Money Crimes with Nicole Lapin - GREED: The FTX Collapse

Episode Date: November 14, 2024

Sam Bankman-Fried was known as the Crypto King. Armed with sophisticated algorithms and a keen financial eye, it seemed like the FTX founder would change the world as we knew it. But something sinister hid behind his unassuming image -- and by the time Sam was exposed as a fraud, people had already lost millions. Money Crimes is a Crime House Original. For more content, follow us on Instagram and TikTok @crimehouse. To learn more about listener data and our privacy practices visit: https://www.audacyinc.com/privacy-policy Learn more about your ad choices. Visit https://podcastchoices.com/adchoices

This is Crime House. When it comes to finance, one of the hardest concepts to grasp is cryptocurrency. But even if you have no idea how crypto works, there is one thing almost everyone understands. If you invested at the right time, it could make you rich beyond your wildest dreams. After Bitcoin burst onto the scene, everyone from movie stars to tech bros cashed in on the crypto craze. Entire countries even adopted it as official currency. As value skyrocketed, it felt like the good times might go on forever. But by the end of 2021, experts believed that the combined value of all cryptocurrencies was more than $3 trillion.

Then, in a heartbeat, it all came crashing down. And at the center of all the chaos was a guy named Sam Bankman Freed. Sam described himself as an effective altruist whose goal in life was to help as many people as he could. But in the end, the justice system decided that the only one he was trying to help was himself. As the saying goes, those who don't understand history are doomed to repeat it. That's especially true when it comes to money. If you want to make the right decisions when it comes to managing your assets, you need to know what mistakes to avoid and how to spot a

trap. This is Money Crimes, a Crime House original. I'm your host, Nicole Lapin. Every Thursday, I'll be telling you a story of a famous financial crime and giving you advice on how to avoid becoming a victim yourself. At Crime House, we want to express our gratitude to each and every one of you, our community, for making all of this possible. Please support us by rating, reviewing, and following Money Crimes wherever you get your podcasts. Your feedback truly makes all the difference. And for ad-free and early access money crimes, plus exciting bonus content, subscribe to Crime House Plus on Apple podcasts.

This episode is all about Sam Bankman Fried, the founder of Futures Exchange, also known as FTX. In less than five years, Sam built FTX into an online cryptocurrency trading platform, big enough to rival the New York Stock Exchange. But it only took a couple of errant tweets to bring the entire enterprise down. And put Sam behind bars. Hey everyone, it's Nicole. I have a quick favor to ask you. If you're enjoying Money Crimes, I would be so incredibly grateful if you took a moment

to rate and review us on Apple or on Spotify. Your feedback helps us improve the show and reach more people who love all things finance and crime. Thank you so much for your support. You've always wanted to be part of something bigger than yourself. support. This is for you. The Canadian Armed Forces. A message from the Government of Canada. This episode is brought to you by Dyson On Track.

Dyson On Track headphones offer best-in-class noise cancellation and an enhanced sound range, making them perfect for enjoying music and podcasts. Get up to 55 hours of listening with active noise canceling enabled, soft microfiber cushions engineered for comfort, and a range of colors and finishes. Dyson On Track headphones remastered. Buy from DysonCanada.ca With ANC on, performance may vary based on environmental conditions and usage. Accessories sold separately. separately. Sam Bankman Fried always thought big, like saving the world big. In interviews and confessions to close friends, Sam talked about solving the world's biggest

problems, everything from pandemics to AI to nuclear war. He came to represent everything we all wish billionaires could be, smart, altruistic, and unpretentious. From the way he lived, you'd never even know how rich Sam was. He drove a Toyota Corolla, slept at the office, and walked around in ratty sneakers and cargo shorts. Sam didn't seem to care about vanity or luxury, but he also didn't think much about the past. In an interview with author Michael Lewis,

Sam had a hard time remembering what his youth was even like. As far as Lewis could tell, Sam practically sleepwalked through his childhood. Aside from his brother, Gabe, Sam only had one real friend and they weren't even that close. He was an outsider, but he didn't care.

He never even bothered trying to fit in. To him, school was just as pointless as friends. He hated reading and he thought art was just stupid entertainment. From all the descriptions we have, it seems that Sam was pretty disconnected from his emotions apart from a simmering depression that never really went away. But one thing Sam did remember from his youth was how much he loved games. In high school, he used to build these elaborate puzzle-like treasure hunts

and then share them online. They were ridiculously complicated with unexpected twists that rewarded players who thought outside the box. That kind of brilliance got him into MIT's undergrad physics program in 2009. By then, Sam was on the path to becoming a physicist or even a college professor like his parents. But in 2012, fate intervened. At the time, the big finance

firms were shifting away from the Wolf of Wall Street type alpha male culture that we're all familiar with. Most trading was now done with computers, so companies were looking for geniuses who could build and run super fast algorithms designed to make lots of money. One of those firms was Jane Street Capital, and one of their recruiters convinced Sam to apply for a summer internship. The interview was mostly puzzle solving, which was Sam's expertise. So he aced every test.

He was so good that they offered him a full-time job after only a few weeks of interning. He accepted and joined as soon as he graduated. At Jane Street, Sam's job was to trade International Exchange Traded Funds, or ETFs. If you're not familiar with the term, ETFs are basically collections of assets, like stocks, that get pooled together.

They're a great way to invest in a particular industry while not putting all of your eggs in one basket. For example, if you wanna invest in tech, but you not putting all of your eggs in one basket. For example, if you want to invest in tech, but you aren't sure where to start an ETF lets you buy a little bit of stock in a lot of different companies. If the value of all of those companies goes up, so does the ETF. If one goes down, but the others go up, you still make money. When it came to trading ETFs, Sam got the hang of it right away. He made $300,000 in his first year

at Jane Street and double that in year two. If he had finished his third year, he would have earned a million dollar bonus. Not bad for a 25- old. If he stayed on that path he would have become a very successful trader on Wall Street. But something else happened around that time and it completely changed Sam's outlook on life. He discovered a school of thought called effective altruism. At its basic level, effective altruism means finding the best way to help the most people. That extends to future generations as well, which is why effective altruists tend to be passionate about things like preventing pandemics and nuclear war. pandemics and nuclear war. It's a very big picture sort of thing. And Sam was definitely a big picture sort of guy. He especially liked effective altruism because it essentially boiled down to a math problem, one with really big numbers. He realized that if he was going to make the kind of impact he wanted, he needed to make

a lot more money. So in the fall of 2017, Sam left Jane Street to start his own trading firm called Alameda Research. He sought out fellow effective altruists and convinced them to pool their savings into the firm while agreeing to donate most of the profits to charity. If Sam was going to accomplish his goals, he had to think bigger than ETFs. He needed something new,

something with huge growth potential. That's when a friend told him about cryptocurrency. As I said in the beginning, crypto is pretty complicated if you don't know much about it. But I'm gonna break it down for you as simply as I can. During the 2008 financial crisis, confidence in traditional banks was extremely low.

There just wasn't a lot of trust that they could be relied on to keep people's money safe. That's when someone calling themselves Satoshi Nakamoto proposed a solution. What if there was a way to cut the banks out of the equation? If you could create a safe, reliable form of currency that could be directly exchanged from buyer to seller,

there would be no need for third parties like banks to process transactions for you. The result was Bitcoin, arguably the first cryptocurrency. Instead of dollars or euros or yen, people traded digital coins or tokens. The record of each transaction was kept permanently on a database called a blockchain and stored on people's computers rather than at a bank. Because of the way blockchain is coded, it can't be altered, which means you can't just add a bunch of zeros to your account. And the technology is pretty easy to replicate, meaning that anyone can

make their own currency. By the time Sam Begman Fried started looking into crypto in 2017, there were hundreds of different coins. Their value changed minute to minute like the stock market and even varied by location. That's where Sam saw his opportunity. If the price of Bitcoin was a few dollars lower in say Japan, he could buy it there and sell it somewhere else at a profit. Do this a few million times and the profits could be in the billions. It was a good plan and Sam managed to raise a hundred seventy million dollars from investors to put it into action.

At first, it seemed to work. In the month of November 2017 alone, he made $500,000 in profits. In December, he made $4 million. But most of Sam's employees were amateurs, and eventually their winning streak ended. By February 2018, he was losing $500,000 every day and Sam, who'd never managed a team before, had a hard time boosting morale. In fact, he made it a whole lot worse. Reportedly, he expected his employees to work insane hours and then he wouldn't even show up to meetings. When he did, he usually hadn't bathed and had spent that time playing video games instead of giving them his full

attention. It's ironic that someone obsessed with the greater good made so many people miserable. But Sam was a walking contradiction. Considering he managed money for a living, Sam had a bizarrely carefree attitude toward finances. When employees reported that $4 million had gone missing, he just brushed it off. He knew they'd eventually find it. Plus, he was too busy building an automated trading system called Modelbot. In theory, Modelbot would scan the internet for crypto price discrepancies and then buy

or sell at the right moments. Sam kept pushing to turn it on, but his team warned him, if it didn't work, they could lose every penny they had in a single hour. At first, he listened to them, but things at Alameda kept getting worse. In the span of just six months, the company's capital dropped from 170 million

to just 40 million. Eventually, it nearly fell apart. On April 9, 2018, every member of Sam's management team quit, along with a huge chunk of his employees. But Sam refused to give up, and with his entire management team gone, there was no one to stop him from doing whatever he wanted. So he decided it was time to turn on Model Bot. I am so dreading groceries this week. Why? You can skip it. Oh, what, just like that? Just like that. How about dinner with my third cousin? Skip it.

Prince Fluffy's favorite treats? Skippable. Midnight snacks? Skip. My neighbor's nightly saxophone practices? Er, nope, you're on your own there. Could've skipped it. Should've skipped it.

Skip to the good part and get groceries, meals, and more delivered right to your door on skip. Hey there, it's Nicole. If you have been enjoying the crazy stories on money crimes, then I think you're going to love the Crime House original, Mind of a Serial Killer. What sets Mind of a Serial Killer apart is its focus on the twisted psychology of the world's most notorious serial killers. We're talking names like Jeffrey Dahmer, Ted Bundy, the Night Stalker. Featuring expert psychological analysis from licensed clinical and forensic psychologist Dr. Tristan Engels,

Mind of a Serial Killer will definitely take you into these stories like never before. So get ready to uncover what drives someone to commit the unimaginable. Mind of a Serial Killer is a Crime House original. New episodes drop every single Monday. Just search Mind of a Serial Killer and follow wherever you get your favorite podcasts. If you're fascinated by the darker sides of humanity, join us every week on our podcast, Serial Killers, where we go deep into notorious true crime cases. With significant research and careful analysis, we examine the psyche of a killer,

their motives and targets, and law enforcement's pursuit to stop their spree. Follow Serial Killers wherever you get your podcasts and get new episodes every Monday. In April 2018, Sam Begman Fried's first company, Alameda Research, nearly went belly up. When the dust settled, he was left with 40 million dollars and an untested trading algorithm called ModelBot. With nothing else to lose, Sam took a chance and let the program go live. Just as he predicted, ModelBot worked like a charm. It scanned the internet for price differences in cryptocurrencies around the world, then bought low and sold high. Within six months, Alameda Research

was trading more than 5% of the total crypto market. To take advantage of the momentum, Sam relocated from the US to Hong Kong where the laws around crypto weren't as strict. That's when he came up with his next big idea. A new kind of cryptocurrency exchange. Crypto exchanges are basically like stock markets. People can trade one type of cryptocurrency for another or buy coins for cash. When Sam came up with his idea, one of the biggest cryptocurrency exchanges was called Binance.

It was originally founded by a guy named Cheng Pen-Shao, who also went by CZ. Between 2019 and 2021, Binance grew from $3 billion to almost $100 billion. Sam's idea was to make an exchange like Binance, but his would give customers the ability to do more sophisticated trades like placing bets on crypto futures. Sam actually tried to bring CZ in as a partner. CZ said no, and then adopted some of Sam's ideas for his own platform. Sam didn't let that stop him though. He was committed to making an exchange bigger and better than Binance. In order to do that, he needed to build a new team, a collection of coders, crypto enthusiasts, and effective

altruists who hadn't deserted him when Alameda nearly went under. One of those loyal followers was Caroline Ellison, a trader that Sam had poached from his Jane Street capital days. Like Sam, Caroline was super smart and really into effective altruism. And apparently she was really into Sam too. Now there are two signs of the story. According to Sam, the two of them dated for a few months before it tapered off. But some people have said going by Caroline's social media,

it was a lot more progressive than that. Some of her posts allude to being in a polyamorous relationship with Sam and a few other people at the company. Whatever the case was, Sam trusted Caroline and the rest of the team to bring his crypto exchange to life. But his management style hadn't improved since the missteps at Alameda.

Sam never bothered to give people specific titles. No one knew exactly who reported to whom or what the scope of their job really was. It was basically the Wild West. But at the time, everyone was just hyper-focused on getting the product out the door. After four months of frantic work, Sam launched Futures Exchange in May of 2019. It came to be known by another name, FTX. Despite the rushed process,

FTX immediately stood out for its elegance. Most of the other crypto exchanges like Binance were buggy and simplistic. Sam's platform ran smoothly and could process complicated trades. Every time someone made a transaction, FTX collected a fee, which created a baseline profit. But to take it even further,

Sam created his own crypto coin called FTT. Owning FTT coins entitled you to sell them back to FTX in exchange for a piece of the company's revenue. In other words, buying FTT was like buying FTX stock. The more FTX was worth, the more its coin value went up. Ironically, one of the earliest investors was his rival, CZ, who bought $80 million worth of FTT. But Sam wasn't worried about boosting CZ's finances. He was too busy getting filthy rich himself.

After less than a year in business, he made $20 million. By the end of 2020, he'd made a hundred million. In 2021, it was a billion. But Sam wanted more. He wanted FTX to be, quote, the biggest source of financial transactions in the world. Most of FTX's trading went through his international division,

which was incorporated in Antiqua and operated out of Hong Kong. There was a US arm too, but FTX's customers could only trade a few coins that the government had authorized. And for Sam, that was a big problem. In order to take FTX to the next level, Sam knew that crypto needed some level of regulation in the US.

That would convince the banks that FTX was safe to invest in and open up a whole new market of customers. If everything went well, FTX could triple its profits overnight. To make sure he got what he wanted, Sam started donating a lot of money to a lot of politicians and political action committees. Between 2020 and 2022, it's estimated that he donated around $100 million. There was just one problem with that. million dollars. There was just one problem with that. It wasn't his money to give. In essence, Sam was running a massive fraud scheme here. Investors at FTX would deposit money into their accounts for trading crypto, money that they were supposed to be able to access at any time. Little did they know, a lot of that money got funneled to Sam's

other company, Alameda Research. Sam would then use the money from Alameda for his political causes, property investments and other spending. A good comparison would be like if your bank was in debt and then emptied your account to pay for it. Even in the murky world of crypto, it is clearly illegal. But Sam was willing to do whatever it took to make more money. Remember, effective altruism didn't necessarily mean he was trying to be a good person. It just meant he wanted to help the largest number

of people possible. And if it meant gambling with his own customers' money, so be it. On top of his political donations, Sam spent a fortune on celebrity endorsements for FTX by people like Larry David, Cristiano Ronaldo, and Tom Brady. All that mattered was promoting his brand.

And it worked. In October of 2021, Forbes listed Sam's net worth at $22.5 billion. In May of 2022, Time magazine named him one of the world's 100 most influential people. My Magazine named him one of the world's 100 most influential people. In just three years, Sam had catapulted FDX from an idea to a financial juggernaut. Which meant his vision of changing the world was finally within reach. And to everyone who was watching, it seemed like he was going to change it for the better. They just had no idea that he was trampling all over people in the present to do it. But it wouldn't be long until his charade was exposed. All it took was a single tweet. In the spring of 2022, 30-year-old Sam Bankman Fried was being hailed as the boy genius of crypto.

He was building a lavish headquarters in the Bahamas. His two companies, Alameda Research and FTX, dominated the cryptocurrency market. He had what felt like half of Congress in his pocket and some of the world's biggest celebrities were advertising his product. All thanks to his willingness to gamble with his customers' money. But the good times were about to end.

The crisis started in May of 2022, when a crypto coin called Terra Luna turned out to be what some consider a giant Ponzi scheme. Within a week, Terra Luna's value went from an estimated $60 billion to nearly nothing. A big hedge fund had bought $600 million worth of Teraluna and they suddenly went bankrupt. This set off a chain reaction, sending other coins into a skydive. Spooked investors wanted to cut their crypto exposure and asked Alameda for their money back. But thanks to Sam's reckless spending, Alameda didn't have it.

Caroline Ellison, Sam's former maybe girlfriend, was currently the CEO of Alameda. After the Terra Luna disaster, she called an emergency meeting. They had two options. They could come clean and declare bankruptcy, or they could borrow what they needed from FTX. Ultimately, Sam decided to move 10 billion from FTX's customers into Alameda's own accounts. He just didn't think it was a big deal. He said he was sure he had plenty of money to cover the loss without anyone ever noticing. After all, he had done it before, and everything had turned out fine. And he was right, at least for a few months.

But on November 2, 2022, the crypto-focused media company CoinDesk published an article examining the contents of Alameda's portfolio. They found that Alameda owned nearly $6 billion worth of FTT, the cryptocurrency that Sam invented. If the price of FTT collapsed like Terra Luna, then Alameda could lose $6 billion overnight. And everyone who owned FTT would also lose out big time. Still, most of the people who read the article weren't super concerned, since the FTX platform itself seemed to be in great financial shape.

But one person was paying very close attention. CZ, the CEO of Sam's rival crypto exchange Binance. And CZ was out for blood. On Sunday, November 6th, four days after the CoinDesk article, CZ posted a tweet that Binance was selling all of its FTT tokens. Remember, CZ had initially invested 80 million into FTT, which was worth way more at this point.

If he dumped his investment now, it would be a huge red flag. That tweet was a bombshell, but Caroline's response was even worse. Several hours after CZ's post, she tweeted that Alameda would happily buy his tokens for $22 each. She thought her confidence would calm the market. She was wrong. A number of investors pulled their money from the exchange only seconds after her tweet.

It set off another chain reaction and FTX lost $2 billion in a single day. The next day, Monday, they lost another 4 billion. There was supposed to be about 15 billion in cash on hand to cover everyone's deposits. But by Tuesday, it was clear they were about 10 billion short. Sam admitted he had messed up, but denied that he had done anything illegal. He blamed the entire fiasco on the company's inability to keep good records.

Neither he nor Caroline seemed to know where the missing money was. Sam later told a reporter that he simply misplaced $8 billion. Before things got any worse, Sam thought he could fix the damage. He just needed someone to give him billions of dollars. But nobody was coming to Sam's rescue, except for his nemesis, CZ. On Tuesday, November 8, 2022, CZ signed a letter of intent to buy all of FTX outright

on the condition that he'd get to look at Sam's books. But it seemed like whatever he saw, it wasn't good. Or maybe he was just stringing Sam along. The following evening, CZ tweeted that he was backing out of the deal with a final twist of the knife. FTX was finished. By Thursday, Sam's compound in the Bahamas was gutted.

Author Michael Lewis said it felt like, quote, a smash and grab crime scene. On December 12th, just over a month after CZ's first tweet, police in the Bahamas arrested Sam. After 10 days in prison there, he agreed to be extradited to the US. Prosecutors in New York charged him with wire fraud,

securities fraud, and money laundering. At first, Sam was allowed to stay out on bail, a whopping $250 million bond. But he had gone through life without really worrying about the rules, and he wasn't about to start now. Despite being clearly forbidden from doing it, Sam tried to get in touch with a couple of potential witnesses, which is a nice way of saying he engaged in witness tampering.

One of those witnesses was Caroline Ellison, who had agreed to testify against Sam in exchange for leniency. Prosecutors accused Sam of trying to discredit her by leaking Caroline's private notes. She had written about their breakup and how stressed she was at work. Sam hoped that by getting those notes published, Caroline would seem like a jealous ex. Again, his gamble failed.

At Sam's trial, Caroline claimed that he'd told her to make fake balance sheets to cover up the money that Alameda stole from FTX. And there were plenty of Sam's former employees willing to back her up on it. In November of 2023, Sam was convicted of seven counts of fraud related to him stealing $8 billion from FTX customers. And on March 28th, 2024, the judge sentenced him to 25 years in prison. Since then, he has filed an appeal. So it will be some time until we see

how his story really ends. Recently, Caroline Ellison also received her punishment for her role in all of this. Just a few weeks before this recording on September 24th, 2024, she was sentenced to two years in prison. Another FTX exec was sentenced to seven and a half years in May, and there are a few more awaiting sentencing.

They may have claimed they were working to help society, but in the end, it was all about themselves. On the surface, FTX was a great idea, giving individuals more power over their finances, all in the name of the public good. Sam Bankman Fried used that to his advantage. power over their finances, all in the name of the public good. Sam Begman Fried used that to his advantage. While cryptocurrency does have a lot of potential,

Sam made it seem like this foolproof, surefire thing. But just like any other financial investment, crypto is volatile, and in many ways, it's far less stable than the traditional stock market, especially when there's guys like Sam out there using people's faith in him to further his own interests. Even if he really was motivated by effective altruism, the damage he caused in the process was irreparable.

And for that, Sam Bengman Fried is paying the price. Thank you so much for listening. I'm your host, Nicole Lapin. Come back next time as I take you through another wild story and offer you some advice along the way. Money Crimes is a Crime House original powered by PAVE Studios. Join me every Thursday for a new episode. Here at Crime House, we want to thank each and every one of you for your support. If you like what you heard today, reach out on social media at Crime House on TikTok and on Instagram. And don't forget to rate, review and and follow Money Crimes wherever you get your favorite podcasts. Your feedback truly makes all the difference.

And for ad-free early access to Money Crimes, plus exciting bonus content, subscribe to CrimeHouse Plus on Apple Podcasts. Money Crimes is hosted by me, Nicole Lapin, and is a CrimeHouse original powered by Pave Studios. It is executive produced by Max Cutler. This episode of Money Crimes was produced and directed by Ron Shapiro, written by Xander Bernstein, edited by Lori Marnelli, fact-checked by Sarah Tardif, sound designed by Russell Nash, and included production assistance from Sarah Carroll. Of the many sources we used when researching this episode, the one we found most credible and helpful was Going Infinite, the rise and fall

of a new tycoon by Michael Lewis. Hey there, it's Nicole. If you've been enjoying all these crazy stories on money crimes, then I know you'll love the Crime House original, Mind of a Serial Killer. Mind of a Serial Killer is all about exploring the terrifying psychology of history's most If you're you listen to podcasts. If you're fascinated by the darker sides of humanity, join us every week on our podcast Serial Killers, where we go deep into notorious true crime cases. With significant research and careful analysis, we examine the psyche of a killer, their motives and targets, and

law enforcement's pursuit to stop their spree. Follow Serial Killers wherever you get your podcasts, and get new episodes every Monday.