Cryptocurrency maverick Sam Bankman-Fried, famously becoming a billionaire under 30, has plunged into a twist of fortunes so violent and abrupt that it has reached record proportions.
Once considered a financial prodigy, Bankman-Fried now faces legal battles, possible extradition and bankruptcy in a sudden departure from his previous high-profile status as a mythical entrepreneur, political financier and philanthropist working to save other struggling crypto firms was announced. In short, the saga may have cost some investors their savings.
The collapse of Bankman-Fried’s disgraced empire comes as FTX, the company he founded and ran until his recent resignation as CEO, grapples with a solvency crisis. Founded in 2018, FTX was one of the world’s largest cryptocurrency exchanges until it filed for Chapter 11 bankruptcy earlier this month. In a single day, November 8, 2022, his net worth in the Bloomberg Billionaires Index plummeted an estimated 94 percent to $991.5 million. This devastating drop marks the biggest one-day drop in the index’s 10-year history. Commentators say his personal wealth could now be below zero.
This unfolding drama reads like a Hollywood blockbuster in the making. It comes complete with a meteoric rise from obscurity and subsequent fall of world fame, not to mention huge financial donations, a mea culpa that took to social media, and a class-action lawsuit naming headline legends — all in one short period of four years.
The lawsuit, filed by Florida attorney Adam Moskowitz, alleges billions in damages and names NFL quarterback Tom Brady and billionaire entrepreneur Mark Cuban, as well as Larry David, Gisele Bundchen, Stephen Curry and Shaquille O’Neal as possible celebrities liable for crypto endorsement.
Never in my career have I seen such a complete failure of corporate controls and a complete lack of trustworthy financial information
Once crowned a “crypto emperor” by The New York Times, the 30-year-old former billionaire stepped down as CEO of the FTX cryptocurrency derivatives exchange earlier this month.
Investors rushed to quickly withdraw their investments, while advisors reportedly struggled to find both cash and crypto amid the ruins. Critics point to poor internal oversight and record keeping, and draw unsavory parallels between FTX’s implosion and that of Lehmann Brothers, Enron Corp. and Bernie Madoff’s Ponzi scheme.
Sheila Bair, a former financial regulator, told CNN earlier this week that, like Madoff, Bankman-Fried used his reputation and connections to persuade investors and regulators who should have spotted troubling “red flags.”
“Charming regulators and investors can be distracting [them] from digging in and seeing what’s really going on,” said Bair, a former Treasury Department deputy treasury secretary, of the rise and fall of Bankman-Fried and FTZ. “It felt a lot like Bernie Madoff in that way.”
John J. Ray III, FTX’s new CEO, who previously oversaw Enron’s liquidation, described an unprecedented collapse. According to Bloomberg, Ray III said in an affidavit, “Never in my career have I seen such a complete failure of corporate controls and a complete lack of trustworthy financial information.”
FTX now faces possible review by the Securities and Exchange Commission and the Department of Justice.
The company’s main competitor, Binance’s billionaire Changpeng Zhao, announced on Nov. 9 that it was withdrawing from a previous agreement to acquire FTX, citing “abused customer funds and alleged investigations by US authorities.”
son of law professor
SBF, as he is also known, is the son of academics, two law professors at Stanford University. His mother, Barbara Fried, has written extensively on issues of distributive justice, tax policy, property theory, and political theory. His father, Joseph Bankman, is a tax law scholar who played an advisory role at FTX in its regulation and charitable efforts, as discussed recently on the company’s eponymous podcast. His brother, Gabe Bankman-Fried, ran a nonprofit organization funded in part by SBF called Guarding Against Pandemics that worked toward pandemic prevention.
SBF’s background includes high school summers at Canada/USA Mathcamp and undergraduate studies at MIT. His financial collapse raises broader questions about the crypto industry, which the entrepreneur entered after a stint at Jane Street Capital. Shortly after, he founded Alameda Research as a quantitative bitcoin trading firm.
From Nassau, Bahamas, SBF and his company FTX claimed a large stake in the industry, with his personal fortune estimated at $10 billion to $16 billion last month. Six months earlier, in March 2022, Forbes estimated it had risen to as much as $24.5 billion.
The FTX crisis quickly spread over the course of a week earlier this month when CoinDesk, a crypto news site, received a leaked document suggesting improper financial ties between FTX and SBF’s hedge fund, Alameda Research. A digital token created by FTX called FTT comprised a significant portion of Alameda’s assets.
Ian Allison, a senior reporter at CoinDesk, observed: “While there is nothing unusual or wrong with this in and of itself, it shows that Bankman-Fried’s trading giant Alameda rests on a foundation that consists largely of a coin invented by a sister company … not an independent asset like fiat currency or any other crypto.”
Binance, the world’s largest crypto exchange, held assets including the FTX token within the company. Binance CEO Changpeng Zhao’s announcement that the exchange would “liquidate all remaining” tokens it received after its “exit from FTX equity last year” sparked a massive bank run on FTX clientele out. The company was unable to pay billions of dollars in requested withdrawals. As the Wall Street Journal reported, FTX “lent billions of dollars worth of client assets to fund risky bets at its affiliated trading firm,” ultimately “setting the stage for the stock market to implode.”
‘I did it’
What complicates this storyline further is that SBF drew attention to his commitment to “effective altruism”, his membership in an organization called Giving What We Can where wage earners give 10% to effective charities, and his public pledge to donate his wealth in the squander his career.
According to Open Secrets, which tracks campaign finances, SBF donated approximately $40 million to the US midterm campaigns for many candidates supported by pro-Israel groups, including the Democratic Majority for Israel (DMFI) and the United Democracy Project, an organization affiliated with AIPAC PAC. SBF also donated $250,000 directly to DMFI PAC last May. And in the 2020 campaign, he was among the top contributors to Joe Biden’s campaign with a personal contribution of $5.2 million.
SBF reportedly didn’t indulge in sports cars and other luxuries common to the ultra-rich. In an FTX photo provided to Reuters in July, he embodies a casual lifestyle – unshaven, a head of untamed dark curly hair, wearing a simple olive crew-neck T-shirt. SBF is vegan and reportedly shared a penthouse with 10 roommates.
Reuters has initially reported that SBF has told the news service that he is staying at his home in the Bahamas. Other outlets suggest it is for sale.
SBF has publicly committed to doing everything in its power to rectify this situation. A thread of his tweets attracts public speculation. On Twitter, which he previously offered for sale with Elon Musk, SBF issued a public apology. He said he was sorry and he simply admitted, “I made it and should have done better.”
The question remains whether politicians who received donations will be forced to return funds – and whether the US will extradite SBF for a trial or whether he will be prosecuted.