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FTX case: The former "golden boy" of the crypto scene, Sam Bankman-Fried, had to appear before the New York court at the end of March. The criminal trial will begin on 3 October.

Photo: Ed Jones / AFP

On November 11, 2022, FTX, one of the largest cryptocurrency trading venues to date, filed for bankruptcy. The collapse of the crypto exchange caused shockwaves from which the digital currency market has not recovered to this day. After customers and investors withdrew massive amounts of money from FTX shortly before the bankruptcy, it became apparent that at least $8 billion was missing from the cash register. Millions of people lost access to their accounts, and many billions of dollars fizzled out. Now, with what is believed to be one of the most spectacular white-collar criminal proceedings of the year, the legal process begins.

I. The Judge

On October 3, the criminal trial against Sam Bankman Fried (31), the once radiant founder of FTX, will start in New York. Under the file number 1:22-cr-00673-LAK, "United States of America vs. Sam Bankman-Fried", the New York Attorney General's Office has investigated him. It accuses him of internet fraud, joint securities fraud, fraud against debtors, conspiracy, joint money laundering and others, a total of eight charges. The trial, scheduled for six weeks, will be presided over by District Judge Lewis Kaplan (78).

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Experienced: District Judge Lewis Kaplan

Photo: JANE ROSENBERG / REUTERS

Kaplan is a senior judge and is also experienced in sensational proceedings. He judged al-Qaeda terrorists and Guantanamo detainees, presided over the trial of the Gambino mafia family and a sex trial of Prince Andrew. Most recently, he brought Donald Trump (77) a defeat in the trial of rape allegations against Jean Caroll. So now Sam Bankman-Fried.

According to the indictment, "SBF" secretly funneled up to $10 billion in customer money from FTX to the hedge fund Alameda, which was part of its convoluted corporate empire. With the money, Alameda should plug holes in the balance sheet, make investments and continue to place risky bets on the crypto market. Bankman-Fried also needed money to donate heavily to political parties in the U.S. – and to finance a life of luxury in the Bahamas. If convicted, he faces more than 100 years in prison. Sam Bankman-Fried denies the allegations.

II. The Fallen Founder

Two years ago, at the height of the Bitcoin boom, Sam Bankman-Fried was worth around $25 billion and was considered the "Golden Boy" of the crypto world. His crypto trading platform FTX, founded in 2019, was one of the market leaders and issued its own digital currency, the "FTT" token. The fuzzy head, who usually appeared in shorts and a baggy T-shirt even at investor meetings, was the star of the scene. He was one of the largest donors to political parties and philanthropic organizations. According to the philosophy of "effective altruism" he propagated, he wanted to make a lot of money quickly in order to save the world. At a conference in the Bahamas, he even appeared alongside celebrities such as Bill Clinton, Tony Blair and Gisele Bündchen.

He was the founder and CEO of FTX. His convoluted business empire, which included around 100 companies until bankruptcy, was carried out by "SBF" with a small group of confidants from the Bahamas. FTX's beach parties — and the drink bills — are legendary.

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Plunged deeply: Bankman Fried faces 100 years in prison

Photo: ANDREW KELLY / REUTERS

In mid-November 2022, he was arrested at the company's headquarters in the Bahamas and extradited to the United States shortly before Christmas. His parents managed to raise $250 million bail, so he could wait for the trial at his parents' home near San Francisco. In the meantime, however, he is in custody in the notorious Metropolitan Detention Center in Brooklyn because Judge Kaplan assumes that SBF tried to influence witnesses from his parents' mansion.

The former crypto king is now broke himself today. For the trial, Judge Kaplan granted him three suits and two pairs of shoes. In interviews, such as most recently with SPIEGEL, he says again and again that it is now all about giving investors back their money. His answer to almost all questions: "I fucked up!" In the crypto scene, the abbreviation "SBF" no longer stands for the golden crypto boy Sam Bankman-Fried, who was celebrated on the cover of "Forbes", but for "Scam Bancrupt Fraud".

Sam Bankman-Fried and his lawyers plead not guilty: He failed in the checks, but he did not intentionally steal money from his customers, Bankman-Fried said. He had assumed that his trading platform – similar to a bank – could freely invest customers' money as long as they were liquid enough for withdrawals. He did not know how much money FTX had "loaned" to the hedge fund Alameda, nor that this "borrowing" was punishable by law. Sam Bankman Fried does not see himself as the mastermind of a gigantic fraud system, but rather as a hapless fellow who has simply lost track.

III. The Comrade

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Caroline Ellison, ex-boss of Alameda, was the gambler in the engine room

Photo: Screenshot:FTX Official / youtube

A key role in the FTX collapse was played by Caroline Ellison (29), the ex-head of hedge fund Alameda Research and ex-girlfriend of Bankman-Fried. The Alameda fund, which belongs to the company empire and made risky arbitrage bets with cryptocurrencies, and its connection to FTX is at the center of the financial scandal.

"SBF" had already met Ellison during his time as a trader at Wall Street trading house Jane Street: When he left in 2017 and founded Alameda, Ellison came along. During the boom that followed, fuzzy head Bankman-Fried rose into the glaring spotlight with FTX. Ellison, a math nerd and Harry Potter fan with horn-rimmed glasses, stayed in the engine room with Alameda.

The two lived in a luxury villa in the Bahamas, along with ten other young men and women from the FTX leadership circle. At times, it was like an "imperial harem," Ellison told Business Insider. And just like the doors in the beach flat, the financial interfaces between FTX and Alameda were apparently wide open: For example, customer funds flowed from FTX to Alameda without FTX customers knowing about it. Discreet money transfer increased from the summer of 2022, when the young machinist received more margin calls and had to plug financial holes at Alameda. In total, the Ellison troop was able to access a credit line of 65 billion dollars, so it was regulated by the software architecture of the platform. This becomes a central point in the process.

Spicy for Bankman-Fried: Ellison has already confessed at a hearing before the start of the trial that there had been an agreement between her and Bankman-Fried on the subject of money withdrawal. The two had agreed to remain silent about these transactions. The ex-girlfriend and flatmate could thus become the most important prosecution witness in the trial. In addition to ex-chief technology officer Gary Wang and Nishad Singh, she is the third person from FTX's inner circle of executives to admit the allegations in advance.

IV. The Money Smugglers

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Ex FTX CTO Gary Wang: Digital backdoor programmed

Photo: Lucas Schifres / Getty Images

The decisive question in the process will be how – and with whose consent – the sum of a total of around 10 billion dollars was moved from the FTX platform to Alameda in order to finance cryptocurrency speculation and global venture capital deals.

According to investigators, Bankman-Fried had instructed his chief technology officer, Gary Wang, to change the computer code in FTX's payment system. This created a digital backdoor through which the hedge fund could withdraw almost unlimited money from FTX customers' deposit accounts. Wang has also already admitted in a hearing that he had known about the mechanism since July 2022. The former head of technology is thus also one of the most important prosecution witnesses against SBF.

Alameda didn't just put FTX customers' money into currency betting and around 150 start-ups worldwide. A smaller part was apparently also used to finance the crypto gang's luxury life: "Alameda bought private planes, houses and luxury apartments in the Bahamas and paid for parties," FTX lawyer Andrew Dietderich said at a hearing in January. Around 7 million dollars had been spent on "meals and entertainment" alone within nine months. It remains to be seen how much money Democrats and Republicans received from FTX in 2022 came from the "back door" programmed by Wang.

V. The Major Donor

Already in his time as a "golden boy" and multi-billionaire, Bankman-Fried appeared as a generous donor. He was among the top ten donors to the Democratic Party in the 2022 election year and supported numerous philanthropic organizations. According to CNBC's calculations, around 72 million dollars flowed from FTX to the Democrats via the donor network organized by his mother Barbara Fried (40) – part public, part covert.

Fried co-founded the Political Action Committee (PAC) "Mind the Gap", which supports Democratic projects. She apparently had a direct influence on the donation system at FTX, which is indicated by emails to her son, according to a lawsuit filed by FTX's lawyers against the parents. The fact that PACs finance party work and engage in political lobbying is common practice in the United States. However, it is against the rules on party financing to use a straw man system. Barbara Fried and her husband Joseph Bankman (68), both law professors at Stanford, deny the allegations of FTX lawyers.

In an interview shortly after the bankruptcy, Bankman-Fried clarified that FTX had also donated tens of millions of dollars to the Republicans to create a crypto-friendly political environment and to prevent digital currencies from being strictly regulated. However, these donations were completely concealed. In total, according to the lawyers of the bankruptcy administrators, FTX is likely to have donated around $100 million to political parties.

VI. The Billionaire Hunter

How high the total damage caused by the FTX scandal actually is also depends on how much money insolvency administrator John Ray III (64) can recover. Ray's reputation in the scene is legendary: After the collapse of the energy giant Enron at the end of 2001, the largest company bankruptcy in the USA to date, Ray was responsible for its liquidation. So Ray can handle fraud – and bankruptcy cases even in XL.

His nickname is "Pitbull" – and that's meant as a compliment in his industry. He has already recovered around $7 billion of the shifted FTX funds. Whether 2 or 3 billion dollars are missing in the end also depends on how the start-up investments of the Alameda Research fund are ultimately valued – if they can be sold at all.

Ray has also filed a civil lawsuit against Sam Bankman Fried's parents, whom he accuses of enrichment. It remains to be seen whether the donations attributed to FTX, which have flowed to Democrats and Republicans, can also be recovered.

VII. The Overseer

But even if FTX's customers and creditors "only" suffered losses of around 1 or 2 billion in the end, the political damage and loss of trust are enormous. The fact that FTX was able to move up to $10 billion unchecked was not only due to a lack of controls within the company. It was also because crypto trading venues were largely unregulated, despite their billions in revenue in the US. The U.S. Securities and Exchange Commission under Chair Gary Gensler (65) remained surprisingly passive for a long time.

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Crime scene cleaner: SEC chief Gary Gensler now wants to catch up on crypto regulation in a show of strength

Photo: JIM LO SCALZO / EPA

Genslernow wants to change this in a show of strength. The edgy SEC chief wants to put cryptocurrencies on an equal footing with securities – in this case, digital currencies would fall under the SEC's oversight and be subject to strict controls. In an industry that has grown for years in a largely unregulated environment, this is causing considerable unrest: many crypto companies would then no longer be able to do business in the US, according to the warnings. Gensler's demands are playing the death blues for the crypto industry in the US. Of course, he is not one of the perpetrators who destroyed trust in the industry.

VIII. The profiteer

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Ascent: Binance CEO Changpeng Zhao

Photo: DARRIN ZAMMIT LUPI / REUTERS

Changpeng Zhao, head of the world's largest crypto exchange Binance and now the sole crypto king, was not entirely uninvolved in the collapse of FTX. At the beginning of the crypto boom, Zhao and Bankman-Fried were still business partners, preaching a new, golden age. But over time, SBF developed into a media shining light, while Zhao was perceived more as a dark lord with an opaque business model and an equally opaque corporate network. Zhao sold his shares in FTX again – and received a large amount of FTT tokens in return.

When industry service Coindesk speculated about an imbalance at hedge fund Alameda at the end of October 2022, many FTX customers became nervous and began withdrawing money. Zhao spoke out publicly shortly afterwards and announced that he was selling his FTT tokens because he was worried about FTX's financial stability. This was followed by a rush of customers to their deposits: the value of FTT collapsed, and FTX had to close access for customers due to a lack of liquidity. For two days, SBF and Zhao discussed a possible rescue loan for FTX, but then Zhao waved it off.

FTX filed for bankruptcy. Binance, headquarters unknown, is now the most important player in the market.