Unpacking S(c)am Bankman-Fried - Part 3
Abraham George Crypto Musings
I planned to write two more reports relating to SBF but then SBF got arrested quickly in an unexpected manner. So I will end this series with this report.
The long and painful grim journey for the former cryptocurrency wizard Sam Bankman-Fried has started now. The 30-year-old who was living in a $30 mio penthouse has moved into an 80 square foot jail cell. What a fall!
It is not that he is in any ordinary jail or any special jail for white-collar criminals. He is in the only prison in the Bahamas called Fox Hill. It is one of the most notorious prisons in the world. While it has space for 1000 prisoners there are more than 2000 living there. It is rat infested too. He has been denied bail too. Finally, all his political donations could not buy him any comforts or freedom when he needed it most. He won’t be playing any more video games, giving interviews, or twittering at will.
Do not know how he will survive this ordeal before he will be extradited to the US, not before February 2023.
The main US stock market regulator SEC has brought many charges against SBF. US prosecutors have charged SBF with eight counts of fraud and conspiracy. The charges include wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering.
SBF also faces additional charges for campaign finance violations. He was the second largest Democratic Party donor after George Soros and even donated much smaller amounts of money to some Republicans through dark pools to avoid discovery from the Democratic Party.
The speed at which things have moved now indicates that the prosecutors had help from one or two insiders which have accelerated the process.
SBF was supposed to appear before Congress on 13th Dec but he got arrested the same day and Warren Davidson one of the Republican Senators is upset that he could not question him on his relationship with Gary Gensler the SEC Chairman and CFTC executive.
All along SBF portrayed himself as a leader of the crypto community. He preached the importance of regulation and accountability. He projected himself as an innovator and a creative mind that could bring new productive changes to the crypto world.
Customers, politicians, and regulators around the world believed his lies and sent billions of dollars to FTX, believing their money was secure. But it was not to be. From the beginning, SBF improperly diverted customer assets to his privately held crypto hedge fund, Alameda Research, and used those customer funds to make crazy venture investments, buy posh real estate and make large political donations. He also made ‘loans’ to himself and other FTX executives.
The most ironic thing is that SBF’s parents are both law professors at Stanford. They both enjoyed the benefits of other people’s money as they are owners of the multimillion-dollar real estate in the Bahamas that was purchased by their son with embezzled money.
Don’t think both of them will be teaching at Stanford anymore. It doesn’t matter if they were aware of the fraud or not. The very affiliation and direct link to such a toxic case are enough for any organization to disassociate with connected parties.
There are many lessons to be learned for all market participants as the details of this multimillion-dollar fraud will unfold in the coming days. Firstly how could such a thing have happened after all the lessons we had from Enron, Bernie Madoff, and Elizabeth Holmes?
This year alone we had the failures and collapse of crypto lenders like BlockFi and Celsius, and so was crypto hedge fund Three Arrows Capital and stable coin TerraUSD causing billions of losses to investors. None were caught by the SEC but the SEC Chairman was quick to go on TV to have caught Kim Kardashian on some influencer guidelines and fined her a million dollars or so. It is pathetic we have a regulatory body like this. The job of the SEC is to prevent such disasters and not bring charges after the fact.
The failure of FTX has nothing to do with the ethos of cryptos. Cryptos is supposed to be a decentralized business. FTX was a centralized exchange. Its business was serving crypto users. But the business model was no different from the centralized banks of Wall Street.
They were not on the blockchain. Blockchains are transparent by design. If it was on a public blockchain no one needed any special permission to find out what FTX was up to. So there is no point in bashing the crypto markets because FTX failed. The blockchain principle allows you, “Don’t trust, but verify.”
It will be a long road for SBF and closely associated people to FTX and Alameda research. Based on past precedence of such cases SBF is good for more than 100 years in jail.
To be honest it is too early to say how it will all play out and who else will be implicated. To add spice to the story SBF has hired notorious attorney Mark Cohen, who’s famous for representing child sex trafficker and pedophile Ghislaine Maxwell. Cohen also represented the notorious former Mexican drug lord “ El Chapo. “
I hope Michael Lewis will come out with a good book on the FTX saga followed by a movie that can serve as a sequel to the movie “Wolf of Wall Street”. If you have real stories like this who needs any fiction?
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.