Case Study 1: FTX — The Trial of Sam Bankman-Fried

How a $32 Billion Company Was Built on Fraud

The Defendant

Sam Bankman-Fried — known universally as SBF — stood trial in the Southern District of New York in October and November 2023, charged with seven counts of wire fraud, securities fraud, commodities fraud, money laundering conspiracy, and campaign finance violations. At the time of his arrest, he was thirty years old. Less than two years earlier, he had been the wealthiest person in the cryptocurrency industry, with an estimated net worth of $26 billion. He had appeared on the cover of Forbes and Fortune. He had met with heads of state. He had testified before the U.S. Senate and House, presenting himself as the reasonable face of crypto — the adult in the room who wanted regulation.

The trial lasted approximately five weeks. It produced some of the most detailed courtroom testimony ever given about the inner workings of a crypto enterprise, and it answered a question that had been debated since FTX's collapse: was this a case of a legitimate business destroyed by market conditions, or was it fraud from start to finish?

The jury's answer was unambiguous.

The Prosecution's Theory

The prosecution's theory was elegant in its simplicity. It can be summarized in four propositions:

1. FTX customers deposited money into the exchange to trade cryptocurrencies.
2. FTX transferred those deposits to Alameda Research, its sister company, through a software backdoor that exempted Alameda from risk controls.
3. Alameda used the customer deposits for unauthorized purposes: trading, venture investments, real estate, political donations, and personal expenses.
4. Sam Bankman-Fried directed and knew about all of this.

The prosecution did not need to explain blockchain technology, tokenomics, or DeFi to the jury. The fraud was as old as banking itself: a custodian took money that did not belong to him and spent it.

The Cooperating Witnesses

The prosecution's case was built on four pillars: three cooperating witnesses and a mountain of documentary evidence.

Caroline Ellison

Caroline Ellison, the former CEO of Alameda Research, was the prosecution's most important witness. She and Bankman-Fried had been in an on-and-off romantic relationship throughout their time running the businesses together. She testified over two days and provided the most detailed account of FTX's inner workings.

On the commingling of funds: Ellison testified that she and Bankman-Fried had discussed, explicitly and repeatedly, the use of FTX customer deposits by Alameda. She stated that Bankman-Fried had directed her to take "whatever Alameda needed" from FTX. She estimated that by mid-2022, Alameda had borrowed approximately $14 billion from FTX, of which roughly $8 billion came from customer deposits.

On the false balance sheets: Ellison testified that Bankman-Fried had instructed her to prepare multiple versions of Alameda's balance sheet — she described seven different versions, each tailored for a different audience. Some versions omitted the borrowings from FTX entirely. Others listed the borrowings but understated the amount. She testified that the purpose of the multiple versions was to present Alameda as healthier than it actually was to lenders, investors, and potential business partners.

On the personal spending: Ellison described how FTX funds were used to purchase luxury real estate in the Bahamas — multiple condominiums and a penthouse where she, Bankman-Fried, and other executives lived. She described how Alameda funds were used for venture capital investments that Bankman-Fried directed personally, and how customer deposits ultimately funded hundreds of millions of dollars in political donations.

On the aftermath: Ellison described the chaotic final days before the collapse, when she and Bankman-Fried attempted to calculate the size of the shortfall. She testified that Bankman-Fried appeared surprised by the size of the hole — not because he was unaware of the borrowings, but because the trading losses had been larger than he had realized.

Gary Wang

Gary Wang, the co-founder and CTO of FTX, provided the most damaging technical testimony. Wang had built FTX's trading software, and he testified about the specific code that enabled the fraud.

On the software backdoor: Wang testified that he had written a feature in FTX's code — at Bankman-Fried's direction — that gave Alameda Research a special exemption from the exchange's risk engine. Every other user on FTX was subject to automatic liquidation if their account balance fell below the required collateral threshold. Alameda was not. The exemption allowed Alameda to withdraw more money from FTX than it had deposited — functionally, to borrow customer deposits without limit.

Wang described the specific mechanism: Alameda had an "allow negative balance" flag in the system that no other account possessed. This flag meant that Alameda's account could go negative — that is, Alameda could withdraw money that it did not have — and FTX's risk engine would not intervene. The money that filled the negative balance came, necessarily, from customer deposits, because customer deposits were the only pool of capital in the system.

On the insurance fund: FTX publicly claimed to maintain an "insurance fund" that protected customers against losses. Wang testified that the insurance fund was largely fictitious. The displayed number was generated by a formula that produced a random number that increased over time, designed to give the impression of a growing reserve. In reality, the fund was a fraction of the displayed amount.

Nishad Singh

Nishad Singh, FTX's director of engineering, testified about the use of customer funds for political donations and personal investments. He described how Bankman-Fried had directed political donations totaling over $100 million, using funds that ultimately originated from FTX customer deposits. Singh also testified about the broader culture at FTX — a small group of young people in the Bahamas making decisions about billions of dollars with no oversight, no compliance infrastructure, and no one willing to challenge Bankman-Fried's judgment.

The Documentary Evidence

The cooperating witnesses' testimony was corroborated by extensive documentary evidence: internal chat messages (primarily on Signal and Slack), financial spreadsheets, balance sheet versions, and internal accounting records. The prosecution presented chat logs in which Bankman-Fried discussed the use of customer funds, directed the preparation of misleading financial statements, and acknowledged the size of the shortfall.

One particularly damning exchange, presented at trial, was a private conversation between Bankman-Fried and a reporter in which he was asked about the relationship between FTX and Alameda. In a draft response (never published), he wrote that he had considered saying Alameda did not have special privileges on FTX, acknowledged that this would be a lie, and discussed how to phrase the response to be misleading without being technically false.

The Defense

Bankman-Fried took the stand in his own defense — a decision that legal observers considered risky and that, in retrospect, did not serve him well.

His defense rested on several claims:

Claim 1: He did not intend to defraud anyone. Bankman-Fried argued that the borrowings from FTX to Alameda were known to some employees and that they were intended as short-term arrangements that would be repaid. He characterized the situation as a series of business decisions that went wrong in a volatile market, not a deliberate scheme to steal.

Claim 2: He did not know the extent of the shortfall. Bankman-Fried claimed that FTX's accounting was poor (a point not in dispute) and that he was not fully aware of how much Alameda owed FTX until the final days.

Claim 3: Customer funds were not "taken." Bankman-Fried attempted to argue that Alameda's borrowings were legitimate margin trading positions — the same as any other trader on the exchange — and that the term "customer funds" was a prosecutorial framing rather than an accurate description.

The prosecution systematically dismantled each claim on cross-examination. On intent: they presented messages showing Bankman-Fried directing the preparation of false balance sheets. On knowledge: they presented evidence that he had personally reviewed Alameda's positions and the size of the FTX borrowings. On the characterization of the borrowings: they pointed out that no customer had consented to their deposits being lent to Alameda, that there was no disclosure, and that the software backdoor — which Bankman-Fried had directed Wang to create — was specifically designed to circumvent the controls that existed to protect customer funds.

Bankman-Fried's testimony was marked by repeated claims of failing memory. The phrase "I don't recall" appeared dozens of times. This evasiveness, in a case where the defendant had demonstrated exceptional memory and attention to detail in other contexts (he was known for his ability to track complex trading positions across multiple screens), undermined his credibility with the jury.

The Verdict and Sentencing

On November 2, 2023 — exactly one year after the CoinDesk article that triggered FTX's collapse — the jury found Sam Bankman-Fried guilty on all seven counts. Deliberation lasted approximately five hours.

On March 28, 2024, Judge Lewis Kaplan sentenced Bankman-Fried to 25 years in federal prison. The sentence was below the prosecution's request (40-50 years) but above the defense's request (6.5 years). In his sentencing remarks, Judge Kaplan stated that Bankman-Fried had committed "the biggest financial fraud in American history" and criticized his testimony as evasive and untruthful.

The cooperating witnesses received significantly lighter sentences: Caroline Ellison received two years, Gary Wang received no prison time (time served and supervised release), and Nishad Singh received no prison time (time served and supervised release). The disparity reflected both their cooperation and the court's assessment that Bankman-Fried was the primary decision-maker.

The Recovery

The FTX bankruptcy estate, managed by John J. Ray III and the restructuring firm Sullivan & Cromwell, proved more successful than initially expected at recovering assets. Through a combination of asset sales (including FTX's stake in the AI company Anthropic, which had appreciated significantly), clawbacks of political donations, litigation against counterparties, and recovery of crypto assets whose value had increased since the filing, the estate accumulated sufficient funds to propose a plan that would repay creditors at approximately 100% of their November 2022 claim values in dollar terms.

This outcome — while remarkable by bankruptcy standards — contained a bitter irony for creditors. FTX filed for bankruptcy in November 2022, when Bitcoin was approximately $16,000. By the time distributions were planned, Bitcoin had risen to over $60,000. Creditors were repaid in dollars at November 2022 values, meaning they received their dollar amounts but missed the subsequent price appreciation. A customer who had deposited 1 BTC (worth $16,000 in November 2022) would receive $16,000 — not the 1 BTC (worth over $60,000) they had deposited. The difference between "dollar-for-dollar recovery" and "asset-for-asset recovery" was worth billions of dollars across all creditors.

What the Trial Revealed About Crypto Infrastructure

The FTX trial provided an unprecedented window into how a major crypto exchange actually operated — and the picture was disturbing beyond the fraud itself.

No board of directors. FTX had no functioning board until the bankruptcy filing. The company had made itself appear governance-compliant by having nominal "directors" in various jurisdictions, but no independent body exercised oversight over Bankman-Fried's decisions.

No audit. FTX's financial statements were "audited" by two firms — Prager Metis and Armanino — neither of which was a top-tier auditing firm. Prager Metis operated out of a metaverse office and was later charged by the SEC with audit failures. Armanino withdrew from the crypto auditing business after FTX's collapse. No Big Four accounting firm had examined FTX's books.

No compliance infrastructure. The compliance function at FTX was, by the testimony of those who were there, essentially nonexistent. Customer identity verification was minimal. Anti-money-laundering processes were rudimentary. There was no chief compliance officer with the authority to override business decisions.

An emoji-based expense approval system. Expenses at FTX were submitted through a group chat, and approvals were given via emoji reactions. This was not a temporary startup practice — it was the system for disbursing billions of dollars.

Discussion Questions

1. The "effective altruism" question. Bankman-Fried publicly advocated for effective altruism — the philosophy of earning as much money as possible in order to give it away to the most impactful causes. Some have argued that his stated commitment to EA was genuine and that he committed fraud not for personal enrichment but to maximize the money available for charitable giving. Does the motivation matter? Is it a mitigating or aggravating factor if a fraudster steals with the intention of donating the proceeds?

2. The political donation question. FTX and Bankman-Fried donated over $100 million to political campaigns, primarily to Democratic candidates. After the collapse, recipients returned some (but not all) donations. Should political donations funded by fraud be treated differently from other misused customer funds? What obligations do recipients have when the source of a donation turns out to be fraudulent?

3. The regulatory failure question. Bankman-Fried testified before Congress and met with regulators regularly. He positioned himself as pro-regulation. With the benefit of hindsight, what should regulators have done differently? Should the SEC, CFTC, or other agencies have examined FTX more closely based on the information available before the collapse?

4. The sentence. Bankman-Fried received 25 years — more than many violent offenders, less than many drug offenders. Is the sentence proportionate to the crime? What purposes should sentencing serve in a case like this (deterrence, punishment, incapacitation, rehabilitation)?

5. The recovery paradox. FTX creditors are expected to receive approximately 100% of their dollar-denominated claims, but not the crypto assets they deposited. Is this outcome fair? If you deposited 1 BTC when it was worth $16,000 and the estate returns $16,000 when BTC is worth $60,000, have you been made whole?