Government exhibit within the case against former FTX CEO Sam Bankman-Fried.
Source: SDNY
As Sam Bankman-Fried prepares to face sentencing next month for his criminal fraud conviction tied to the epic collapse of FTX in 2022, former customers of the crypto exchange have reasons to imagine they might actually recoup their money.
Bankman-Fried, who could spend the remaining of his life behind bars, was found guilty in November on seven criminal counts after roughly $10 billion in customer funds from his company went missing. A few of that cash went to pay for Bankman-Fried’s lavish lifestyle, but much of it went towards other investments which have, of late, appreciated dramatically in value.
Lawyers representing the bankruptcy estate of FTX told a judge in Delaware last week that they expect to totally repay customers and creditors with legitimate claims. Bankruptcy attorney Andrew Dietderich, who works with FTX’s latest leadership team, said “there remains to be an important amount of labor and risk” ahead in getting all of the a reimbursement to clients, but that the team has a “strategy to realize it.”
It is a welcome development for the numerous hundreds of customers (reportedly as much as one million) who collectively lost billions of dollars in FTX’s collapse 15 months ago, when the crypto exchange spiraled out of business in a matter of days. Given the evenly regulated and unsecured nature of FTX — and the crypto industry at large — those clients faced the true possibility that the overwhelming majority of their money had evaporated. Loads of failed hedge funds and lenders lost virtually the whole lot throughout the 2022 crypto winter.
Bankman-Fried never believed his company’s situation was that dire.
Whilst regulators and federal prosecutors unearthed evidence showing that the 31-year-old entrepreneur and his top lieutenants had been pilfering billions of dollars from customer wallets for years, Bankman-Fried insisted that every one the cash was still someway accessible.
“FTX US stays fully solvent,” Bankman-Fried wrote in a Substack post on Jan. 12, 2023, while he was under house arrest at his parents’ home in Palo Alto, California. He said the exchange “should have the ability to return all customers’ funds.”
In some ways, his narrative appears to be proving true.
Joseph Bankman and Barbara Fried arrive for the trial of their son, former FTX Chief Executive Sam Bankman-Fried, who’s facing fraud charges over the collapse of the bankrupt cryptocurrency exchange, at Federal Court in Recent York City, U.S., October 26, 2023.
Brendan Mcdermid | Reuters
For months, FTX’s latest CEO, John Ray III, and his team of restructuring advisors have been clawing back money, luxury property, and crypto, in addition to tracking down missing assets. They’ve already collected greater than $7 billion, and that does not include valuables like $26 million in gifts and property to Bankman-Fried’s parents, or the $700 million handed over to K5 Global and founder Michael Kives, who invested FTX money in firms like SpaceX. A few of those investments have seen a precipitous rise in value.
FTX had been negotiating with bidders a few potential reboot of the corporate, but those efforts were scrapped last month.
Braden Perry, who was once a senior trial lawyer for the Commodity Futures Trading Commission, FTX’s only official U.S. regulator, told CNBC that the choice to repay users in full got here after “the abandonment of efforts to restart the FTX crypto exchange,” in favor of “a concentrate on liquidating assets to make customers whole.”
Getting actual a reimbursement within the hands of customers still stays a challenge. While loads of the worth has been recouped and more is to come back, divvying up large amounts of money is a posh process in bankruptcies, particularly when a lot of the cash is in non-traditional and illiquid assets.
Even Ray was doubtful in the beginning of the method, noting in late 2022 that, “At the tip of the day, we’re not going to have the ability to get better all of the losses here.”
‘Sam coins’ soar
What Ray wasn’t banking on was an enormous market rebound. When he made those remarks, crypto was mired in a bear market, with bitcoin trading at around $16,000. It’s now above $47,000.
In September, the bankruptcy team released a standing report showing that FTX had $3.4 billion price of digital assets, with over $1.1 billion coming from its Solana investment.
Solana suits right into a category of so-called “Sam coins,” a bunch that also includes Serum, a token created and promoted by FTX and sister hedge fund Alameda Research. After the dust settled from FTX’s bankruptcy, Solana saw an enormous run-up in its price, and it continued to rally after the September report. Because the end of that month, it’s spiked fivefold.
Meanwhile, FTX’s bitcoin stash, which was price $560 million on the time of the September report, is today valued north of $1 billion.
Bankman-Fried’s investments weren’t limited to crypto. He also used client money to back startups like Anthropic, the bogus intelligence company founded by ex-OpenAI employees. FTX invested $500 million in Anthropic in 2021, before the generative AI boom. Anthropic’s valuation hit $18 billion in December 2023, which might value FTX’s roughly 8% stake at about $1.4 billion.
During Bankman-Fried’s criminal trial in Recent York, Judge Lewis Kaplan denied the defense’s request that or not it’s permitted to say that FTX’s investment in Anthropic was a sensible bet. The bankruptcy estate of FTX has been seeking to sell its Anthropic stake, in response to a court filing this month.
Sam Bankman-Fried stands as forewoman reads the decision to the court.
Artist: Elizabeth Williams
In his biography on Bankman-Fried titled “Going Infinite,” Michael Lewis said he was told by an investor fascinated about bidding for the enterprise portfolio that “if it was sold intelligently, it should go for at the least $2 billion.” Lewis, who published his book late last 12 months, wrote that, based on his back-of-the-envelope math, the $7.3 billion that Ray’s team had give you didn’t include Serum, some large clawbacks and other enterprise investments that had appreciated in value.
For FTX customers, being made whole, in response to a judge’s ruling, means getting the money equivalent of what their crypto was price in November 2022. In other words, they are not seeing any of the upside of FTX’s investments or being given virtual coins that may allow them to money out at higher valuations.
Still, some investors have found a technique to take part in the FTX’s ongoing odyssey. The marketplace for FTX IOUs lit up last 12 months because it became clear that the bankruptcy estate was cobbling together a lucrative portfolio. One financial firm that had lost around $100 million initially sold its FTX debt for six cents on the dollar in a latest secondary market out of concern that he may never get a greater deal. As of December, those claims were going for greater than 70 cents on the dollar.
If customers are eventually made whole, that might play a giant role in Bankman-Fried’s appeal, likely following his sentencing, which is about to happen in Brooklyn on March 28. Perry said it could also affect how the judge handles sentencing in the primary place.
“Under the federal sentencing guidelines, and even assuming no monetary loss, SBF still faces at the least 70 months in prison based on his base level offense, variety of victims, sophisticated means, and leadership role,” Perry said.
The huge losses that were originally expected would suggest 30 to years to life, Perry added.
Renato Mariotti, a former prosecutor within the U.S. Justice Department’s Securities and Commodities Fraud Section, told CNBC that judges typically consider the quantity of restitution paid to victims at sentencing.
“If the victim is made whole, that could be a big plus for the defendant,” said Mariotti. He noted, nevertheless, that the extent of the fraud coupled with Bankman-Fried’s false testimony and violation of bond conditions could limit the reduction.
“I often advise clients to pay restitution before sentencing if in any respect possible,” Mariotti said.
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