Front Burner - Guilty: The fall of Sam Bankman-Fried

Episode Date: November 6, 2023

A jury has found FTX founder Sam Bankman-Fried guilty on seven counts, from conspiracy to fraud, following the collapse of his crypto exchange last year. Jacob Silverman, host of The Naked Emperor podcast, walks us through Bankman-Fried’s trial and explains what the verdict means for FTX customers and the cryptocurrency industry. For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts Transcripts of each episode will be made available by the next workday.

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. Hi, I'm Damon Fairless. In 2019, Sam Bankman-Fried, or SBF, launched the cryptocurrency exchange FTX. Over the years, there were glowing write-ups. Sam was described as a disheveled, oddball genius tech founder who lived like a shabby college student in a $35 million penthouse.

His rise to prominence was wild. At its height, FTX was valued at more than $32 billion. But his crash was even wilder. In November of 2022, Sam Bankman Freed's reputation tanked along with the bankruptcy and total collapse of FTX. And now a conviction on seven counts of fraud, conspiracy, and money laundering. At the heart of it, the relationship between FTX, the crypto exchange, and the hedge fund Alameda Research, also founded by SPF. Prosecutors said FTX took billions from its clients to cover debt and make trades at Alameda. That money was also used to buy luxury real estate,

fund celebrity sponsorships, and make political donations. Today, we look at what led up to this verdict and what it could mean for the future of cryptocurrency. Jacob Silverman is the host of our spinoff series, The Naked Emperor. And if you haven't listened to it, you should. It's great. Jacob's here with me today to talk about the trial. Hey, Jacob, thanks for coming on. It's great to have you back on. Thank you. I appreciate it. So it only took the jury a few hours to decide on Sam Bankman Freed's verdict.

And actually, I was just reading a piece that you wrote that the line you used took about as long as a late era Scorsese film to land on a verdict. So what does that tell you about the evidence that was presented against him in this trial? Yeah, I think the evidence was very strong. My joke was about a Scorsese film thinking of Killers of the Flower Moon because that movie, I think, is over three hours. They took about four hours and they had dinner during it. But I think just the fact that they were able to do it in one session and without going into the next day, and I don't think they asked many questions of the judge or points of clarification, I think it shows what a lot of us thought during the trial,

which is that, frankly, the prosecution made a pretty effective case. If this kind of trial is sort of an exercise in storytelling, they told a convincing story, which was that Sam Bankman Freed was in charge of everything. He owned these two companies and he oversaw everything, including the movement of money of customer funds from FTX to Alameda, which were then spent on investments and political donations and all these other things. But overall, I think a lot of people had this feeling that whether you thought Bankman-Fried was guilty or not, the prosecution was pretty methodical and simple in a way in terms of walking the jurors through what happened here and also just here's all this evidence,

chat logs and text messages and Slack messages and emails and documents. There really wasn't a lot left out that there was plenty there to tell the whole story. So if we're thinking about in terms of story, and we already knew quite a bit about the story in terms of mismanagement of funds, kind of going into the trial, obviously your podcast series went into that to some extent too. But were there things that were really new and revealing, startling twists to that story that came out of the trial? Yeah, I think the general arc of things was probably in line with what a lot of folks thought before and with some of the earlier reporting and information that's come out through the bankruptcy and civil lawsuits. But there are certainly some surprising moments.

I think overall, the situation was probably worse than the public generally knew, even after the company collapsed. For example, there was an incident apparently where Caroline Ellison, who was the CEO of Alameda Research, the hedge fund, she was also Sam Bankman-Fried's ex-girlfriend. And she was instructed by Bankman-Fried to create some possible fake balance sheets reflecting Alameda's assets and kind of telling a better version of what they might have, lying about what they had, really. And then they sent these fake balance sheets to lenders. had, really. And then they sent these fake balance sheets to lenders. Because at the time,

actually, Alameda was surviving off of billions of dollars in loans that they were getting from other lenders. They weren't actually making much money. So I don't think anyone really knew that there were these seven fake balance sheets, and that they actually sort of had the audacity to send these out to people. But what we did know was that about a year ago, almost exactly a year ago, a balance sheet was leaked to a publication called Coindesk. And that's what helped precipitate FTX's collapse because it showed that the company was in pretty bad shape financially. Over the weekend, speculation rose about the solvency of FTX. This came after a Coindesk report revealed Alamator Research's balance sheet is full of FTX's native token FTT. Well, what we learned in court was that this was one of the seven fake balance sheets. So the balance sheet that had so notoriously leaked that had set off this whole thing

was actually a fake. And not only that, it was supposed to tell a sort of rosier picture of what was going on here. But on its own, it was so bad that to the general public, it helped start this run on FTX. So one of the interesting bits about what you're just talking about is the fact that, you know, the people closest to him, and I mean like professionally closest to him, but also personally close to him, like, like Carolyn Ellison, you know, these folks, you know, pled guilty and they testified against him. So how, how significant is it that his inner circle did that, that they basically turned on Sam Bankman Freed? It was very significant. I mean, these were people who he lived with, one of whom he dated.

One of them was good friends with his younger brother. Another one he had gone to math camp with in high school. A lot of them looked up to Sam. And so you had three top executives who pleaded guilty and gave various expressions of remorse. And then they said, we did this. We committed these crimes under the direction of Sam Bankman Freed. And here's how it happened. The trial featured testimony from Bankman Freed's ex-girlfriend and former business partner, who took a plea deal, telling the court,

he set up the systems and directed her to take customer money to repay loans. In court, they gave very precise testimony. I mean, of course, they had worked with the prosecutors beforehand. But I also think the fact that these are sort of engineer math types that they tended to speak very clearly and precisely like, oh, I had this conversation with Sam on this date on the balcony of his apartment or something like that. So you got these very clear stories from them. And that was very effective, and especially when you compare that against Bankman-Fried himself and his lawyers who told just a very hazy story and never had this clear counter-narrative of what exactly happened. founders of FTX. And he actually testified about a piece of code that was kind of a smoking gun in a way, right? It was really quite crucial to defrauding FTX customer funds. Can you tell me a bit about that? Sure. There was essentially a backdoor in the FTX code that allowed Bankman Freed or Alameda to withdraw customer funds from FTX. You know, it's important to note that the main crime here really is about

$8 or $9 billion at least of customer funds that were moved from FTX to Alameda or in some cases never really arrived at FTX because they co-mingled in a couple bank accounts. But this code allowed Bankman Free to move billions of dollars without anyone really noticing. Of course, Gary Wong knew, and he helped code it, which is what made him an accomplice. Wong told the court that he committed financial crimes, and when prosecutors asked who he committed the crimes with, Wong claimed it was alongside executives Nishad Singh, Caroline Ellison, and SBF himself.

But this was something that Bankman-Fried was supposed to have ordered, and it allowed the fraud to continue, but it also kept the circle small so that only a few people really knew about this within the companies. So Sam Bankman Freed took the stand in the final weeks of the trial, and he was trying to convey that he didn't know much about what was going on. And as you said, there's this kind of, you know, hazy counter-narrative that wasn't much of a counter-narrative. But he also said like, I mean, literally said more than a hundred times, I don't recall, you know, various iterations of basically, I don't know.

I can't remember. Did it surprise you that he'd take the stand period to convey what he didn't know? In these kinds of cases, they generally advise the client or the defendant not to take the stand. And I figure his lawyers and maybe even his parents, who are lawyers, said the same thing. But in the end, I don't think it was a surprise necessarily. Sam Bankman-Fried has always been a big talker. As I've written before, he may be a little awkward, but he's not shy. I mean, you know, the classic advice, right? Don't say anything. You know, recede into a hole. say anything, you know, recede into a hole. And it's not who I am. I mean, it's not who I want to be. I don't have, 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, you know, this is someone who talked his way into billions in a way and was, you know, good at getting money out of people and the support of others, even if he was a bit of an eccentric or maybe because he was an eccentric. And he's someone who seems to have a fair amount of egoism and sort of nerdy arrogance. And so I think he thought he could take the stand and either somehow explain things away or at least, you know, muddy the waters enough with his supposed brainy intelligence to confuse the jury, because you really only need one person to, one juror for a mistrial. But I think one thing that a lot of people thought was just he seemed very unprepared, and so did his lawyers. These are very high-priced lawyers, and you'd expect at some point a kind of more coherent strategy,

and as I've said, a more coherent counter-narrative. But instead, it never really appeared. And then when he was on the stand, there were times with his own lawyers when it was a little awkward, but he was generally okay, as one might expect. But he really just could not handle the cross-examination. It's not as if he betrayed that much emotion. There seemed to be some annoyance at times. But more importantly, he just couldn't give succinct, clear answers. So I think that ends up being the surprise, in a way, about his testimony. It's not that he decided to take the stand, but that he did it so shoddily. And that he wasn't more prepared to be attacked, of course, or be put on the spot by the prosecutor.

And didn't have very good responses. In particular, we saw that there would be these yes or no questions. And instead of responding yes or no, which, you know, some defendants don't like to do, of course, but you have to, he would go on these long monologues. So we had a number of objections that were sustained by the judge for what's called narrative, where the defendant basically, or the witness just slips into storytelling, into talking. And there are other times also when the prosecution would object and she would say, this was a yes or no question about whether he spoke to someone, for example, or wrote a document. And then he's off talking about a trip to the Middle East or something entirely different. It just didn't really seem like he was ready to, frankly, play by the rules

of the court and try to make his case within that context. 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. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years.

I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? 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. Has this trial changed your understanding of Sam Bankman Freed?

I think a little bit. To be honest, I was not someone who thought he was necessarily one of the biggest fraudsters in American society before his company went down. But I struggled to see why the hype was there and the supposed genius. I've talked to him and interviewed him before his company collapsed, and I certainly had some skepticism. But I think what stands out after this trial and after all the evidence and the testimony is just that, frankly, I have a hard time seeing what the there was there at all. What was innovative? What was important or brilliant about this? Where was the technological or economic innovation? I just don't see it. And given the fact that he performed so poorly in his own defense, I think we have to say that a lot of people were tricked or allowed themselves

to be because they saw a profit potential in him. This was someone who didn't really seem to care about other people's emotions or the rules or the law and was just his bad luck and frankly, the public's good fortune that it caught up with him. One of the aspects I find about the story that's the most intriguing to me is, as you said, this is, you know, your take is that this is a guy who maybe didn't care much about other folks' emotions, maybe the law, but he was someone who talked a lot about effective altruism, right? Like doing as much good as possible with the wealth he was amassing. In the end, my goal is to do as much good as I can for the world. I'm part of an effective altruism community.

Basically, it's a group of people looking to try and figure out if you want to maximize the amount of good you do, maximize the positive impact that you can have on the world, what does that imply? What does that mean you should do with your life? And I think it sort of grew out of like... But do you really, do you think he really believed in that, the effect of altruism?

I don't know. There's this now famous interview he did. Well, it was sort of a discussion he was having online late one night with a Vox reporter, and then it was published, and he said he believed it was off the record, but frankly, I thought that was a little naive. But anyway, in that conversation, he's very dismissive and swears a lot and says, oh, the effect of altruism stuff was basically a cover. I think in some ways that's true. I can't say definitively whether he believed this stuff. I mean, Sam Bankman-Fried does have a quantitative mind. He's known for basically making up odds about things. Like he said, he told Caroline

Ellison he thought there was a 5% chance he would become president one day of the United States. So that kind of quantitative thinking is part of effective altruism. Like how can you do the most good? Can you calculate this in a statistically meaningful way or mathematical way? But given how he actually acted in practice, you have to question that or perhaps question whether effective altruism is the sort of wholly charitable philosophy it presents itself as. But maybe it is really just a kind of rhetorical and moral cover or philosophical cover for greed. One thing that did stand out to me was that, yes, he donated to some laudable organizations or, you know, various fellowships or pandemic prevention, things like that.

But, you know, he donated to a lot of politicians who didn't care about the issues that he does. He did some donations in secret. And then when in his early years, when he was donating a lot of his money from Jane Street in the early years of Alameda Research, he was actually donating mostly to foundations and organizations that were started by other effective altruists. So, and just, I kind of want to follow up on something there in terms of his political donations. We, you know, knew some of this already. He had donated tens of millions of dollars, may have gone to like, you know, up to like 196 members of Congress who received donations from FTX. But did more clarity come out on those donations in the trial? There wasn't a lot in the trial about that. There was some for sure. I mean, Nishad Singh, one of those three

FTX executives who pleaded guilty, took the stand. And he talked about how there was basically a lot of money going out in his name. And while we did hear a little bit more about those things, I expect a lot more in the months to come when perhaps there might be some other indictments of other individuals. And then there is a trial scheduled for next March for Sam Bankman Freed, which will probably go forward. And that trial will almost certainly cover this bribe that he allegedly paid to Chinese officials to unlock a bunch of frozen crypto from a money laundering investigation. Originally, we thought that bribe was about 40 or $50 million. In court, it came out that it was $150 million.

And there were a few other little notes in there about some of the political donations and just the sheer breadth of it. But I think to really find out what happened here, we might have to wait for the next trial and for some of these civil lawsuits and other investigations. One of the things that, in this current trial, that prosecutors made a fairly big deal of is that, you know, basically they said he was fronting. His disheveled appearance, his messy hair, the cargo shorts, the t-shirt, the kind of like, you know, purposeful slovenliness, I guess. And part of it was just a deliberate act to attract customers. That was the argument, at least. Do you think this verdict will maybe prompt a harder look at eccentricities, whether they're real or fake, that some tech founders seem to trade on?

I hope so. Even with Elizabeth Holmes, she was quite openly and self-consciously imitating Steve Jobs, certainly in how she dressed. But I hope in general that we take the cult of the CEO down a peg or two, that we start questioning some of these people more, that just because someone sort of resembles this kind of eccentric nerd archetype, that doesn't mean that they're a brilliant businessman or have necessarily the right ideas for how to improve our political system or even human flourishing in general. I mean, I think even if you go back to what FTX was and what Sam Mankman-Fried did, he was a finance guy and he ran kind of a crypto casino. This was someone who talked a good game and was running a casino in the Bahamas. game and was running a casino in the Bahamas. And I think if we just had that initial framing, even there may not have been the kind of hype surrounding him that, you know, is often laid

at the feet of other tech CEOs too. And then, you know, basically at the end of it, he's found guilty of defrauding customers, FTX customers, billions of dollars. So what do we know about where the money is now? So a lot of it was lost. It's hard to say exactly how much. I mean, they have recovered assets, but, you know, the whole basically was about $9 billion. They had a forensic accountant take the stand, and he was quite effective. And he was basically saying, look, here's $200 million. It moved from FTX to Alameda. Then it was used to invest in this company. So there was more than a billion dollars that went into marketing and payments to celebrities. There was billions of dollars that went into investments. There was a lot of money that was just gambled in the crypto markets and they lost.

The court was shown an eye-popping spreadsheet of investments made in 2021, including a $1 billion investment to the now bankrupt crypto lending firm Genesis, investment in a crypto mining company, half a billion dollars as well to AI company Anthropic, and $200 billion to K5. I think it'll still take a long time to untangle all this, to find out, where is some of this money, some of this crypto, can it be recovered? And in general, in these kinds of bankruptcy filings, customers will be lucky to get 50, 60% on the dollar. I think this is still going to end up being a pretty catastrophic loss for a lot of people. I guess I'm curious what the bigger ripple effects this verdict will have on the industry in general, the crypto industry. Well, the industry is already in pretty big trouble.

I mean, late 2021 was when crypto market values peaked, the price of coins. The next year is when trading activity peaked. So really, you know, people have left the exchanges. People aren't coming back to the casinos to gamble more. You've had a lot of other bankruptcies, including some provoked by the bankruptcy of FTX. I mean, one thing that we did really discover or see in a vivid way during the trial was that all these companies worked with each other and loaned money to one another and often loaned money based on very specious collateral. Like FTX was using its own token, basically a cryptocurrency it created as collateral to get dollar denominated loans.

It's like as if I printed out a few sheets of paper and wrote money on it and then went into a bank and asked for a loan. But I mean, obviously it takes two because these lenders gave them the money. But I think people are understanding that, you know, the underlying fundamentals of this business are not very strong. And certainly, there's still some optimism or hope and even some money inside the industry. But there's a big gap here between sort of the broader public and people who have dabbled in crypto and where the industry is at now.

And given that that's kind of the state of the industry, you've also said like in the past that the US government wanted to make an example of Sam Bankman Freed. But given that the industry is already where it's at, what is that example? What's the warning? That's a good question. I think in a broader sense, it's that, hey, you can't rip people off or do large frauds and huge financial crime and get away with it. I mean, you know, Sam was an important figurehead for all this. And given how spectacularly the business imploded and how many people he both ripped off and embarrassed, I think there was a strong motivation to both take this quickly to trial and to find him guilty. You know, the ripple effect in crypto might be limited because crypto itself is struggling. But I think this might say something about the larger financial

markets and about who's allowed to get away with this kind of stuff in the US. So, and you mentioned this earlier, but there's a sec, he's got a second trial coming up. We've just dealt with some of the charges, but he's already facing up to 110 years in prison. At the end of all this, how do you see it playing out for him? I would be surprised if it gets less than 20 years, though it could vary. I believe Elizabeth Holmes got something like 12 to 15. You know, this is a huge fraud. It was, it hurt a lot of people, even though we sometimes focus on the rich people he conned or the celebrities he fooled. There are a lot of

everyday people who just dabbled in crypto who now lost their money. There are people who worked for the company who kept their money on FTX. There are all kinds of people who lost who I think deserve some sympathy. So I think Sam Bankman-Fried is going to jail for a long time. And I think if the second trial does indeed happen in March, I think he could get another significant sentence because there's a lot of evidence here and these are major crimes. You also mentioned Sam Bankman Freed's parents, right? They're both professors of legal ethics at Stanford and they were close advisors. They're actually both being sued by FTX to give back money they had earned from their positions there. So what happens next for them?

I think it's all been pretty surprising. And for them, even just to see how this has played out, you know, they speak of their son as if he could do no wrong. There was this famous line or now famous in the New Yorker where his mom said, Sam cannot speak in untruth. It's just not in him. And clearly that's not the case. His father did take a salary from FTX, was on the payroll and was with Sam at many meetings with important people in government here in the US, in the Bahamas, and was an advisor. They also received $10 million or so in cash, which there's an email saying, oh, this will let your mother retire from Joseph Bankman. And they signed for an apartment in the Bahamas that I believe cost $16 million. Later, they said that they thought that the ultimate beneficiary owner of that apartment was FTX, but they had signed a deed.

And again, these are eminent law scholars. They had signed a deed. And again, these are eminent law scholars. There's just a sense here that, you know, no matter how much they tout their own sort of ethics or virtue, they fell for it too a little bit or, you know, the greed bug took hold of them also. We also know that Joseph Bankman apparently diverted about $5 million to some of his colleagues at Stanford as donations, basically. I mean, I think that's one of the lessons from this trial is that greed, no one is really immune from greed. And you can style yourself as an ethicist

and try to live an upright life. But when you're exposed to hundreds of millions or billions of dollars or unlimited money, it seems, that can be very tempting. I don't necessarily expect prosecutors to send a couple elderly parents to jail for decades, but it would not surprise me to see them charged with some kind of crime and perhaps plead to something. All right, Jacob, it's been great talking to you. Appreciate it. Thank you. Thanks very much. All right, that's it for today. I'm Damon Fairless. Thanks so much for listening to FrontBurner.

I'll talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.