Government evidence in case against former FTX CEO Sam Bankman-Fried.
As Sam Bankman-Fried prepares to face sentencing next month for his criminal fraud conviction related to FTX’s epic 2022 collapse, former clients of the crypto exchange have reason to believe they could actually get their money back.
Bankman-Fried, who could spend the rest of his life behind bars, was found guilty in November on seven criminal charges after approximately $10 billion in client funds of his firm went missing. Some of that money went to pay for Bankman-Fried’s lavish lifestyle, but much of it went into other investments whose value, of late, has appreciated dramatically.
Lawyers representing the FTX bankruptcy estate told a judge in Delaware last week that they expect to fully pay customers and creditors with legitimate claims. Bankruptcy attorney Andrew Dietderich, who is working with FTX’s new leadership team, said there is “still a lot of work and risk” ahead to return all the money to customers, but that the team has a “strategy.” to make it”.
It’s a welcome development for the thousands of customers (reportedly up to a million) who collectively lost billions of dollars in the FTX collapse 15 months ago, when the crypto exchange fell into bankruptcy in a matter of days. Given the unregulated and unsecured nature of FTX (and the cryptocurrency industry in general), those customers faced the real possibility that the vast majority of their money had evaporated. Many failed hedge funds and lenders lost virtually everything during the crypto winter of 2022.
Bankman-Fried never believed her company’s situation was so serious.
Even as regulators and federal prosecutors unearthed evidence showing that the 31-year-old businessman and his top lieutenants had been stealing billions of dollars from clients’ wallets for years, Bankman-Fried insisted that all the money was still accessible in some way.
“FTX US remains fully solvent,” Bankman-Fried wrote in a Substack post on January 12, 2023, while under house arrest at her parents’ home in Palo Alto, California. He said the exchange “should be able to return all customers’ funds.”
In some ways, his narrative seems to be ringing true.
Joseph Bankman and Barbara Fried arrive at the trial of their son, former FTX CEO Sam Bankman-Fried, who faces fraud charges over the collapse of the bankrupt cryptocurrency exchange, in Federal Court in New York City, USA, October 26, 2023.
Brendan Mcdermid | Reuters
For months, new FTX CEO John Ray III and his team of restructuring advisors have been recovering cash, luxury properties and cryptocurrencies, as well as tracking down missing assets. They’ve already raised more than $7 billion, and that doesn’t include valuables like $26 million in gifts and property to Bankman-Fried’s parents, or the $700 million given to K5 Global and founder Michael Kives , who invested FTX cash in companies. like SpaceX. Some of these investments have experienced a dizzying increase in value.
FTX had been negotiating with bidders about a possible restart of the company, but those efforts were scrapped last month.
Braden Perry, who was once chief trial counsel for the Commodity Futures Trading Commission, the only official regulator of FTX in the US, told CNBC that the decision to refund users in full came after “abandoning efforts to restart crypto exchange FTX,” in favor of “a focus on asset liquidation to make customers whole.”
Putting real money back into the hands of customers remains a challenge. While much of the value has been recovered and more is to come, doling out large amounts of cash is a complex process in bankruptcies, particularly when much of the money is in non-traditional and illiquid assets.
Even Ray had doubts at the beginning of the process, noting at the end of 2022 that “at the end of the day, we won’t be able to recover all the losses here.”
‘Sam coins’ soar
What Ray didn’t count on was a huge market rally. When he made those comments, cryptocurrencies were caught in a bear market, with bitcoin trading at around $16,000. It is now above $47,000.
In September, the bankruptcy team released a status report showing that FTX had digital assets worth $3.4 billion, of which more than $1.1 billion came from its solarium investment.
Solana fits into a category of so-called “Sam coins,” a group that also includes Serum, a token created and promoted by FTX and sister hedge fund Alameda Research. After the dust settled from FTX’s bankruptcy, Solana saw a huge rise in its price and continued to rise after the September report. Since the end of that month, it has quintupled.
Meanwhile, FTX’s bitcoin stash, which was worth $560 million at the time of the September report, is today valued at more than $1 billion.
Bankman-Fried’s investments were not limited to cryptocurrencies. He also used his clients’ money to back startups like Anthropic, the artificial intelligence company founded by former OpenAI employees. FTX invested $500 million in Anthropic in 2021, before the rise of generative AI. Anthropic’s valuation reached $18 billion in December 2023, which would value FTX’s roughly 8% stake at about $1.4 billion.
During Bankman-Fried’s criminal trial in New York, Judge Lewis Kaplan denied the defense’s request that he be allowed to say that FTX’s investment in Anthropic was a smart bet. FTX’s bankrupt estate has been seeking to sell its stake in Anthropic, according to a court filing this month.
Sam Bankman-Fried stands as the foreman reads the verdict in court.
Artist: Elizabeth Williams
In his Bankman-Fried biography titled “Going Infinite,” Michael Lewis said that an investor interested in bidding on the venture portfolio told him that “if it was sold intelligently, it should sell for at least $2 billion.” Lewis, who published his book late last year, wrote that, based on his rough calculations, the $7.3 billion Ray’s team had raised did not include Serum, some large recoveries and other risky investments that had appreciated in value. .
For FTX clients, getting well, according to a judge’s ruling, means getting the cash equivalent of what their crypto was worth in November 2022. In other words, they see no advantage to FTX investments or receiving virtual coins . that would allow them to cash out at higher valuations.
Still, some investors have found a way to participate in the ongoing FTX odyssey. The FTX note market lit up last year when it became clear that the bankrupt crowd was putting together a lucrative portfolio. A financial company that had lost about $100 million initially sold its FTX debt at 6 cents on the dollar in a new secondary market for fear it would never get a better deal. In December, those claims were trading at more than 70 cents on the dollar.
If the clients are ultimately compensated, that could play a major role in Bankman-Fried’s appeal, likely after her sentencing, which will take place in Brooklyn on March 28. Perry said it could also affect how the judge handles sentencing in the first place.
“Under federal sentencing guidelines, and even assuming no monetary loss, SBF still faces at least 70 months in prison based on its basic crime, number of victims, sophisticated means and leadership role,” Perry said.
The massive losses originally expected would suggest a lifespan of 30 to 30 years, Perry added.
Renato Mariotti, a former prosecutor in the Securities and Commodities Fraud Section of the U.S. Department of Justice, told CNBC that judges typically consider the amount of restitution paid to victims when sentencing.
“If the victim is recovered, that is a big advantage for the defendant,” Mariotti said. However, he noted that the extent of the fraud, along with Bankman-Fried’s false testimony and violation of bail conditions, could limit the reduction.
“I typically advise clients to pay restitution before sentencing, if possible,” Mariotti said.
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