Thursday, June 20, 2024

How will a US court count the cost of Sam Bankman-Fried’s crimes?

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When Sam Bankman-Fried is sentenced on Thursday, the US judge deciding his fate will weigh a range of factors, from the nature of his offences and history to how much his actions cost the investors and customers of the FTX crypto exchange he founded.

Defining the financial fallout from his crimes has proven particularly contentious, with lawyers for the former crypto kingpin and the prosecutors who convicted him taking sharply divergent views.

Judge Lewis Kaplan’s evaluation will be a critical factor in determining whether the 32-year old Bankman-Fried spends a mere handful of years in prison, as his lawyers have suggested, or up to five decades, as prosecutors have urged.

When Bankman-Fried’s cryptocurrency exchange imploded in November 2022 with an $8bn hole in its balance sheet, prosecutors labelled it “one of the biggest financial frauds in American history”. One year later, he was convicted on multiple counts of fraud and money laundering by a New York jury.

While its founder faced his criminal case, FTX has been quickly wound down in bankruptcy court under the oversight of its caretaker chief executive, John Ray. After months of tracking down and clawing back money, tokens and other assets, FTX bankruptcy administrators told the court in January that customers with legitimate claims against the exchange “will eventually be paid in full”.

Bankman-Fried’s lawyers seized on that. “The harm to customers, lenders, and investors is zero,” they wrote to Kaplan last month, arguing for a sentence of no longer than six-and-a-half years. The $8bn hole, they said, reflected “the temporary shortfall in liquid assets to cover the unprecedented level of customer withdrawal requests” during a rush on FTX in late 2022.

“Each victim . . . will receive 100 cents on the dollar, plus interest,” lawyers Marc Mukasey and Torrey Young wrote in a subsequent letter to the judge. 

People with knowledge of the restructuring negotiations told the Financial Times this week that FTX could even repay its customers up to two-fifths more than the initial value of their claims, thanks to the surging value of various cryptocurrency and artificial intelligence assets.

Despite the crypto market plunging to multiyear lows after FTX’s bankruptcy, a subsequent upswing has drastically increased the value of tokens customers held during its collapse. 

Bitcoin, the market’s best-known token, has risen roughly 300 per cent since the time of FTX’s bankruptcy, jumping from about $17,000 to register an all-time high of $73,800 earlier this month. Rival token ether has surged by roughly 180 per cent to $3,850 as of Tuesday. Solana — a Bankman-Fried-favourite — has jumped from $15 at the time of FTX’s demise to $188 now.

A boom in the AI space has also sharply increased the value of certain investments Bankman-Fried made while in control of FTX, including an 8 per cent stake in AI start-up Anthropic, which was bought for $500mn and is now worth roughly $1.4bn. The exchange plans to sell two-thirds of the stake for $884mn.

Prosecutors, who are seeking to send Bankman-Fried to prison for 40 to 50 years, have rubbished his claims, arguing that “his victims have received no recovery and there is no timeline for when any such payments will be made”.

Bankman-Fried’s calculations were based on a “distorted depiction” of the bankruptcy proceedings, they added, pointing to former customers who would “never get back either the amount of actual fiat money they deposited in FTX nor the cryptocurrency they were falsely told their deposits had been used to purchase”, because many of the tokens had vanished.

Marc-Antoine Julliard, a cocoa trader who testified at trial that he had bought bitcoin on FTX, would have made about $40,000 on his original investment of $140,000, they said, but will instead be paid the dollar value of his crypto holdings at bankruptcy, leaving him down approximately $88,000. His claim is worth $52,000.

“The fact that two years later victims may receive some money back through FTX’s bankruptcy is of little comfort for those victims who needed the money in November 2022,” prosecutors wrote. “The suffocating sense of dread and despair that victims felt when they could not withdraw their money, their shame and embarrassment, and the resulting damage to lives and businesses, cannot be undone through the bankruptcy.”

Customers are not the only ones nursing losses: FTX investors such as Sequoia Capital stand to lose more than $1.7bn in the bankruptcy, prosecutors said, after their stakes were written down to zero. 

FTX’s Ray also gave a scathing assessment of the cost of Bankman-Fried’s actions. Getting customers their money back still depends on numerous factors, he said — including successfully resolving claims and litigation from various US government authorities and finalising the bankruptcy reorganisation plan.

“Mr Bankman-Fried’s victims will never be returned to the same economic position they would have been in today absent his colossal fraud,” Ray told Kaplan in a letter this month. “Indeed, even the best conceivable outcome . . . will not yield a true, full economic recovery by all creditors and non-insider equity investors as if the fraud never happened.”

Calculating losses from fraud is a highly technical exercise — but an important factor under the sentencing guidelines that inform a judge’s decision. Lawyers and former prosecutors were sceptical that Bankman-Fried’s arguments would hold sway with Kaplan, who was appointed by then president Bill Clinton and has sat on the federal bench in Manhattan for 30 years.

Josh Naftalis, a partner at Pallas who until last year was a federal prosecutor in the office that indicted Bankman-Fried, said the FTX founder’s contentions were “the kind of argument that the judge would say that a jury rejected”. But he said the government had failed to acknowledge some mitigating factors: “The people who were investing in this weren’t necessarily widows and orphans, they were, in the crypto world, relatively sophisticated.”

“The fact that victims might be made whole by someone else’s hand, while Bankman-Fried is serving time, I don’t think that’s a mitigating factor to any great degree,” said Mark Kornfeld, of Buchanan Ingersoll & Rooney. “He’s not the one making them whole.”

Video: FTX: the legend of Sam Bankman-Fried | FT Film

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