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Thursday, 5 October 2023

How Much Did SBF’s Parents Know?

by Rose White

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110 years in prison.

That’s the maximum amount of time Sam Bankman-Fried faces if he’s found guilty on all seven criminal counts against him in what is shaping up to be one of the biggest show trials on Wall Street since the 150-year sentencing of Ponzi schemer extraordinaire Bernie Madoff more than a decade ago. (As one journalist quipped, “I’ll be at the SBF trial next week with all the other media vultures.”)

This week’s trial is just the first of two criminal actions set to weigh the fate of the 31-year-old former CEO of bankrupt crypto exchange FTX.

Only a year ago, Silicon Valley hailed Bankman-Fried as a crypto wunderkind, running a $32 billion empire from his princely digs, a $40 million penthouse in the Bahamas that doubled as his company’s offshore headquarters. This week, he arrived at the federal courthouse in Manhattan to stand trial for allegedly devising one of the biggest financial frauds in the history of the United States.

There’s a lot to unpack here, so let’s get started. The first trial of Bankman-Fried, also known by his initials, SBF, commenced Tuesday with prosecutors for the Southern District of New York pointing the finger at him for losing more than $8 billion of customer money while running FTX into the ground – and allegedly spending massive sums on himself and members of his family. More on that in a moment.

Federal prosecutors have also accused the MIT math whiz of pilfering customer funds to bankroll more than $100 million of campaign donations in the U.S. midterm elections, which took place just days before FTX went under in November 2022. The second trial of SBF, scheduled for March 2024, will tackle the alleged campaign finance violations.

SBF has pleaded not guilty to all seven counts against him in this initial trial, expected to take several weeks. But given the amount of ink spilled over the FTX controversy, including a Michael Lewis book that dropped Tuesday – and the legal actions to come next spring – its ripple effects will no doubt be felt for much longer.

SBF has claimed he didn’t know that customer deposits were being moved into FTX’s multibillion-dollar crypto hedge fund, Alameda Research, which he once joked was “unauditable,” and run by his erstwhile girlfriend, Caroline Ellison, who is slated to testify against him, along with several other of his former friends and colleagues. As reported by Power Corridor earlier this year, SBF’s exact words in an internal communication was that Alameda was “hilariously beyond any threshold of any auditor being able to even get partially through an audit…I don’t mean this in the sense of ‘a major accounting firm will have reservations about auditing it,'” he added. “I mean this in the sense of ‘we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history.'”

Then came the kicker: “We sometimes find $50 million of assets lying around that we lost track of,” SBF noted, not unseriously. “Such is life.”

Having shared that, the charges against SBF are: wire fraud on FTX customers; conspiracy to commit wire fraud on FTX customers; wire fraud on Alameda Research; conspiracy to commit wire fraud on Alameda Research; conspiracy to commit securities fraud on investors of FTX; conspiracy to commit fraud on customers of FTX in connection with the purchase and sale of derivatives; and conspiracy to commit money laundering.

The money-laundering bit, perhaps, is not surprising, considering FTX was based on the offshore tax shelter of the Bahamas and had tentacles in quite a few other secrecy jurisdictions – not unlike many crypto companies that have foundered over the past year.

What has been surprising, however, is the extent to which SBF’s parents appear to have been involved in the alleged skullduggery resulting in the billions of vanishing dollars at FTX and its subsidiaries. According to a civil lawsuit recently filed against both of them, the parents – highly respected Stanford Law School professors, until recently – assisted or otherwise influenced SBF’s running of FTX, paying themselves generously.

Among one of the more astounding accounts leveled by FTX’s lawyers against Joseph Bankman, one of the nation’s leading tax policy scholars, and Barbara Fried, an expert on legal ethics, are that Bankman pressed SBF for a $1 million-a-year salary at FTX after expressing disappointment with receiving just $200,000 annually. In an email to his son, cc-ing his wife, Bankman wrote, “Gee, Sam I don’t know what to say here. This is the first [I] have heard of the 200K a year salary! Putting Barbara on this.” (Pro tip: When whining about your salary to your son, don’t forget to cc his mother.)

Lawyers for FTX, which, almost one year on, is still struggling to claw back millions of dollars to backfill the losses at the company, are looking to reclaim gifts paid to Bankman and Fried, including a $16.4 million Bahamas villa. The gifts, according to FTX lawyers, included what appears to be payments for the decoration, furnishings and upkeep of the villa and millions of cash payments wired directly from Alameda Research to the parents. In one note to SBF following a multimillion-dollar payment, his father wrote, “We are so touched by this gift…Mom is announcing retirement, which she would not have done otherwise.”

FTX lawyers also allege that Bankman, the father, siphoned off $5.5 million of charitable contributions to Stanford University from the company. In a statement, Stanford said that it will return the contributions “in their entirety.”

According to the FTX lawyers, “Bankman was virtually the only grown-up in the room, guiding the FTX Group and other executives, many of whom were recent college graduates in their mid-20s and had never before run a company, let alone managed billions of dollars.”

It remains to be seen how SBF will navigate his trial, but if the Bernie Madoff case is any measure, the family enriched by fraud does not usually hold together well. In addition to his former colleagues and friends testifying against him, SBF’s parents now have retained separate lawyers (that is, separate from SBF and each other).

In a joint statement, the parents denied the claims made against them by FTX lawyers, calling them “completely false,” but the fact Bankman, the father, Fried, the mother – and Bankman-Fried, the son – have all lawyered up for survival does not bode well for their continued solidarity.

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