Front Burner - Front Burner Presents | The Naked Emperor E3: Busted

Episode Date: April 7, 2023

In the weeks after FTX filed for bankruptcy Sam stuck to his story: he did not commit fraud. FTX’s post-collapse CEO claimed the company had been a managerial and financial disaster, writing that he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information.” In response to his cratering public image, Sam Bankman-Fried talked. A lot. He exhibited an almost reckless desire to tell his side of things, insisting he could explain – and vindicate – himself. It was an exceptionally bizarre move for someone who had lost not just his personal fortune, but potentially the funds of millions of customers. Even as U.S. prosecutors filed charges, and his former friends turned on him, SBF was unwavering. With the legal odds against him, why would SBF risk so much by refusing to shut up? Update: Since this episode was published, U.S. prosecutors have added a new charge against Sam Bankman-Fried, accusing him of conspiring to bribe one or more Chinese government officials. The charge has not been proven in court. For more episodes of The Naked Emperor, check out its podcast feed: https://link.chtbl.com/uXdCyMR8 For transcripts of this series, please visit: https://www.cbc.ca/radio/frontburner/transcripts

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hey everybody, Jamie here. So I hope that you have all been liking our Naked Emperor miniseries. It's about Sam Bankman-Fried and his multi-billion dollar crypto exchange FTX, which of course collapsed. And now Sam is facing charges that could land him in prison for the rest of his life. We put up two episodes so far in our feed. You've got number three today. And I know I have been saying this

every week, but it's really good. Host Jacob Silverman paints this incredible picture of how it all came crashing down. There's all this insight into SBF's state of mind after the crash. So it's really great and super insightful. If you like it, you can head over to the Naked Emperor feed. There's a link in the bio and the fourth and final episode is live there now. All right. Enjoy. Have a wonderful long weekend. And we'll talk to you next week. We'd had like a couple of little interactions prior to FTX's bankruptcy. So I really didn't think he was going to respond. It's not like we were friends that went way back. we were friends that went way back. On the day FTX went bankrupt, Tiffany Fong took a chance in Sam Bankman Freed's DMs. Like all of us, she was looking for an interview with the guy whose

multi-billion dollar company had just imploded. So I DMed him that day, kind of just confused and was just like, hey, would you be willing to chat or tell me like your side of what happened? But Tiffany brings a different perspective than your typical crypto commentator. Because in July 2022, she lost a lot of her own savings to another big bankruptcy. When I started posting, I was mostly just posting because I was upset about my crypto losses when Celsius went down. And then I knew that I was personally avidly looking for more information on what was happening with Celsius. So when I found that information, I figured I would post it and share it with others that might be in the same position. So my intention was never to set out to become an influencer or a journalist.

But I guess I've fallen into, I guess you could say, either of those roles. But I'm perfectly fine with whatever anyone wants to call me. I don't really label myself as anything because this has all sort of fallen into my lap. For five days, her note to SBF went unanswered. So when he did reply, she was caught off guard. He responded at like 12.30 a.m. I was actually out to drinks in New York. It was after midnight on a weeknight, and he said he was free for the next hour.

I'm just curious what you thought in that moment where he said yes yes and you're, you know, you don't necessarily think of yourself as a journalist, you're out with a friend, and then he says yes and you're like, well, maybe I should run home and get ready for this. To be honest, I was a little bit tipsy on our first phone call

because I ran through it in my head and I was like, okay, everyone's trying to talk to Sam. I'm not going to be like, hey, Sam, I'm busy right now. Can we schedule this for another day? So I kind of like ran back home from drinks and didn't have questions prepared. It was all kind of on the fly. So that's how the first call came about. Sam sounded different than Tiffany expected.

Look, I don't think that the worst things that are said are true. But like, you don't get in this situation that we got in if you like are, if you make all the right decisions. Like if I, you know, like I hadn't, if I had been more careful, there's a billion things I could have done. He sounded much more chipper than I would have expected for someone whose world just collapsed. I guess that maybe it was just the initial shock of what had happened, maybe. But I would have expected him to sound much more distraught than he did. On their call, Sam admits to making dumb mistakes. And he denies intentional wrongdoing.

One of the first questions Tiffany asks is about the missing customer money, specifically this Reuters report that SBF had diverted billions in customer funds to prop up his hedge fund Alameda Research, using a secret backdoor built into FTX's bookkeeping software. There was something about a backdoor that allowed you to execute commands that could alter the company's financial records without alerting others that this was put in place. I think that was a Reuters article, which made it seem like you secretly were moving money in the background.

Wait, and this is something that I would be doing? money in the background. Wait, and this is something that I would be doing? It kind of said that SBF put, like, a secret backdoor so that he was moving funds to Alameda, and it was undetected. Like, this was something that you put into place, potentially? I mean,

that's how it read? Well, that's interesting. So that, I can tell you, is definitely not true. I don't even know how to code. It's the honest, embarrassing answer. I certainly wasn't, like, building some backdoor in the system. I could barely use the system. But the allegation laid out in that Reuters article wasn't that SBF had built the backdoor himself. It was that his old friend and co-founder Gary Wang did. I was definitely nervous. I mean, I guess being a little tipsy helped with the nerves a little bit. But I certainly didn't feel prepared for the call, which is why I think a couple of my questions like I asked him about the back door and I forgot that Gary Wang coded the back door. You know, there were little things where I wish that I was more prepared for that call.

I think that's also a characteristic of many interviews where you go back and replay in your mind later like, oh, I should have asked about XYZ. That was my first time interviewing anybody in my life. Like, I've never interviewed anyone for anything. So that was my first interview ever. For her first interview ever, Tiffany elicits some pretty interesting information. For example, about SBF's political donations. I donated to both parties. I donated about the same amount to both parties this year. All my Republican donations were dark. And the reason was not for regulatory reasons. It's because reporters freak the fuck out if you donate to a Republican.

They're all super liberal and didn't want to have that fight. So I made all the Republican ones dark. This is classic Sam. He seems extraordinarily candid to the point of recklessness. He's bragging about manipulating the media, catering to their perception of how a good liberal mogul spends his political capital. And if he's telling the truth, he's practically daring government investigators. Find my dark money. Given the gravity of the situation, this approach is just plain weird. You'd expect silence from someone in his position, maybe a no comment. Instead, as the company spiraled into bankruptcy,

Sam was tweeting he was sorry that he'd, quote, fucked up and should have done better. Now, less than a week later, he's on the phone doing a recorded interview. He just comes off to me generally as someone who doesn't care too much for conventional wisdom or formality. He told me on our first phone call, his lawyers told him not to ever say that he fucked up ever again. Lawyers shooed me the fuck out for that one. The first thing they said after that was, they said, Sam, we have only one thing to tell you. You have to promise that

you never, ever, ever say you fucked up again. I told him to go fuck himself. I don't think they know what they're talking about. I mean, whatever. They know what they're talking about in an extremely narrow domain of litigation. They don't understand the broader context of the world. So he seems to have that sort of attitude. I don't think he really listens to authority too well. And I think that that worked well for him in the past because he was kind of a unique figure and people probably admired that about him. And

now it might come back to bite him if he keeps talking too much. I'm Jacob Silverman. This is The Naked Emperor. Episode 3, Busted. Before FTX's sudden collapse, the media had, overall, treated SBF and his empire with a pretty light touch. In the immediate aftermath of the bankruptcies, though, it was time to kick over the log and see what came scurrying out. Some strong investigative reporting followed, like the Reuters story

on the alleged backdoor that allowed customer funds to be funneled out of FTX. And there was more salacious stuff. People surfaced the old tweets by Alameda CEO Caroline Ellison and SBF about their drug use. What looked to be an old Tumblr of Caroline's was found, where a post from 2018 read, How do I signal my genuinely sweet and feminine nature on my dating profile? Should it go before or after the section on wire fraud? There were many reports that Sam and Caroline had been romantically involved, and rumors that others in their inner circle were too. I kind of felt like, all right, like, we as a society have, in my humble opinion, spent about enough time this week trying to figure out whether anyone living in Albany was polyamorous.

And I don't know, I feel like I've answered that question a lot. And the answer is too boring for people to, like, believe. Albany is the name of the luxury resort in the Bahamas where Sam had lived with nine roommates. And look, I'm not too interested in thinking about Sam's sex life myself, but it's not really about sex. It's about a potential lack of boundaries between these businesses that were supposed to be separate. After that phone call with Tiffany, Sam went on a press tour, a deeply bizarre move for someone in his position.

He was interviewed live at a New York Times hosted event via video link. 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. And I think I have a duty to talk to people. I have a duty to explain what happened. And I think I have a duty to do everything I can to try and do what's right. If there is anything I can do to try and help customers out here.

He welcomed George Stephanopoulos at his home in the Bahamas for a segment on Good Morning America. Like, I wasn't spending any time or effort trying to manage risk on FTX. And that obviously, that's a pretty stunning admission. Yeah, I mean, I don't know what to say. Like, what happened, happened. And like, if I had been spending an hour a day thinking about risk management on FTX, I don't think that would have happened. He spoke to Bloomberg, to New York Magazine, to Forbes.

He went on a few Twitter spaces, including one where he was grilled by Kim.com, the eccentric founder of the once popular file sharing site mega upload who accused him of dumping the blame on caroline and alameda you're dropping out kim yeah why would anyone believe anything you say when you are throwing your own lover under the bus i mean look i i fucked up big but I'm pretty offended by some parts of that. Like, Karen and I hadn't been together for a while. I don't control her. I never did. I think it's really fucked that you would say that I would, that that's how things work. out to him myself around this time. Why not, I thought. I asked if he'd meet with me if I flew down to the Bahamas. He responded in probably the most confusing way he could. Potentially, he wrote, complete with exclamation marks. I followed up over the next couple days,

looking at accommodations, trying to nail down details. I gave him a time and location. Could he do it? Potentially, he wrote back. It seemed ridiculous. Was I being trolled? I couldn't afford to go down there without more certainty. Later, when reporters and influencers descended on the island, I wished I had. Sam seemed hell-bent on explaining himself. More than that, he seemed like he thought he could explain himself. That maybe if he just did enough exclusive New York Times shindigs and Twitter spaces with seedy internet entrepreneurs, people would understand. Sam's version of what happened goes like this.

He didn't take FTX customer money and hand it over to his hedge fund Alameda. Rather, Alameda had an account on FTX where they had a large margin position open, which meant they were borrowing a lot of money to make their bets. And yes, he should have realized how much they'd borrowed and how risky that was,

but he didn't knowingly do anything wrong. He also claims he wasn't even fully aware of what was happening at Alameda because he wasn't running things there. I did not know that there was any improper use of customer funds. I was frankly surprised by how big Alameda's position was, which points to another failure of oversight on my part and a failure to appoint someone to be chiefly in charge of that. But I wasn't trying to commingle funds.

Still, as SBF keeps talking, more information keeps coming out and it doesn't look good for the former CEO. The allegations of wrongdoing go well beyond one giant margin position. John J. Ray III, the lawyer and new CEO in charge of dealing with FTX's bankruptcy proceedings, describes in court filings the mess he walked into. And it sounds like, well, what might happen if you gave a bunch of 20-somethings billions of dollars

and a fake money printer and put them on a gorgeous Caribbean island. He says there's no accounting department, no complete roster of FTX employees, practically no risk management. He says that SBF communicated using apps that auto-deleted messages and encouraged employees to do the same. The bankruptcy court in Delaware hears how FTX was run as the

personal fiefdom of Sam and how $300 million of corporate funds were spent on real estate in the Bahamas. The restructuring attorney claims that a substantial amount of assets are missing. Also, Alameda owes $55,000 to Jimmy Buffett's Margaritaville Resort in Nassau. Congress schedules hearings to investigate FTX's collapse and asks Sam to attend. After demurring, Sam says he will go, but not in person. On December 12th, the day before that hearing, Sam is on a Twitter space with some pretty tough crypto critics.

One of them, Molly White, presses him on why he won't go to Washington. Are you worried you might be detained if you stepped foot into the U.S.? I don't believe I would be, but I haven't done a deep dive into that. At some point, something I have to think harder about. He wouldn't have to think about it for very long.

That night, SBF is arrested in the Bahamas. I love you guys. investment and industry connections. That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. I had been working on FTX stuff and we heard that he got arrested. I think it was like 7 or 8 p.m. at night. So I got up at like 4 o'clock the next morning and got on a flight. That's Cheyenne Ligon, a reporter at Coindesk. She'd first encountered Sam

when she was just an intern at the outlet in New York and he was a guest on Coindesk TV. Now, U.S. prosecutors have filed criminal charges against him. And Cheyenne's flying to see Sam in a Bahamian courtroom. We were following the story, and I had met him once before at a conference in New York, you know, when he was kind of at like the height of his popularity. And then the next time I see him, it's in a suit sitting in front of a judge. So it was just pretty surreal for me, too. Sam tells the judge he plans to fight extradition back to the U.S.

He's hoping to be let out on bail as this process plays out. So his parents are both there. I glanced at them a couple of times. And at one point when they were talking about the charges against Sam in the U.S., Sam's dad, Joseph Bankman, had his fingers in his ears like he just did not want to hear anything negative being said about his son. His mom just seemed like incredulous the entire time. Anytime they were calling Sam a fugitive, his mom would like audibly laugh or scoff. It was just very unusual. I've been to a lot of hearings and, you know, usually family members are pretty sedate. Sam's Bahamian lawyer

argues that Sam is not a flight risk, that he has already had opportunities to run, but hasn't taken them. The judge is not convinced. Obviously, ultimately, the Bahamian judge decided not to grant Sam's request to be out on bail and remanded him to prison. And at that point, when I left, I was under the assumption, like everybody was, that he was going to be in jail in the Bahamas until February. Sam is sent to Fox Hill Prison to await his extradition hearing. Its reputation is rough. You know, there's reports that like people have to go to the bathroom in buckets and that there's issues with like drinking water and that people get sick. So, you know, it's my understanding that Sam was being held in kind of the medical wing during his brief stint

in the jail. But, you know, I cannot imagine that that was particularly nice either. It doesn't take long for Sam to decide he doesn't want to fight his extradition after all. A little over a week after going to jail, FBI agents lead Sam in handcuffs to a plane. FBI agents lead Sam in handcuffs to a plane. Once he's in the air, bound for New York, U.S. prosecutors reveal a stunning development. Caroline Ellison and Gary Wang have been charged, too. ...have pled guilty to those charges,

and they are both cooperating with the Southern District of New York. His friends and former colleagues had flipped. So what is Sam Bankman-Fried actually charged with? First we charge that from 2019 until earlier this year, Bankman-Fried and his co-conspirators stole billions of dollars from FTX customers. He used that money for his personal benefit, including to make personal investments and to cover expenses and debts of his hedge fund, Alameda Research. He faces 12 felony charges.

A bunch of them are conspiracy charges connected to various types of fraud. Wire fraud, securities fraud, money laundering, and bank fraud. Also, just plain old wire fraud against both customers of FTX and lenders to Alameda. It's a cornucopia of financial crimes that actually doesn't have much to do with crypto. The government is charging that Sam stole from his customers, that he lied to get investments and lied about what he would do with the money, that he dipped into customer deposits to support the operations and investments of FTX and Alameda, to fund speculative venture investments, to make charitable contributions, and to enrich himself. In short, these are the kinds of laws that financial fraudsters break all the time, whether they're penny stock pushers

or billionaire con men. Then there's the 12th charge. We charge that Bankman-Fried violated federal campaign finance laws by causing tens of millions of dollars in illegal campaign contributions to be made to candidates and committees associated with both Democrats and Republicans. The government claims that SBF and some unnamed co-conspirators used straw donors for their political giving as a way of concealing campaign contributions. Given how many political organizations SBF donated to, the charge potentially implicates a lot of people. A wide-ranging operation to accumulate influence in secret. And all of this dirty money was used in service of Bankman Freed's desire to buy bipartisan influence and impact the direction of public policy in Washington. Maybe investigators already found Sam's dark money.

Maybe they had help. Caroline and Gary have both pled guilty to fraud. According to an unsealed transcript of Caroline's guilty plea, she said she knew that it was wrong and was truly sorry. Gary, too, said he knew what he was doing was wrong. A third former FTX executive and member of SBF's inner circle has also pled guilty. Nishad Singh started at Alameda in 2017 and went on to become FTX's director of engineering. All three are now cooperating with the government's investigation in exchange for the prospect of lighter sentences.

investigation in exchange for the prospect of lighter sentences. SBF denies all charges. He pleads not guilty. But if he is convicted, he could face more than 100 years in prison. For now, Sam Bankman-Fried is out on bail, living at his parents' house near the Stanford campus in California. Here's Tiffany again. So I just thought I'd shoot my shot and ask if he was allowed visitors. I don't know how house arrest works,

so I really wasn't expecting him to say yes or anything, but he was like, yeah, I'm allowed visitors. I don't know how house arrest works, so I really wasn't expecting him to say yes or anything, but he was like, yeah, I'm allowed visitors. So he agreed to meet with me when I came to visit San Francisco. I just took an Uber there and there was a police barricade. There were a few guards around the house and even a police car, which was a little nerve wracking. And I had to get let in through the barricade. So I gave my name. I think Sam called them ahead of time to tell them that I was coming. The guard escorted me to the door and Sam opened the door looking, you know, a little disheveled, just in a t-shirt and gym shorts. Tiffany says it's a nice house, big but not ostentatious, though he does have a library. Yeah, I think we went pretty much straight to his library.

And he looked like he had been spending a lot of time in the library. Like his clothes and I think like socks or something. There were some clothes strewn out on the ground. And it was a little messy, but you know, not anything crazy. He fiddles with his ring a lot. I think it's his like MIT class ring or something like that. He's constantly putting on chapstick and I don't know. He's,

he's very shaky sort of like almost anxious seeming person. Unsurprisingly, Sam's still trying to explain what happened. He was on his computer kind of clinging to Excel documents. He looked like he'd been making. And he was telling me that he's been sort of like avidly writing up his account of events and sort of a chronology of what had happened and how everything unfolded. So he was mostly on his computer kind of flipping back and forth. He hadn't started on the Substack stuff yet, but I guess that was the beginning of what ended up becoming a Substack.

Him apparently, you know, writing out his account of events. Tiffany was there over the winter holidays. In January, Sam put out a Substack newsletter where he continues to insist that he did not steal funds and certainly didn't stash billions away. and certainly didn't stash billions away. He writes that Alameda lost money due to a series of market crashes it was not adequately hedged for, specifically a market crash targeting Alameda and triggered by his crypto rival, Binance CEO CZ. Meanwhile, the rush of withdrawals on FTX required immediate liquidity Liquidity that Alameda no longer had As Sam puts it, as Alameda became illiquid, FTX International did as well

Because Alameda had a margin position open on FTX And the run on the bank turned that illiquidity into insolvency. Sam also claims that FTX US, the American subsidiary, has always been solvent and that it's ridiculous its users haven't been made whole yet. In his written testimony for Congress, Sam expresses regret over signing the bankruptcy filing. He says he was pressured into it. He claims that John Ray hasn't responded to his emails and isn't doing enough to help FTX users. I asked Tiffany why she thinks Sam's talking to her, considering how unusual and potentially risky it is for him to do so. considering how unusual and potentially risky it is for him to do so.

So in general, I think that he does think that a lot of things are misconstrued. So I think that in general, he wants to clear up some things that he believes to be miscommunications in the media. In terms of talking to me, I'm trying to figure that out too. But I think that like part of it is the fact that I'm not an official journalist working for some big publication. I think that might be a little less intimidating in terms of him, like, I don't know, him having to be careful with what he says and being, you know, blasted to millions of people. I also kind of just talk to him like any regular person. Like I don't talk to him just with a list of hard hitting questions, which I don't know, maybe some people might be annoyed by that. I try to ask him difficult questions, but I also, but I also talk to him like a normal person. I ask him how

he's doing. I ask him about his mental health quite a bit. So I don't think that he's getting a lot of that. Obviously his closest friends and people that he worked with have turned against him. So I think that he might be a bit lonely or low in the social department in terms of like just being able to chat with people. I think he probably is lacking that right now in his life. So I think that those things play a role. These are major crimes that he's charged with. Do you think he gets or understands the level of trouble he could be in? It's funny to me. He doesn't like his demeanor isn't overly devastated like I would be if I thought that I was facing a lifetime in prison.

I think he's overall someone who doesn't like thinking about the worst case scenarios. I guess that can be seen in the fact that FTX went down and he doesn't seem like he calculated risk too well there. So yeah, I kept asking, like, are you, you're aware though, that you might go to prison for life? Like I would ask him questions like that. And he says like, yes, I'm aware that that's a possibility, but he doesn't like his demeanor doesn't seem too distraught. I think he's not realistic about potential negative outcomes. And I think that if I were him, I think it would be smart to be thinking about those things.

And he doesn't seem to be thinking about them too much. I think in the very beginning, like when I first got on the phone with Sam, the thing I was most curious about was if he was just some like diabolical villain that had lied about everything. I thought maybe the effect of altruism stuff was all bullshit. I was really skeptical going into it,

like thinking that maybe he's actually some like actual super villain. But I just don't think that the most like sinister view on the story is true, even though I think that would probably make for a good movie plot. But I also don't think he's completely innocent and was completely unaware of what was happening and didn't realize customers' funds were at risk at all. I don't think that that's true either. He obviously seems to have bought a lot of luxurious properties and spent a lot of money on himself as well. But I think if anything, I've just realized that everything is sort of like in

the gray area and is nuanced and there's no like black and white about him or probably most people involved in this story. The question of Sam's guilt won't be solved for months at the very least. And the bankruptcy process could take years. For now, customers still can't access their money. But the system that enabled him still exists. It spans tech, finance, politics, even pop culture. And it would like nothing more than to cast SBF,

who until recently was one of their shining stars, as an aberration. But whatever Sam's guilty of, whether it's incompetence or malice or a toxic mix of both, he didn't act alone. I feel tricked by FTX and everybody that I trusted. I trusted actual people who do investing as a living. Did it ever give you pause that a crypto market was being sold as safe by some of these big industry players like FTX? I mean, should people have been more and more?

I'm not sure it was sold as safe. I don't think anybody can say that, particularly in a volatile asset class. As I indicated, that grant was specifically earmarked to support all this work in Africa. And now without it, I don't know. I don't know. That's next time on The Naked Emperor. You've been listening to The Naked Emperor, a Frontburner miniseries from CBC Podcasts and CBC News.

The show was written by me, Jacob Silverman, with producer Imogen Burchard, associate producer Yvette Sin, sound design by Julia Whitman and Yvette Sin. Thank you. The YouTube channels of Tiffany Fong, The New York Times, Good Morning America, and Twitter Spaces. For more CBC Podcasts, go to cbc.ca slash podcasts.