As Sam Bankman-Fried awaits prison, FTX customers await full payment

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The government’s presentation in the case against former FTX CEO Sam Bankman-Fried.

Source: SDNY

As Sam Bankman-Fried prepares to be sentenced next month for his criminal fraud convictions linked to the epic collapse of FTX in 2022, former clients of the crypto exchange have reasons to believe that they may indeed get their money back.

Bankman-Fried, who could spend the rest of his life behind bars, pleaded guilty in November to seven criminal counts after nearly $10 billion in customer funds went missing from his company. Some of that money went to pay for Bankman-Fried’s lavish lifestyle, but most of it went to other investments, which appreciated dramatically in value.

Attorneys representing FTX’s bankruptcy estate told a judge in Delaware last week that they expect customers and creditors with legitimate claims to be paid in full. Bankruptcy attorney Andrew Dietderich, who works with FTX’s new leadership team, said there is “still a lot of work and risk” in getting customers all their money back, but the team has a “strategy to achieve it.”

This is a welcome development for the thousands of customers (reportedly up to a million) who collectively lost billions of dollars in the collapse of FTX 15 months ago when the crypto exchange headed for bankruptcy. Given the lightly regulated and unsecured nature of FTX — and the crypto industry at large — those clients faced the real possibility that much of their money had evaporated. Many failed hedge funds and lenders lost virtually everything during the 2022 crypto winter.

Bankman-Fried never believed his company’s situation was so dire.

Even as regulators and federal prosecutors uncovered evidence that showed the 31-year-old entrepreneur and his top lieutenants had been stealing billions of dollars from customers’ wallets for years, Bankman-Fried insisted that all the money was still somehow accessible.

“FTX US remains fully solvent,” Bankman-Fried wrote in a Substack post on January 12, 2023, while he was under house arrest at his parents’ home in Palo Alto, California. He said the exchange “must be able to return all customers’ funds.”

In some ways, his description seems to be proving true.

Joseph Bankman and Barbara Fried arrive for the trial of their son, former FTX chief executive Sam Bankman-Fried, who is facing fraud charges over the collapse of the bankrupt cryptocurrency exchange, in federal court in New York City, US, October 26, 2023.

Brendan McDermid | Reuters

For months, FTX’s new CEO, John Ray III, and his team of restructuring advisers have been pulling back cash, luxury property and crypto, as well as searching for missing assets. They’ve already raised more than $7 billion, and that doesn’t include valuables like the $26 million gift to Bankman-Fried’s parents, or $700 million awarded to K5 Global and founder Michael Kives, who invested FTX cash in companies like SpaceX. Some of those investments have seen a sharp rise in value.

FTX was in talks with bidders about a possible reboot of the company, but those were efforts scrap last month.

Braden Perry, who was once a senior trial lawyer for the Commodity Futures Trading Commission, FTX’s sole official US regulator, told CNBC that the decision to pay users in full came after.Abandoning efforts to restart the FTX crypto exchange, “in favor of focusing on liquidating assets to make customers whole.”

Getting real money back into the hands of consumers is still a challenge. While much value has been recovered and more to come, parting with large amounts of cash is a complicated process in bankruptcy, especially when so much is in non-traditional and liquid assets.

Even Ray was skeptical early on in the process, noting in late 2022, “At the end of the day, we’re not going to be able to recover all the damage here.”

The ‘same coin’ goes up

What Ray wasn’t banking on was a huge market rebound. When he made that comment, crypto was mixed into a bear market, as well Bitcoin Trading at around $16,000. It is now above $47,000.

In September, the bankruptcy team Status report released showed that FTX had $3.4 billion worth of digital assets, with more than $1.1 billion from him. Solana investment

Solana fits into the category of so-called “same coins,” which also include Serum, a token created and promoted by FTX and sister hedge fund Alameda Research. After the dust settled from FTX’s bankruptcy, Solana saw a huge jump in its price and continued to rally after the September report. Since the end of that month, it has increased fivefold.

Meanwhile, FTX’s bitcoin stash, which was worth $560 million at the time of the September report, is worth north of $1 billion today.

Bankman-Fried’s investments weren’t limited to crypto. He also used client money to back startups such as Anthropic, an artificial intelligence company founded by former OpenAI employees. FTX invested $500 million in Anthropic in 2021 ahead of the generative AI boom. Anthropic was valued at $18 billion in December 2023, which would value an approximately 8% stake in FTX at approximately $1.4 billion.

During Bankman-Fried’s criminal trial in New York, Judge Louis Kaplan denied a defense request to be allowed to say that FTX’s investment in Anthropic was a smart bet. FTX’s bankruptcy estate is considering selling its Anthropic stake, according to a court filing this month.

Forewoman stands as Sam Bankman-Fried reads the verdict in court.

Artist: Elizabeth Williams

In his biography on Bankman-Fried titled “Going Infinite,” Michael Lewis said that he was told by an investor interested in bidding for the venture portfolio that “if it was sold smartly, it should go for at least $2 billion.” Lewis, who published his book late last year, wrote that, based on his back-of-the-envelope math, the $7.3 billion that Ray’s team came up with included the serum, some big clawbacks and other venture investments. was not Appreciation in value.

For FTX customers, according to the judge’s ruling, making whole means getting cash equivalent to what their crypto was worth in November 2022. In other words, they are not seeing any return on their FTX investment or being awarded virtual coins. That would allow them to cash in on higher valuations.

Still, some investors have found a way to participate in FTX’s ongoing odyssey. The market for FTX IOUs exploded last year As it became clear that the bankruptcy estate was piecing together an attractive portfolio. A financial firm that lost nearly $100 million initially sold its FTX debt for 6 cents on the dollar in the new secondary market knowing it might never get a better deal. By December, those claims were going for more than 70 cents on the dollar.

If the clients eventually go full, it could play a big role in Bankman-Fried’s appeal, possibly following his sentencing, which is scheduled for March 28 in Brooklyn. Perry said that could also affect how a judge handles sentencing the first time. the place

“Under federal sentencing guidelines, and despite no monetary damages, SBF still faces a minimum sentence of 70 months in prison based on its base level crime, number of victims, sophisticated means and leadership role,” Perry said.

The massive damage that was originally expected would indicate a 30-year life, Perry added.

Renato Mariotti, a former prosecutor in the US Justice Department’s Securities and Commodities Fraud Division, told CNBC that judges typically take into account the amount of restitution paid to victims when sentencing.

“If the victim comes clean, that’s a big plus for the defendant,” Mariotti said. He noted, however, that the amount of fraud, along with Bankman-Fried’s perjury and violation of bond conditions, may limit the reduction.

“I generally advise clients to pay restitution before sentencing if possible,” Mariotti said.

See: Former SEC attorney discusses Bankman-Fried’s guilty verdict

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