By Luc Cohen
NEW YORK (Reuters) – A few years after graduating from college, Sam Bankman-Fried began to worry he wasn’t taking enough risks.
So the son of two Stanford Law School professors quit his job on Wall Street and started a cryptocurrency hedge fund in 2017, setting off a sequence of events that will culminate Thursday with his sentencing for what prosecutors federal officials have called it one of the largest financial frauds in the world. Our history.
Prosecutors are seeking 40 to 50 years behind bars for the 32-year-old Bankman-Fried, while his defense attorneys have argued he should receive less than 5 1/2 years.
Two years after launching a hedge fund, Alameda Research, Bankman-Fried founded FTX in 2019, an exchange that allows users to buy and sell digital assets such as bitcoin. Cryptocurrency valuations have surged, pushing Bankman-Fried to a net worth of $26 billion by October 2021, according to Forbes magazine, before he turns 30, becoming the 25th richest person in America.
He parlayed that wealth into political clout, becoming a major donor to Democratic candidates and causes ahead of the 2022 U.S. midterm elections. Based in an expensive Bahamas resort community, Bankman-Fried became known for his mop of hair curly and unkempt and for wearing rumpled shorts, even when entertaining dignitaries including Bill Clinton.
In a cryptocurrency industry plagued by hacker attacks and money laundering, Bankman-Fried hired celebrities including NFL quarterback Tom Brady and comedian Larry David to appear in ads portraying FTX as secure. He has publicly supported efforts to regulate cryptocurrencies.
But prosecutors say his relaxed demeanor and cultivation of a responsible image hid his years-long embezzlement of client funds. They claim the theft came to a head in 2022, when cryptocurrency prices collapsed and he used FTX funds to cover losses in Alameda.
A jury found him guilty of seven counts of fraud and conspiracy on Nov. 2, following a monthlong trial in federal court in Manhattan.
Three former members of his inner circle, who pleaded guilty and agreed to cooperate with prosecutors, testified against him and painted an unflattering portrait of his character, detailing instances in which he became angry with colleagues and suggested that his eccentric personality was mostly an act.
“He understood the rules, but decided they did not apply to him,” prosecutors wrote in the March 15 sentencing memorandum. “He knew what society considered illegal and unethical, but he ignored what was based on a pernicious megalomania driven by the defendant’s values and sense of superiority.”
Bankman-Fried has pleaded not guilty and vowed to appeal his conviction and sentence. Testifying in his own defense at trial, the Massachusetts Institute of Technology graduate acknowledged inadequate risk management but denied stealing funds.
He said he made mistakes, such as failing to implement a risk management team, that harmed FTX’s customers and employees. But he said he never intended to defraud anyone or steal customers’ money.
“We thought we were going to be able to build the best product on the market,” Bankman-Fried testified on Oct. 27. “In practice it turned out the opposite.”
SOUGHT TO AVOID ‘CONVENIENT’ ROUTE
Bankman-Fried had little experience in the cryptocurrency industry before founding Alameda, which initially made money by exploiting price differences in digital tokens between the United States and Asia. A physics major at MIT, he told an FTX podcast that he didn’t apply himself in classes and didn’t know what to do with his life for most of college.
But in those years he became interested in a movement known as effective altruism, which encourages talented young people looking to make a mark on the world to focus on earning money and donating it to worthy causes. This led to him taking a job as a quantitative trader at Jane Street, but he began to doubt whether he would be able to earn as much as he could.
“If I really think I should try to maximize expected values, that probably involves substantially riskier strategies than seems intuitively right,” he said on the June 4, 2020 podcast. “I should be careful not to fall into the prey of trying to pick a comfortable route.”
He brought in Gary Wang, an old friend from math camp, and later Caroline Ellison, an effective selfless colleague from Jane Street and Bankman-Fried’s ex-girlfriend. Both would join him in the Bahamas, where they would share a $30 million penthouse with other Alameda and FTX executives, including Nishad Singh.
Wang, Ellison and Singh pleaded guilty and testified against Bankman-Fried at trial. They have not yet been convicted.
Bankman-Fried was jailed in mid-August, after U.S. District Judge Lewis Kaplan revoked his bail for allegedly attempting to tamper with witnesses at least twice, including by sharing Ellison’s private writings with a New York reporter Times.
In a letter to Kaplan, Bankman-Fried’s psychiatrist, George Lerner, wrote that his patient is on the autism spectrum. Bankman-Fried’s father, law professor Joseph Bankman, wrote that his son long struggled to make eye contact and respond to social cues, but that the media didn’t care as FTX thrived.
“Once the company collapsed and its wealth disappeared, people became less forgiving and interpreted these same characteristics… as a sign of disrespect, evasion, or lying,” Bankman wrote.