. Unlike SBF who decided to proceed to a jury trial, Salame had pled guilty to conspiracy to make unlawful political contributions thereby defrauding the Federal Election Commission mandates, and for operating an unlawful money transmission business, all in violation of federal statutes. In addition, the court imposed three years of supervised release and ordered him to pay more than $6 million in forfeiture and more than $5 million in restitution (US Attorney’s Office, 2024 May 28). Sentencing of Nishad Singh and Gary Wang is scheduled for October 30 and November 20 respectively. The sentencing of Caroline Ellison, whose testimony was critical in the trial of SBF, has not been set. Auditors of FTX, Prager Metis CPS LLP., consented to pay the sum of $1.95 million in penalties for negligence and falsely alleging conformity to Generally Accepted Auditing Standards (US Securities and Exchange Commission, 2024 Sep 17).

Payments Made to Founders of FTX and Alameda

Approximately $3.2 billion of payments were made to SBF and other major participants in the fraudulent schemes later uncovered, according to the company’s successor, CEO John J. Ray III. The payments include the following:

  • $2.2 billion to SBF
  • $587 million to Nishad Singh
  • $246 million to Zixiao “Gary” Wang
  • $87 million to Ryan Salame
  • $25 million to John Samuel Trabucco
  • $6 million to Caroline Ellison

In addition, large sums totaling about $240 million were spent for luxury accommodations and other Bahamas properties, political and charitable payments, and other expenditures (Crawley, 2023 Mar 16). Auditors for FTX appear to be either complicit or highly negligent with FTX’s compliance with SEC mandates. Thus, the SEC sued the accounting firm Prager Metis CPAs, LLC and its California professional services firm, Prager Metis CPAs LLP, for violating auditor independence rules and for aiding and abetting their clients’ violations of federal securities laws. The specific allegations include the alleged lack of independence from their said clients in that from approximately December 2017 to October 2020, Prager improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams, and continued to sign engagement letters containing indemnification provisions and also issued “accountant’s reports” in which it purported to be independent in connection with its audits and exams (SEC v. Prager Metis CPAs LLP, 2023 Sep 29).

Prosecutor’s Summation to the Jury

After 15 days of testimony from witnesses, the parties presented closing arguments. The prosecutor, Assistant US Attorney Nicolas Roos, stated that SBF used billions of dollars of customer monies to pay for Alameda’s creditors, make investments, and give sums to political candidates. It was not mere poor managerial decision-making but rather a deliberate decision to fund the liabilities of Alameda. “He took the money….he knew it was wrong. He did it anyway, because he thought …he could walk his way out of it and talk his way out of it. And today, with you, that ends” (Cohen & Godoy, 2023 Nov 1).

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About the Authors

Rosario (Roy) GirasaRosario (Roy) Girasa is a Distinguished Professor at Pace University and has been a professor of law at the Lubin School of Business on the Pleasantville, NY campus since 1980. He holds four degrees: a BS and PhD from Fordham University, an MLA from Johns Hopkins University, and a JD from New York University School of Law.
Girasa is the author of six published texts and more than 130 articles. His books include the textbook and manual Cyberlaw: National and International Perspectives; Corporate Governance and the Law of Finance; Laws and Regulations in Global Financial Markets; Shadow Banking: Rise, Risks, and Rewards of Non-Banking Financial Services; and Regulation of Cryptocurrencies and Blockchain Technologies (published July 2018). His latest book Artificial Intelligence (AI) as a Disruptive Technology: Economic Transformation and Government Regulation was published in February 2020.
He has delivered lectures globally, including as president of four annual conferences in Tunisia, several colleges in India, and at the Supreme Court of India. You may reach him at [email protected].

Emilio CollarEmilio Collar is a Professor of Management Information Systems in the Ancell School of Business at Western CT State University in Danbury, CT. He holds a BBA and MS in Information systems from Pace University (NY) and a PhD from the University of Colorado at Boulder. He is a KPMG Doctor Scholar and a member of Beta Gamma Sigma.
Prior to his Ph.D., Emilio has had various jobs and consulting engagements in large Corporations including General Reinsurance Corp. and IBM. As an independent consultant, Emilio has provided consulting services on software implementation of Oracle databases, Internet website development, e-commerce applications, and Internet security and planning.
Emilio co-founded an organization called The International Group of E-business Research and Applications (TIGERA).
Emilio has served as editing manager for the Journal of Computing and e-Systems, track chair for multiple topics at TIGERA, and either as a guest or invited reviewer for various academic journals. He has published papers in academic journals including Cybernetics and Informatics, International Journal of Computer Science and Information Security, International Journal of Management Science and Business Administration, Journal of Management and Business Research, Journal of Systemics, and Review of Contemporary Business Research. You may reach him at [email protected].

References
Footnotes
  1. For a lengthy and personal discussion of Samuel Bankman-Fried and his parents, see Sheelah Kolhatkar, Inside Sam Bankman-Fried’s Family Bubble, The New Yorker (Sept. 25, 2023). Kolhatkar, S. (2023 Sep 25, Sep 25). Inside Sam Bankman-Fried’s Family Bubble. The New Yorker. https://www.newyorker.com/magazine/2023/10/02/inside-sam-bankman-frieds-family-bubble
  2. CoinDesk is a major digital media company that investigates, publishes and distributes information about digital technologies including crypto assets and blockchain technologies.
  3. 18 U.S.C. §1343 states: Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years.
  4. U.S.C. §2 states: (a) Whoever commits an offense against the U.S. or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal; (b) Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the U.S., is punishable as a principal.
  5. 18 U.S.C. §1349 states: Any person who attempts or conspires to commit any offense under this chapter shall be subject to the same penalties as those prescribed for the offense, the commission of which was the object of the attempt or conspiracy.
  6. 15 U.S.C. §78j(b) Manipulative and Deceptive Devices states: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange— (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement [1] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
  7. 18 U.S.C. §1957(a) states: 18 U.S. Code § 1957 – Engaging in monetary transactions in property derived from specified unlawful activity (a).
Whoever, in any of the circumstances set forth in subsection (d), knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity, shall be punished as provided in subsection (b).
(b) (1) Except as provided in paragraph (2), the punishment for an offense under this section is a fine under title 18, United States Code, or imprisonment for not more than ten years or both. If the offense involves a pre-retail medical product (as defined in section 670) the punishment for the offense shall be the same as the punishment for an offense under section 670 unless the punishment under this subsection is greater. (2) The court may impose an alternate fine to that imposable under paragraph (1) of not more than twice the amount of the criminally derived property involved in the transaction.

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