Consider This from NPR - The Parents Caught In The Middle Of The FTX Collapse

Episode Date: December 13, 2022

Prosecutors say the former CEO of cryptocurrency giant FTX, Sam Bankman-Fried, defrauded investors and customers for years, to the tune of billions of dollars. Bankman-Fried was arrested Monday night in the Bahamas, on an extradition request by American authorities.NPR's David Gura unpacks the charges and the ongoing investigation into Bankman-Fried's activities at FTX.And Wall Street Journal reporter Justin Baer discusses the role Bankman-Fried's influential parents – the legal scholars Joseph Bankman and Barbara Fried – played in the rise and fall of FTX. In participating regions, you'll also hear a local news segment to help you make sense of what's going on in your community.Email us at [e-mail] more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This message comes from Indiana University. Indiana University performs breakthrough research every year, making discoveries that improve human health, combat climate change, and move society forward. More at iu.edu slash forward. Sam Bankman-Fried has not exactly been quiet since the spectacular collapse of his company FTX. What are your lawyers telling you right now? Are they suggesting this is a good idea for you to be speaking? No, they are very much not. That was Bankman Freed talking to Andrew Ross Sorkin

in a remote video interview last month in front of a live audience at the New York Times Dealbook Summit. That was after he had already resigned as CEO of FTX, after his cryptocurrency exchange had declared bankruptcy, and after news reports suggested that he had used customer deposits to make risky bets. SPF, as he is known, tried to paint a picture of naive optimism or, at worst, incompetence. You know, I wasn't thinking about it. I wasn't talking about what are the risks involved with FTX. I obviously wish that I'd spent more time dwelling on the downsides and less time thinking about the upsides. There was also an ABC News interview and a 32-part Twitter thread. But at a hearing in front of the House Financial Services Committee on Tuesday,

Bankman-Fried wasn't there to tell his version of the FTX story. What role, if any, should he play in FTX moving forward? The role he's currently playing? Zero. That person talking right there is the new CEO of the company, John Ray, answering a question from Republican Congressman Roger Williams. Ray was appointed to lead FTX through bankruptcy. Up until now, he's been best known as the guy who took the helm at Enron after that energy trading firm imploded. Bankman-Fried was

expected to testify at that congressional hearing as well, attending virtually. But on Monday night, he was arrested in the Bahamas. So he wasn't there to hear Democratic Representative Al Green tick through the charges in the indictment. Wire fraud on customers. Conspiracy to commit wire fraud on lenders. Conspiracy to commit commodities fraud. The list of charges went on and on. And in Washington, there was only Wray who painted a damning picture of SBF's tenure at FTX. There was plenty of

incompetence in his telling of it, a lack of record-keeping, corporate oversight, or security controls on customer assets. Wray told Republican Congresswoman Ann Wagner that invoices and expenses were tracked via the chat app Slack. And the company used accounting software that you could pick up at Best Buy. They use QuickBooks, a multi-billion dollar company using QuickBooks. QuickBooks? QuickBooks. Nothing against QuickBooks. Very nice tool. just not for a multi-billion dollar company. And, you know, for all the talk of cryptocurrency as a complex financial instrument, Ray said what happened at FTX was pretty simple, ultimately. Taking money from customers and using it for your own purposes.

Sophisticated, perhaps, in the way they were able to sort of hide it from people, frankly, right in front of their eyes. But this isn't, you know, sophisticated whatsoever. This is just plain old embezzlement. Old school. Old school. Consider this. It's a moment of reckoning for Sam Bankman Freed. In the space of a couple months, he's gone from crypto wunderkind to a criminal defendant who could face decades in prison. From NPR, I'm Elsa Chang. It's Tuesday, December 13th. This message comes from WISE, the app for doing things in other currencies. Send, spend, or receive money internationally, and always get the real-time mid-market exchange rate with no hidden fees.

Download the WISE app today or visit wise.com. T's and C's apply. Support for NPR and the following message come from Carnegie Corporation of New York, working to reduce political polarization through philanthropic support for education, democracy, and peace. More information at carnegie.org. It's Consider This from NPR. Sam Bankman-Fried is facing more than half a dozen criminal charges. Prosecutors say he defrauded customers and investors, and they say the investigation is still ongoing. NPR's David Gurra has been following a whirlwind day, and he spoke to my colleague Ari Shapiro about what happened.

David, a lot of pieces of this story have fallen into place in the last 24 hours. What's the picture that emerges when you put them all together? Well, what we have from prosecutors is a portrait of somebody who seemed to have had no hesitation taking customers' money to finance his own investments. And they allege he also used customers' money to buy luxury real estate, to make campaign contributions,

and to try to plug holes that kept getting bigger and bigger as we saw this huge drop in the value of cryptocurrencies earlier this year. Gary Gensler, the chair of the SEC, the Securities and Exchange Commission, said Bankman Freed, quote, built a house of cards on a foundation of deception while telling

investors that it was one of the safest buildings in crypto. And, you know, Ari, there's another picture that's emerging. It's one of a very aggressive, very fierce government response. Remember, it was just a month ago Bankman-Fried stepped down and FTX filed for bankruptcy. Prosecutors seem pretty outraged by the number of people who may be victims of fraud here and by the amount of money that seems to have just disappeared. So far, FTX says it can't find $8 billion. So this is shaping up to be a big battle for law enforcement and for regulators, Ari, and it's one they very clearly want to win.

What are they most concerned about? What are the biggest charges? Bankman Freed is accused of defrauding investors in FTX and customers, many of whom were small-time individual investors. And Begman-Fried, who was a big political donor, has also been charged with violating campaign finance laws. A lot's been made of the sprawling nature of FTX and the complexity of crypto. Well, at a news conference this afternoon, Michael Driscoll, the FBI assistant director in charge of this case, said none of that matters. This case is about fraud. Fraud is fraud. It does not matter the complexity of the investment scheme. It does not matter the amount of money

involved. If you mislead and deceive to take what does not belong to you, we will hold you accountable. And Begman-Fried faces some serious charges here, and this is the type of case that could land a person in prison for decades. At the heart of this indictment and of the complaints from regulators is this cozy relationship between FTX and Bankman-Fried's private crypto hedge fund. It was called Alameda Research. What's alleged is there was no wall whatsoever between these two institutions. Bankman-Fried was integrally involved in both of them, and money from FTX customers was used to pay Alameda's

debts, to pay its bills, really to keep it afloat. Well, the SEC says there was no meaningful distinction between FTX customer funds and Alameda's own funds, and Bankman-Fried used Alameda as, quote, his personal piggy bank. You know, Sam Bankman-Fried was pretty talkative in the days leading up to his arrest. Now, given the seriousness of these accusations, how has he been handling things? He appeared in a courtroom today in the Bahamas where FTX is headquartered and negotiations started over his bail and his extradition. Bankman-Fried was supposed to testify before Congress today at a hearing on the collapse

and that hearing before the House Financial Services Committee went on without him. It was our first chance to hear from John Ray, the new CEO of FTX, and he painted a bleak picture of the work ahead for himself. I've just never seen an utter lack of record-keeping. Absolutely no internal controls whatsoever. As for Bankman-Fried, his lawyer said in a one-sentence statement today, Bankman-Fried is, quote, reviewing the charges with his legal team and considering all of his legal options.

Meanwhile, the investigations continue. And at his news conference this afternoon, Ari, U.S. Attorney Damian Williams spoke directly to people who may have participated in the activities that led to FTX's implosion. I would strongly encourage you to come see us, he said, before we come see you. That was NPR's David Gurra. Of course, Sam Bankman-Fried was the focus of the news today, but FTX's implosion also puts a spotlight on Bankman-Fried's parents. Joseph Bankman and Barbara Fried have both been prominent professors at Stanford Law School here in California. They supported their son's business, and now his legal troubles have shifted some attention to them. Though so far, there is no evidence either of them were engaged in any possibly criminal activity that led to FTX's collapse. Justin Baer wrote about Bankman-Fried's

parents and their roles in FTX this week in the Wall Street Journal. And he joins us now to tell us about his reporting. Justin Baer, welcome. Thank you. Great to be here. Great to have you. Okay, so just before we begin, full disclosure on my part, I went to Stanford Law School. And I remember both Joe Bankman and Barbara Fried. They were very well-liked, very popular professors. I took tax law from Professor Freed. But I'm going to start by having you tell us more about them. How would you describe these two individuals? Yeah, so they've both been at Stanford Law School since the late 1980s. But it's probably fair to

say that they're more than just faculty members on campus. They were often described by colleagues and friends over the years as these sort of central figures, these pillars, both kind of culturally there, but also intellectually. Can you describe what you learned about how Joe Bankman and Barbara Freed raised their son? It was a little unusual, wasn't it? Yeah, I think they had discovered at an early age that Sam and his brother really enjoyed having more adult conversations. And so from that point on, they really sought to cultivate that with them. You know, Joe and Barbara were pretty well known on campus as hosting these Sunday dinner parties with their friends and colleagues and, you know, sort of interesting people that were visiting. As you might guess, many other kids, you know, didn't necessarily want to talk about politics or religion or current events and would kind of, you know, as dinner played out, would sort of

excuse themselves and go watch TV in the other room. But Sam and his brother would always, almost always remain behind and they would participate and hold their own in those conversations. And based on what you've learned so far in your own reporting, how would you describe Bankman's and Freed's involvement in FTX? Like, how deeply were they involved? I think in Barbara's case, she wasn't really involved in any meaningful way. Joe, different story. He was actually a paid employee for some time, a little less than a year, focused a lot on their philanthropic efforts. He sat in on meetings in Washington with lawmakers, with his son,

as they were either lobbying on behalf of the company or maybe the crypto industry itself. And as the situation began to turn dire, he became a bit of a liaison between other people at the company and the lawyers and his son. And at one point, he was asked to urge Sam to resign so that the bankruptcy could proceed. And then, of course, there's this luxury property that they had been using when they were visiting Sam in the Bahamas was reportedly – the parents were listed on the deed. And so that's one unresolved element there about how they obtained that and why they still appear to hold it. Also, Bankman, I mean, he very much helped shape this image, FTX's image, as this company that would try to give low-income people access to the financial system, right? Like, as an academic, I know that Bankman was very interested in the inequities in the financial system.

Yes. No, that was sort of central to his official role within FTX. He was primarily focused on various philanthropic efforts and that idea, low-income folks getting bank accounts, being able to transfer funds to their loved ones in other parts of the world. He was leading that effort. What sort of legal liability could Joe Bankman or Barbara Freed potentially face in the wake of this collapse, you think? Yeah, that's certainly unresolved, right? We don't know yet what involvement they had in the areas that ultimately found FTX and the sister trading firm Alameda in big trouble, right? The central allegation is that they used customer funds on FTX in exchange in order to cover up losses and other issues at this trading firm Alameda.

And so one thing that's unresolved is to what extent, you know, what knowledge that his parents had about that prior to it being revealed, you know, in early November as things were imploding. That was Justin Baer of The Wall Street Journal. There's one more slice of the congressional hearing we want to note before we let you go. It came from Democratic Congressman Brad Sherman, who proudly declared that he had received an F grade from the Crypto Action Network advocacy group.

And I'll have one comment from my colleagues. Don't trash Sam Bankman-Fried and then pass his bill. He was talking about a crypto regulation bill with bipartisan sponsorship that Bankman-Fried had supported. Sherman says he wants crypto investments banned. My fear is that we'll view Sam Bankman Freed as just one big snake in a crypto garden of Eden. The fact is, crypto is a garden of snakes. That debate, whether cryptocurrency is an Eden of financial innovation or a snake pit of predatory scams is one that will continue to occupy Congress whatever happens to Sam Bankman Freed. It's Consider This from NPR. I'm Elsa Chang.

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