In November 2022, the collapse of FTX, once the second largest crypto exchange, shook the industry. What founder Sam Bankman-Fried initially tried to disguise as a short-term liquidity crisis turned out to be a fraud of enormous proportions. As a result, a court sentenced the former FTX CEO to 25 years in prison.
The history of FTX and Alameda Research goes back to 2017. At that time, the "altruist" Sam Bankman-Fried founded a quantitative trading firm aimed at exploiting price discrepancies in the crypto markets. Two years later, he launched his own exchange: FTX. With heavyweights from the venture capital industry, the platform became one of the largest crypto trading venues. Alameda Research handled a significant portion of the volume and acted as a market maker. One key detail was hidden from the public. The trading firm had access to all of FTX's customer funds and was making risky bets. After the onset of a new "crypto winter," Alameda declared bankruptcy, taking the exchange down with it. This construct was obviously fraudulent, as CVJ.CH revealed early on. CEO Sam Bankman-Fried now faces more than two decades in prison.
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Complete failure of corporate governance
After FTX Group filed for bankruptcy in mid-November 2022, an experienced bankruptcy trustee took over. John J. Ray III helped manage the aftermath of some of the largest corporate collapses in history, including the downfall of energy trading company Enron after an accounting fraud scandal in 2001. But even he expressed shock at the events in the FTX case shortly after taking over the case.
"Never in my career have I seen such a comprehensive failure of corporate controls and such a complete absence of reliable financial information as here. From compromised system integrity and inadequate overseas regulatory oversight to the concentration of control in the hands of a very small group of inexperienced, naive and potentially compromised individuals, this situation is unprecedented." - John J. Ray, FTX CEO and leader of the insolvency proceedings in Delaware
The custody of customer funds was particularly shocking. Sam Bankman-Fried and his co-founder, Gary Wang, always maintained full control over the digital assets of FTX Group's main operations. The company managed access to private keys and sensitive data through an "unsecured group email account". In addition, Alameda Research gained backdoor access to a credit line of up to $65 billion - more than the assets deposited by customers. This burdened the trading firm when the market turned against Alameda's investments.
Eventually, as expected, customers demanded their assets back in record time. However, the FTX exchange did not have the liquid assets to cover these liabilities. Withdrawals had to be halted and the insolvency lead took over. To date, nearly $40 million in customer funds are being spent monthly on legal fees. Repaying customers will likely take several more years. Former users of the Mt. Gox crypto exchange have been waiting more than a decade for their money. And FTX customers with crypto holdings will be paid out on a dollar basis at the time of the bankruptcy filing. Those who held a Bitcoin on the platform will receive less than $20,000.
Sam Bankman-Fried believes in his innocence
Throughout the legal proceedings, founder Sam Bankman-Fried pleaded not guilty. Already in November 2023, a court found the entrepreneur guilty. Specifically, Bankman-Fried was convicted of wire fraud, conspiracy to commit wire fraud against FTX customers and Alameda Research lenders. As well as conspiracy to commit securities and commodities fraud against FTX investors, and conspiracy to commit money laundering.
Prosecutors had sought a sentence of up to 50 years, while Bankman-Fried's attorneys asked for only six and a half years. U.S. District Judge Lewis A. Kaplan finally announced the sentence in federal court in Manhattan: the FTX founder will receive 25 years in prison. With good behavior, he could be released a few years early. Unfortunately, Bankman-Fried showed no remorse, Kaplan said. In addition to the prison sentence, the judge ordered Bankman-Fried to forfeit more than $11 billion.
