Motley Fool Hidden Gems Investing - SBF Goes to Jail

Episode Date: April 13, 2024

Sam Bankman-Fried is heading to prison for 25 years. Bitcoin is nearing an all-time high. What even is crypto anymore? Zeke Faux is the author of “Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall.” He returns to Motley Fool Money to join Ricky Mulvey for a conversation about: FTX’s inevitable decline. The resurgence of meme coins, and smaller stories in the crypto space. The side effects of creating cryptocurrencies. Tickers discussed: BTC, META, DOGE, TSCO, GME, AMC, USDT, SLP, WIF Host: Ricky Mulvey Guest: Zeke Faux Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

A lot of crypto guys would say to me, OK, so there's like some scams in crypto, but aren't there a lot of scams on the stock market, too? And as you point out, I mean, yes, there are scams on the stock market. But when you buy a share of Facebook and you're going to Facebook earns money every time someone opens that Instagram app, looks at some ads and you your share represents some claim, some tiny claim on those profits. And that is what supports the value of Facebook stock. Like Dogecoin, there's no way for it to ever make money or dog whiff hat. So the only value it has is that you're hoping that you are getting in early and somebody else is going to buy it for some reason later. I'm Mary Long and that's Zeke Fox, author of the book Number Go Up, Inside Crypto's Wild Rise and Staggering Fall. My colleague, Ricky Mulvey, caught up with Fox for a conversation about what it was like to be with Sam Bankman-Fried in the days before his trial and why he got such a long sentence.

They also discuss Bitcoin's philosophical inconsistencies, how a Russian smuggler uses Tether and a swimming pool, and what it means to have both everything and nothing at the same time. The main story is that Sam Bankman-Fried got 25 years. He's the guy on the cover of your book, and it seems that his story is kind of over. The main thing that happened, because for setup, which could take a while, but the main thing it seems like is that the hedge fund attached to his trading arm, FTX, got customer money from the trading arm to plug trading losses, and the people on the trading arm did not know about that, that their customer money was being used to sort of cover up the losses for these wild bets that the hedge fund was taking? Like, is there more to the crux of

it? Or is that is that is that the heart? Is that the meat? That's a pretty good summary. I mean, we're if you're not a crypto person, you might not really know what FTX was. And it was a trading app that if look just like, you know, E-Trade or Schwab or anything, you'd log in. And instead of seeing that you had stocks, it would show that you had, you know, two bitcoins. But what it turned out is that the numbers that it was displaying to the users were basically fictitious because when the users sent money into FTX, the money would go instead to Sam Bankman-Fried's hedge fund, which would then spend it on whatever it wanted. And what we learned at the trial, we heard a parade of Sam Bankman-Fried's best friends

and top colleagues at work telling the same story, versions of the same story. And what they said was, it was actually basically closer to a scam from the start. Even when they were starting the exchange, they had their eye on that customer money as a source of capital. And pretty early on, they made secret changes to the exchange's source code that allowed the hedge fund to take the customer money. So each day the trial went on, it just got worse and worse for Bankman-Fried. and the jury convicted him in a few hours and the judge, as you said, gave him a pretty harsh

sentence. Yeah, 25 years for securities fraud. I'm trying to not minimize what he did, but that's a really long time. What was your reaction to that sentencing? So I have to separate this out. And on the one hand, our criminal justice system in the United States is really harsh. I mean, the prosecutors pulled out a lot of examples of other white collar crimes, and it's not unusual for someone who's convicted of a crime that involves hundreds of millions or billions of dollars to be sent to prison for 20, 30, even 50 years. Now, is that right? I'm not sure if that is the punishment that's necessary. On the other hand, if anybody is guilty, it's Sam Bankman Freed. I mean, they provided evidence that he'd done so many different crimes. They actually

just sort of out of, they dropped a few of the charges that they'd been considering trying him on just because they already got him on so many other charges. They decided to just skip over a bribe that he paid to Chinese officials that they said was possibly the biggest bribe ever. That's a violation of the Foreign Corrupt Practices Act. And he had a scheme to hide his political contributions, which they said was the biggest campaign finance scheme ever. So those were not, he wasn't tried on those counts, but the judge was allowed to take those into consideration when he arrived at a sentence. The prosecutors had actually been asking for 40 or 50 years. Sam Begman Freed's lawyers had asked for seven or six and a half. So the

judge's ruling was kind of a compromise. And the way the judge was talking, it sounded like he was going to give him 100. So it might have been, honestly, a relief when he finally said 25. Yeah. What's the story with the bribe to a Chinese official? this is a crazy story. So the hedge fund kept money on crypto exchanges around the world so it could make different trades. And its account on one Chinese exchange was frozen, which they had a billion dollars that was locked up due to an investigation that apparently was not their fault. And so they could not withdraw this billion dollars. And this just goes to show you their creativity and also their low regard for the law, they first tried a different scheme.

So they opened up accounts at this exchange under the name of Thai prostitutes. Then they tried to have their account lose all the money in gambles to the Thai prostitutes who were then going to withdraw the billion dollars and give it to them. That didn't work. So the money was still locked up. So they decided to pay a bribe to a Chinese official to get the money out. And there was one person who worked at the hedge fund who was Chinese, and she objected to this. And Sam Bankman-Fried cursed her out. She quit after they paid the bribe.

Wow. It's almost like a Kenny Powers eastbound and down type of crypto scheme. Yeah, I mean, I have so many questions about this. I was sad they didn't try it. Like, how do they know the Thai prostitutes? How did they get their bank accounts? Did they just buy their identities on the dark web or did they already know them somehow? Yeah, that's those are good questions.

The thing about Bankman Freed, too, is he's he's a big expected value guy. So every decision he makes kind of runs through this. Like, what is the expected value of the result of this? And in your book, you kind of go through the options that he went through. I can do radical transparency. I can find sympathetic journalists. He had 15 options. And it seems that he really stuck through the maintain innocence the entire time throughout this trial.

Did that surprise you at all? I mean, he apologized at times, but he was really going for the, you know, there were just numbers all over the place and it was a crazy situation. this was not a malicious crime, which that story seemed to have been backed up by pretty much everyone testifying against him. Right, like, he was just sticking with the same story that he told me back in November 2022. Right after FTX failed, I flew down to the Bahamas. And I've been at this point, I'd spent like two years going down the crypto rabbit hole for my book. And I have to be honest, I did not expect FTX to fail. He was the most respected guy in crypto and would even talk about how he thought the rest of the industry was kind of sketchy, which is part of how he won

me over. But I flew down there. I wanted to hear his version of what had happened. Even at that point, it was pretty clear that it was a big fraud. But he welcomed me into his $30 million penthouse. And for hours, he tried to just say that basically, he wasn't paying any attention to the money that was going in and out of his company. Mistakes were made. They weren't by him. I mean, at one point, I had to laugh. I was like, Sam, are you trying to tell me that you just misplaced $8 billion. And he said, misaccounted. So this was part of that PR strategy that you mentioned of just trying to tell his story to every journalist to maybe win over the lawyers who might be prosecuting him or the jury that might hear his case. But it backfired at the

trial because he took the stand in his own defense and he told a version of the story again. But then the prosecutor was allowed to cross-examine him and confront him with all the things he said on this apology tour, which were contradicted by evidence at the trial. One of the things that she asked him was, hey, did you ever tell anyone that your hedge fund, Alameda, didn't play by the rules on your exchange? And he had said exactly that to me. And he said, no, I don't remember saying that. She whipped out a copy of Number Go Up, walked it over to him, told him to turn to page 224, and had him read the part where he said to me, my hedge fund did not have to play by the same rules on the exchange which right there is fraud uh because he had told every all the customers that the hedge fund did play by the same rules

so his own words like came back to bite him are you going to use that as a blurb for your book you know it was it's kind of surreal i i like to think just uh i'm just a regular person using common sense to look into things and try and figure out what's going on i don't like to think that i'm part of some sort of super official uh inquiry of course i will take the free ad of the prosecutor waving the book around though yeah you gotta you gotta get the court the courtroom sketch of number go up um i think it's easy to to see him it's easy to see the version of bankman freed now that's that's in in prison but i think you're one of the few journalists who openly talks about being won over by him. What was it like being won over by

Bankman Freed when FTX was growing and you were investigating Tether? You weren't really looking into FTX as much. Yeah. I mean, I thought that maybe he would be a good source to tell me about other weird things going on in crypto. And so I flew down to the Bahamas right after their big Larry David Super Bowl ad and spent a couple of days at FTX's offices. And Sam, I mean, he had a really unusual manner, but it was kind of charming in his own way. And I will say, I've talked to his friends, I've talked to his colleagues. He wasn't always nice to everyone. He was often very mean, but he was on his best behavior when he was talking to reporters. And You could ask him anything, and he would tell you a real answer.

Now, that answer, in hindsight, often a lie. But so many corporate executives will just tell you the same bullet points, and he would actually consider anything. Like he explained, I was fascinated by this philosophy of effective altruism, this idea that the only thing that matters is what will do the greatest good for the greatest number of people, and how that means that you don't have to follow the same rules as everyone else. And I thought what that meant was they moved to the Bahamas to run a sketchy crypto exchange, and they were going to give the money to charity. What I did not realize was it also meant, hey, if we need to steal the customer's money to make ourselves into trillionaires so that we can save the world, we'll do that too.

But we had a great conversation that one of the first times we talked, he explained this to me. And this is one where I kick myself. I feel like I was almost onto his thing. But I said, Sam, this philosophy is really interesting. But by this logic, wouldn't it make sense for you to just run a big scam? And you could probably steal like $4 or $5 billion right now. You give it all to charity. Think of all the lives you'd save. and if you said this to a banker like they'd probably be offended they wouldn't humor your question they'd be like can we get back to promoting my new product and he was like he was like yeah i mean at first that kind of makes sense but you know i think in the long run like i'm gonna make even more money why blow it all my whole reputation with the scam right now and like as a reporter it's really fun to talk to someone who will engage with all your questions even if he did have any, I mean, he generated great material. Like he's sitting there playing video games

while he's doing like business stuff right in front of me. Like who does that? He's answering all his emails in front of me when most people would treat them like state secrets. Yeah, he let you literally look at the laptop he was using to run the exchange. That was the early part of following him. And then you go back to the Bahamas, which you mentioned.

This was sort of right before he was arrested. There's journalists sort of swarming the compound. People are getting out of there. But he agreed to talk to you for 11 hours. Yeah, off and on, off and on. He disputed that at the trial. He said it was only one hour. It was definitely a lot more than one hour.

Like, it started out at lunchtime and it ended at midnight. But he took a lot of breaks. And so I'll forgive him because he had a lot going on. Um, but, uh, I, yeah, I wasn't sure if I was going to go down there, but then, um, I emailed him late at night. He keeps on hours and I brought up what you said about expected value. And I wanted to talk about that. And I said, cause basically I had this question for him, which boils down to, would you do

it all over again? because he's he's said in his philosophy that when you should take risks that have a high chance of not working out the biggest payoff come with the with big risks and so the fact that something did not work out is not proof that it was a bad bet it could just be you know you rolled the dice and you know it came up on the losing number and so i really wanted to ask him does it did you make a bad bet? Did you just get unlucky? Or was this bet misguided in some way? And I felt like we got kind of close to talking about it, but we were kind of limited by the fact that he had to say he was innocent in that we all knew that at that point,

he hadn't been charged, but we all knew it was coming. And he was preparing his defense. So we couldn't really talk openly about the expected value of stealing the customer money. Yeah, because there's a version of this where, and I know basically every Ponzi scheme logic is, as long as I could keep this going longer, I could make everything right. That might actually be the case, though, with FTX, where crypto is now back to, what is it, Bitcoin's like $75,000 a coin. he had a couple of bets at his hedge fund at these now highly successful AI startups like Anthropic. If this was allowed to keep going, maybe there would still be an FTX going on right now. Maybe the scheme would still be going on. Or do you think this sort of collapse was inevitable? So it's hard to say the complete counterfactual. One thing that I would say is that Throughout FTX's history, he was presented with the chance a few times to kind of like pull back on the scheme or double down and go in deeper and ramp up the scheme.

And he always chose to ramp it up. So to me, that suggests that because, yes, like if the customers hadn't pulled their money, they would not know that any money had been misappropriated. Just like Bernie Madoff's customers. If nobody asked for their money back, it's fine. You could just keep going. Or if not too many people asked for their money back. But I think the evidence suggests that Bankman Freed, because he had the desire to have infinite money to become a trillionaire to save the world, he would have kept doubling down on this scheme and ramped up the risk rather than thinking, oh, phew. I just survived this really risky thing. Now I'm going to cut back on risk. I'm going to sell some of my risky investments and try to fill this hole. To me, the evidence suggests he would have continued to gamble with the customer money, and then who knows what would have happened next. Yeah. I want to go back to the Bahamas story real quick, because you were also talking to the people who were working around FTX, not just the employees inside on the spreadsheets, but

you know the chauffeurs the people helping out helping them sort of like maintain the compound if you will what did you learn from them about how sort of this this company kind of changed the place that they were living and what they observed about the people who worked there if you've never been to nasa in the bahamas i mean it's a really small island it's a small country and this was a huge deal uh like what i went back there for this conference that they that they threw in April 2022, near the peak of everything. I mean, the prime minister came, he opened it up. Benjamin Freed met with the prime minister many times. There was some talk of FTX paying off the Bahamas national debt, perhaps as a way of currying favor with the

government. When I was down there, I remember I was out to lunch at this restaurant and just randomly, the guy was talking about the huge catering orders they would place and how it really helped a lot of the restaurateurs on the island, though they thought it was a little weird how much of it would just go to waste. But I had an interesting conversation with this person on the FTX staff. And at that time, there was a lot of talk about kind of this idea that maybe these guys were like crazy partiers, that they were into polyamory, which pretty much most of that has not proven to be true. And that's what this staffer told me. I mean, he had a lot of interesting things to say about FTX, but he said, bro, people are talking about it like it's some Wolf of Wall

Street thing. Bro, these are a bunch of nerds. They just worked all the time, which I really think is true. When I was with Bankman Freed at the end in his penthouse, he's got this amazing pool on this deck that overlooks a beautiful harbor filled with you know the biggest yachts i've ever seen and i thought to myself like i wonder if he's ever been swimming in this pool should i see if he wants to go swimming right now this could be like one of his last days to try out like his amazing pool but i i thought that was too weird so i didn't i didn't ask but i i later I talked to some of his friends and they said, no, I don't think he ever really did use the pool. You know, these guys were just, they could have been anywhere. They picked the Bahamas

because it had really favorable regulations towards crypto. It was so eager to have them located there that it would cater to their needs. I kind of want to move to where crypto is right now. It's in an interesting place, especially Bitcoin, which you've tracked the Bitcoin story for a while. I've played with Bitcoin. I've owned Bitcoin, but I don't anymore. I lost money on Bitcoin. But it seems that one of the appeals with Bitcoin is that it was decentralized. You don't need to get these big financial institutions involved. Now, one of the appeals of Bitcoin is that the big financial institutions are very much involved. They have the exchange traded funds where you can go on your regular brokerage account and buy Bitcoin through these ETFs with a low

low management fee in some cases. Has that changed any of the sort of religion of Bitcoin as you've seen it where, you know, the big the appeal was that we need to get these we need to get these bankers out of the system? Yeah, I mean, the Bitcoiners, I think, are willing to overlook the philosophical inconsistencies there, because having new money coming to Bitcoin is helpful for the pretty much main and only point of Bitcoin, which is the title of my book, Number Go Up. And I picked that title because I was at this Bitcoin conference in Miami. And the guy, he actually called it, he was talking about why Bitcoin was so great. And he actually called it number go up technology. And what that meant was,

hey if the price goes up other people will see that and they'll buy it and then it'll go up more and then more people will buy it and pretty soon we'll all be rich and i thought that was kind of a joke and it was pretty funny it sounded like he was describing some kind of pyramid scheme but in the last few months uh it seems like that's been what's happening like no one has figured out any sort of use for Bitcoin or any real reason to buy it other than, wow, it's really going up. Aren't you a little jealous that you don't have some Bitcoin? You would have made some money. Maybe it's not too late. Buy some now. It'll go up more. And I would always ask the crypto guys, not just Bitcoin, but any sort of coin. I'm like, let's just say your coin does not go up. I'm not

saying it's going to crash, but let's say it's like kind of flat. What is the point of your coin? Why would anyone buy it? And I never heard a great answer for that. Yeah, Bitcoin is now the size of meta platforms by market cap, which I find incredible. That's the Instagram, Facebook, and WhatsApp and the social media that 3 billion people on the planet use on a daily basis. But it's not just Bitcoin. It's a lot of the meme coins have had a resurgence lately. Dogecoin, for the stock folks listening, Dogecoin, which is a bit like it's a joke, is the same size as Tractor Supply, which is a profitable retailer with 2,200 stores. That's a lot with the meme coin. And I mean, I'm sure a big piece of this with the meme coins is wash trading, people on

both sides of the transaction maintaining the market value. But I mean, what's going on with this resurgence with not just Bitcoin, but a lot of these joke coins that seem to have died when interest rates went up. I mean, it's crazy. Did you see dog with hat? I did not. Okay, so this is like Dogecoin, but now it's got a hat on. It's got a market cap of like $4 billion. And I don't think there's too much activity going on in these meme coins for it all to be wash trading. I mean, To me, it looks a lot like the GameStop and AMC excitement, where you just get enough people talking about it on the internet that it can move markets. I do think in the long run, people will lose interest, and the price will therefore go

down. A lot of crypto guys would say to me, OK, so there's some scams in crypto, but aren't there a lot of scams on the stock market too? And as you point out, I mean, yes, there are scams in the stock market. But when you buy a share of Facebook, Facebook earns money every time someone opens that Instagram app and looks at some ads. And your share represents some claim, some tiny claim on those profits. And that is what supports the value of Facebook stock. Like Dogecoin, there's no way for it to ever make money or dog whiff hat.

so the only value it has is that you're hoping that you are getting in early and somebody else is going to buy it for some reason later and to me i just don't think that is sustainable and we saw with gamestop and amc that people lost interest and the stock went back down though i do think gamestop still trades pretty far above its like fundamental value i haven't looked at it lately but yeah i i haven't either but i think the um ryan cohen coming back into the picture sort of helped with the the or not back into the picture but he was at chewy and then he takes over gamestop and i think that helped with sort of the the meme interest we've talked about sam bankman freed quite a bit but you you you look at a lot of the the stories

going on in crypto that people aren't talking about as much your book hits um tether which should be talked about more. Also, Smooth Love Potion, which is in the category of meme coins of having a small resurgence that I would absolutely recommend that nobody touch. Are there any smaller stories going on in the crypto world right now that you think deserve more attention? There was a story the other day by Angus Berwick and Ben Foldy in the Wall Street Journal about Tether that I thought was pretty amazing. They spoke to a Russian smuggler who was trying to procure electronics that were needed for the Russian army to have drones to fight in Ukraine. And he explained exactly how we would

use Tether to obtain these parts from foreign suppliers, because the US has imposed sanctions on Russia. We're banning trade with Russia. And even Chinese banks are afraid of doing business with Russia because they might get sanctioned too. And for this smuggler, Tether is like a perfect workaround. And they go through how it all works. It was really an amazing story. And he said, they quote from like a group chat where the smuggler is offering his services to people. And he said, I'll give you everything you need to destroy each other. Please pay in crypto. So I'm fascinated by how Tether has created this great, even though the company may not have anything to do with it, they've created this dollar backed semi-anonymous

currency. It's helping all sorts of weird people move money all around the world. And it's had all these unexpected consequences. And you mentioned, it's a little different, but you mentioned smooth love potion. That was the currency of Axie Infinity, which was like a Pokemon-ish game that went crazy in the Philippines and then inevitably crashed. And that was, I feel like time and time again, the crypto guys, without really maybe thinking too hard about what's going to happen, create these new coins, these new systems that have real consequences for people all over the world. And then they just sort of throw up their hands and say, oh, not my problem. It's just, I just made this coin. It's not my fault what people do with it. And I would argue that

you are responsible for what happens. as always people on the program may have interest in the stocks or cryptos they talk about and the motley fool may have formal recommendations for or against so don't buy or sell stocks or cryptos based solely on what you hear i'm mary long thanks for listening we'll see you tomorrow Thank you.