Another One Bites the Dust: SBF's Crumbling Crypto Empire

Forbes 30 Under 30, a collection of 30 brilliant entrepreneurs and minds under 30 years old, is one of the world’s most prestigious groups. But lately, it seems like the correct name for it should be Forbes 30-Year-Sentence Under 30 since so many of its members are going to jail for fraud, including the formerly up-and-coming Sam Bankman-Fried.

Sam Bankman-Fried (SBF) was a cryptocurrency entrepreneur and the former CEO of a crypto trading company called FTX. The Securities and Exchange Commission specifically alleges that he raised $1.18 billion from investors and then used that money for personal gain and funneled it into another company that he owns, Alameda Research LLC, to give the company an “unlimited line of credit.” He’s currently on trial and under arrest for defrauding his investors. Unfortunately for him, his legal prospects are not looking great.

First Week of Trial

Unlucky for SBF, the co-founder of FTX, Gary Wang, has pleaded guilty to fraud and is now working with authorities to testify against him. Wang testified that SBF “called the shots” and defrauded everyone outside of leadership. FTX employees also testified about the interconnectedness of Alameda LLC and FTX. FTX was a traditional crypto company: consumers convert cash to crypto and FTX collects a small fee when consumers convert it back. Alameda, on the other hand, was making risky investments into other crypto companies for returns. FTX was allowing Alameda to use FTX money to finance these investments, something the investors were not told about. Strangely, SBF often used lots of code with his associates such as the term “our Korean friend” referring to the secret way Alameda was able to take FTX’s funds.

Wang testified that he wrote the code that allowed Alameda to access FTX’s money, including the money of customers. Because cryptocurrency is solely digital, the amount of crypto one has in an account is in reality just a number. When Alameda took FTX’s money, no investor would’ve known because, on their end, the numbers looked just fine. However, when investors started pulling their money out, FTX didn’t have enough liquidity (enough cash) to return their money, creating a situation similar to a bank run and ultimately leading to the bankruptcy of FTX. In cross-examination of the witnesses, the defense has put forth the argument that Alameda actually had access to FTX’s bank account because FTX had trouble finding a banking partner.

Second Week of Trial

In another unlucky blow for SBF, the CEO of Alameda LLC, Caroline Ellison, has also taken a plea deal to testify against SBF. To add salt to the wound, Ellison is also BF's ex-girlfriend. Ellison testified that FTX took $10 billion in customer funds to bail out Alameda and patch up the balance sheet for loans and other deficits. When asked, “When you were working at Alameda, did you commit any crimes?”, Ellison explicitly stated “Yes, we did” (the we referring to SBF and her). More importantly, she noted that SBF was the one who decided to use customer funds. Interestingly, she testified that SBF was a utilitarian, specifically noting that he did not believe in an innate immorality of lying or stealing. In fact, according to Ellison, SBF believed such actions were good as long as they brought the most well-being to society.

In response, the defense’s cross-examination implied that Ellison wanted to hold onto her position that the collapse of Alameda was her fault. The defense noted that Ellison did not prepare sufficiently for “market downturns” and “soured deals.” Additionally, in cross-examination, Ellison stated she “found it difficult to have in-person, one-on-one conversations with him.” As such, the defense has attempted to argue that the relationship issues between her and SBF could’ve damaged their business communication.

Interestingly, one billion dollars worth of funds were frozen by the Chinese government on Huobi and OKX exchanges in the investigation against Alameda. Alameda tried to bribe Chinese officials to release the funds, and in fact, Ellison stated that Alameda paid Thai prostitutes to open accounts on the OKX and Huobi exchanges to draw those funds out.

Throughout the examinations, Ellison also revealed she had a Google document called “Things Sam is freaking out about” that detailed SBF’s anxieties including bad press coverage and a scheme to unleash regulators onto Binance, a rival to FTX

Throughout the tumultuous two weeks, one thing remains clear: SBF won’t be seeing freedom for a while. Will SBF’s trial be enough to deter future defrauders? Likely not. While we can laugh and feel pleased that another defrauder has been caught, SBF’s case represents more than just a single fraud but rather a sinister pattern occurring with young, successful entrepreneurs: Elizabeth Holmes, Charlie Javice, and now SBF. How soon will the next genius millionaire young adult be caught and exposed for being another fraud? And when will it end? Only time will tell.