Inside Sam Bankman-Fried’s doomed FTX empire

The rising image suggests FTX wasn’t merely felled by a rival, or undone by a foul commerce or the relentless fall this 12 months within the worth of cryptocurrencies. Instead, it had lengthy been a chaotic mess. From its earliest days, the agency was an unruly agglomeration of company entities, buyer belongings and Mr. Bankman-Fried himself, in accordance with court docket papers, firm steadiness sheets proven to bankers and interviews with staff and buyers. No one may say precisely what belonged to whom. Prosecutors are actually investigating its collapse.

Mr. Bankman-Fried’s corporations had neither accounting nor functioning human-resources departments, in accordance with a submitting in federal court docket by the chief introduced in to shepherd FTX via chapter. Corporate cash was used to purchase actual property, however information weren’t saved. There wasn’t even a roster of staff, to say nothing of the phrases of their employment. Bankruptcy filings say one entity’s excellent loans embody at the very least $1 billion to Mr. Bankman-Fried personally and $543 million to a prime lieutenant.

The lives of the individuals who ran FTX and its associated corporations had been equally blurred. Ten of them lived and labored collectively in a $30 million penthouse at an upscale resort within the Bahamas. The hours had been punishing, and the traces between work and play had been laborious to discern. Romantic relationships amongst Mr. Bankman-Fried’s higher echelon had been frequent, as was use of stimulants, in accordance with former staff.

Mr. Bankman-Fried, 30 years previous, saved a busy schedule, toggling between six screens and getting by on a number of hours of sleep a day. He was at occasions romantically concerned with Caroline Ellison, the 28-year-old CEO of his buying and selling agency, Alameda Research, in accordance with former staff.

“Nothing like common amphetamine use to make you respect how dumb lots of regular, non-medicated human expertise is,” Ms. Ellison as soon as tweeted. A lawyer for Ms. Ellison declined to remark.

To the skin world, Mr. Bankman-Fried was the mayor of cryptoland, the person charged with convincing lawmakers, buyers and fans that he’d constructed a brand new form of finance. He urged Congress and regulators to approve his mannequin for crypto buying and selling. On his cryptocurrency buying and selling change, FTX, positions and danger had been cross-checked by computer systems, and algorithms would react inside milliseconds to guard unhealthy trades from spilling over to harm different prospects, he mentioned. On Twitter, he admonished opponents for practices he known as unsafe.

But behind the scenes, Mr. Bankman-Fried was taking enormous dangers himself. Though he mentioned publicly that Alameda was only a common consumer on the change, the agency ran up a invoice of $8 billion shopping for stakes in startups, buying and selling on credit score that no different consumer may get. Much of that cash, a lot of which belonged to FTX’s prospects, is probably going gone.

FTX’s swift collapse—it went from paragon to bankrupt in simply over every week—has renewed questions on crypto’s viability, its unregulated standing and the way so many well-heeled buyers may have been misled for therefore lengthy. Investors have poured a whole bunch of billions of {dollars} into digital currencies lately. Staid monetary establishments had been lastly getting in on the motion, too.

The govt tapped to information Mr. Bankman-Fried’s corporations via chapter mentioned the state of FTX’s affairs was the largest mess he had seen in a decadeslong profession that features unwinding the accounting scandal that was Enron Corp. In a court docket submitting he mentioned lots of the agency’s information of its digital belongings gave the impression to be lacking or incomplete; in lots of circumstances, he was unable to find related financial institution accounts.

In final week’s chapter papers, a Kenya-based money-transfer firm was listed as an FTX entity. That shocked its CEO, Elizabeth Rossiello.

In a 2021 monetary report, FTX mentioned it had agreed to purchase her firm for about $220 million. FTX by no means did. There was no settlement, at any value, mentioned Ms. Rossiello. “We had been going to be their unique accomplice in Africa,” she said, nothing more.

“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” John J. Ray III mentioned in court docket papers.

A full accounting of what went unsuitable at FTX is probably going months away, however a reconstruction of what the agency did and the way its executives operated makes plain its public picture—a workforce of good quants bringing a classy, digital method to danger—was a mirage.

Mr. Bankman-Fried has blamed the misuse of buyer funds on sloppy record-keeping and a flood of sudden buyer withdrawals.

“I’m sorry. That’s the largest factor,” he tweeted Nov. 10. “I f—ed up, and should have done better.”

Golden boy

Mr. Bankman-Fried’s mixture of bravado and humility captivated crypto bros and the Davos set. Investors poured billions into the agency run by the mop-headed “League of Legends” fan who wore ratty T-shirts and slept on a beanbag chair. He was raised on the Stanford University campus by two well-known professors, fluent in the language of the highly educated.

FTX, unlike most young startups, seemed to be turning a tidy profit taking a cut of billions of dollars in daily crypto trades. Mr. Bankman-Fried wasn’t like the other crypto founders. He said he was amassing a fortune for the sole purpose of giving it away, part of a movement known as effective altruism. He lobbied lawmakers to tame the wily crypto market.

Mr. Bankman-Fried’s businesses appeared to be pillars of stability. FTX was seemingly flush with cash after having raised about $2 billion from investors such as Sequoia Capital and Ontario Teachers’ Pension Plan.

Yet late last year, the company started calling Bahamian banks with an unusual offer: Deposit your cash in FTX’s crypto-lending platform in exchange for interest of as much as 12%, according to bankers.

Then, in May, the crypto market crashed, taking down several crypto firms. Mr. Bankman-Fried played the role of white knight.

FTX and Alameda, the trading firm, extended hundreds of millions of dollars in credit to prop up one struggling lender, BlockFi, and made an unsuccessful bid to keep lender Voyager Digital out of bankruptcy.

Mr. Bankman-Fried’s heroics drew comparisons to John Pierpont Morgan’s private bailouts that helped end the Panic of 1907.

“There really was significant and irresponsible risk that was taken on by some of the smaller names that are running into problems,” he advised The Wall Street Journal in July.

No boundaries

Behind the scenes, Alameda the buying and selling agency and FTX the change had been much more entangled than outsiders realized.

One potential investor was involved concerning the seeming lack of limitations between the 2 corporations. Alex Pack first met Mr. Bankman-Fried in December 2018 within the Cafe Gray Deluxe on the forty ninth ground of Hong Kong’s Upper House lodge.

Then a managing accomplice with Dragonfly Capital, a crypto-focused enterprise agency, Mr. Pack was contemplating an funding in Alameda. He was captivated by the raveled founder, who shuffled in 20 minutes late for the assembly, wearing shorts and a T-shirt.

A monthslong due-diligence course of turned up an April 2018 buying and selling error that price Alameda greater than $10 million. Dragonfly solely discovered concerning the loss after chatting with Alameda’s merchants; the financials the agency provided didn’t return far sufficient to disclose it, Mr. Pack mentioned. Mr. Bankman-Fried appeared nonchalant when requested concerning the loss, Mr. Pack mentioned. “We had been like, that is some fairly reckless risk-taking,” said Mr. Pack, now a managing partner with Hack VC.

The talks fell apart when Mr. Bankman-Fried revealed that Alameda was working on the crypto exchange that would become FTX—but only wanted Dragonfly’s money for Alameda, not for the new project. “Alameda and FTX were tied at the hip,” Mr. Pack mentioned. “Proposing to make use of our cash, if we had been to take a position, to finance his new enterprise to the detriment of the enterprise we had been investing in—that left a reasonably bitter style in our mouths,” he said.

Mr. Bankman-Fried often said Alameda played by the same rules as any other trader on FTX. “There are no parties that have privileged access,” he advised the Journal in July.

He had lengthy extolled the virtues of FTX’s “danger engine,” a system that monitored traders’ bets across a dizzying array of cryptocurrencies. If someone’s bet was going bad, the system would demand more collateral. If the trader didn’t top up their account in time, FTX could liquidate the trader’s assets.

Yet Alameda, according to bankruptcy-court documents, had a “secret exemption” that allowed it to keep away from liquidations in sure circumstances. The paperwork didn’t spell out particulars of the exemption.

Alameda’s particular standing allowed it to successfully rack up an $8 billion invoice with FTX. Much of that cash was spent shopping for stakes in startups and obscure digital currencies that couldn’t simply be offered to lift money, in accordance with a monetary doc ready by FTX dated Nov. 7 that was considered by the Journal.

Alameda spent $1.1 billion shopping for stakes in Genesis Digital Assets between August 2021 and April 2022, the doc reveals. Bitcoin mining corporations comparable to Genesis Digital have plunged in worth in latest months.

Alameda additionally invested in Anthropic, an artificial-intelligence startup based final 12 months by devotees of the effective-altruism motion. Anthropic mentioned in a press launch that Mr. Bankman-Fried and a few senior colleagues at FTX had led a $580 million funding spherical within the firm. Documents say the funding was really made with firm cash.

In addition, Alameda invested in venture-capital funds that backed FTX, together with $200 million in two funds run by Sequoia Capital and $20 million in a Paradigm-run fund, in accordance with the doc.

Before they collapsed, Alameda and FTX valued their enterprise and crypto investments at greater than $5 billion, all advised, the doc mentioned.

What’s an FTT Worth?

The fates of Mr. Bankman-Fried’s buying and selling agency and change had been intertwined in one other large method. Alameda was extremely depending on its holdings of FTT, a cryptocurrency that FTX launched in 2019, in accordance with the monetary doc considered by the Journal.

Humans have ascribed worth to things for eons. A greenback invoice is only a piece of paper, in spite of everything. But its worth comes from traditions and agreements, legal guidelines and practices fashioned over a whole bunch of years. Cryptocurrencies compress that into the stroke of a key: Make a cryptographic token with some code, give it a reputation, and get somebody to consider it’s value $10. If you maintain 100 thousand of those tokens, you now have an asset value one million {dollars}—in idea.

Crypto buyers noticed the FTT token as just like shares of FTX, and its worth soared as FTX grew into one of many world’s greatest digital-currency exchanges.

Alameda holds the lion’s share of FTT in existence. Before it collapsed, Alameda had marked the worth of its FTT at $5.5 billion, in accordance with the doc.

The tokens supplied Alameda with a type of superpower: The agency may publish its stash of FTT as collateral and borrow different cash to fund its buying and selling methods.

The technique had one large flaw: If the worth of FTT crashed, Alameda’s cash spigot would dry up.

The doc additionally listed holdings of $5 billion of serum and $1.7 billion of solana, tokens that had been typically known as “Sam cash” because of Mr. Bankman-Fried’s role in promoting them. Alameda created serum in 2020 while solana was launched by a startup that was backed by Alameda. FTX listed the tokens on its exchange, giving them credibility among crypto investors and helping to boost their price, while Alameda counted their value toward the assets on its balance sheet.

One of Mr. Bankman-Fried’s most vaunted deals helped keep his own ship from sinking. Going into the summer, BlockFi held hundreds of millions of dollars worth of FTT as collateral for loans, according to people familiar with the matter. If the lender failed, the liquidation of those tokens would have crashed FTT. FTX extended a $400 million revolving credit facility to BlockFi that kept the lender afloat.

“BlockFi was not aware of or involved with any improper business conduct done by FTX or its counterparties,” a spokeswoman mentioned.

On June 6, as a wave of layoffs rippled via the crypto trade, Mr. Bankman-Fried tweeted that FTX would “continue to grow as others minimize jobs.”

Later that month, FTX laid off around 20 people, mostly in the Bahamas, people familiar with the matter said, without public notice. FTX required some to sign nondisclosure agreements, they said.

Game Lovers

Mr. Bankman-Fried got his start at Jane Street, a high-tech trading firm, after leaving the Massachusetts Institute of Technology. For fun, he and some colleagues played games that tested their intellects, such as Bughouse chess, a fast version of the game played by four players on two boards.

He founded Alameda in 2017 and FTX two years later. The exchange specialized in exotic investments like perpetual futures, leveraged tokens and options. Such markets, which U.S. regulators keep off-limits to Americans, allow traders to make huge, debt-fueled bets.

After a stint in Hong Kong, Mr. Bankman-Fried and FTX made their home in the Bahamas, moving in 2021 to take advantage of the island country’s crypto-friendly regulatory regime.

On the archipelago’s New Providence island, an 80-square-mile oasis that feels to its financial elite like a small club, FTX landed with a splash, according to people on the island. The company rapidly acquired high-end real estate.

Locals said they were excited to be part of what felt like a new wave of industry. The Bahamian prime minister, Philip Davis, hoped FTX would help center his country as a nexus of the crypto world, he said in several public speeches. When given the chance to buy FTX equity earlier this year, one Bahamian FTX worker said employees spent thousands of dollars each on shares.

FTX laid out tens of millions of dollars on residences to turn part of the waterfront resort into an extension of FTX, according to people familiar with the matter. The resort kept a restaurant open 24 hours a day with FTX employees in mind, the people said.

Fundraising prowess

In 2021, Silicon Valley was in a full crypto craze. Coinbase Global Inc.’s direct listing gave the company a blockbuster $65 billion market capitalization after its first day of trading. Venture capitalists poured more than $9 billion into crypto and blockchain startups in the first half of 2021, according to PitchBook, nearly triple what they invested in all of 2020.

FTX never really had the red-ink phase common to startups. The exchange generated an operating profit of $14.4 million on revenue of $89.9 million in 2020, its first full year in business, according to financial statements reviewed by the Journal. Mr. Ray, the executive charged with seeing FTX through its bankruptcy, in court papers said he has doubts about the company’s past financial statements.

Mr. Bankman-Fried was able to dictate the terms of any deal, people familiar with the matter said. One investment firm that Mr. Bankman-Fried pitched was told it had less than a week to decide whether the firm was in, one of the people said. When the firm asked to see more information about FTX’s balance sheet, the startup declined to provide it, that person said.

Potential investors said Mr. Bankman-Fried appeared uninterested compared to the typical founder scrounging for money. He frequently deferred to another executive, Ramnik Arora, and moved on to other tasks.

On a call pitching Sequoia Capital, the firm that has backed some of the biggest companies in Silicon Valley, Mr. Bankman-Fried was simultaneously playing the video game “League of Legends,” in accordance with an article Sequoia printed on its web site about FTX in September that it has since eliminated.

In all, dozens of buyers plowed round $2 billion into his agency in simply seven months, flocking as a herd to wager on one of many world’s hottest startups.

Big spending

Mr. Bankman-Fried was giving multimillion-dollar donations to Democratic politicians and to fund quite a lot of causes, together with combating local weather change and curing tropical ailments. He plunged deeper into the effective-altruism motion.

FTX spent large to draw new prospects. The firm final 12 months agreed to pay $135 million over 19 years to emblazon the basketball enviornment the place the Miami Heat play with its emblem.

The deal appeared to vault FTX into an higher echelon of company America. Additional sponsorships adopted, with a Formula One racing workforce, a prestigious chess event, esports organizations and different NBA groups.

Its ads featured sports activities stars together with Tom Brady and Stephen Curry. The message in most was that it wasn’t essential to grasp crypto to affix the frenzy, simply the FTX app.

In one business, retired Boston Red Sox slugger David Ortiz is watching a recreation on tv when he receives a cellphone name.

“You’re entering into crypto? With FTX? Steph and Tom are in?” Mr. Ortiz says. “Oh I’m in, bro.”

Cracks emerge

This 12 months’s crypto meltdown put a chill on Silicon Valley. But Mr. Bankman-Fried wanted extra money. He needed one other $1 billion to purchase beaten-down crypto startups and consolidate his management over the trade.

He painted a grandiose imaginative and prescient to potential buyers, floating the concept of buying Robinhood Markets Inc., in accordance with two buyers who spoke to Mr. Bankman-Fried.

But he struck out in Silicon Valley. Mr. Bankman-Fried turned to Middle East sovereign-wealth funds wealthy with oil cash. At the Saudi Future Investment Initiative final month, he met with officers from the Public Investment Fund and pitched them on the corporate. From there he flew to Abu Dhabi, searching for an funding from the emirate’s wealth funds.

He got here house empty-handed.

The first cracks appeared in Mr. Bankman-Fried’s empire on Nov. 2, when crypto web site CoinDesk printed an article with particulars from a leaked copy of Alameda’s financials. It revealed that the buying and selling agency’s steadiness sheet was hyped up with billions of {dollars} value of FTT and numerous “Sam cash.”

Alameda’s Ms. Ellison tweeted that the leaked balance sheet reflected only “a subset of our corporate entities,” however the injury had been completed.

The CoinDesk report drew the eye of Changpeng Zhao, the billionaire head of Binance, the world’s largest crypto change. Binance was a big holder of FTT, with greater than $500 million of the token.

On Nov. 6, Mr. Zhao tweeted that Binance would promote its FTT holdings, a transfer that threatened to crash the worth. Although many observers chalked up the transfer to his long-simmering rivalry with Mr. Bankman-Fried, Mr. Zhao mentioned he was defending Binance from the dangers of holding an illiquid token.

Ms. Ellison tweeted that her agency would “fortunately” buy the entire pile of FTT tokens at $22 per coin. Binance contacted her about the offer but never heard back, a person familiar with the matter said.

In a few tweets Mr. Zhao had ignited a run on FTX. On Sunday, Nov. 6, the crypto exchange was slammed with some $5 billion worth of withdrawals.

If FTX had managed customer funds as traditional brokerages do, it would have kept them separate from other parts of its businesses.

But FTX had loaned billions of dollars worth of customer funds to Alameda to cover its liabilities, people familiar with the matter said.

Mr. Bankman-Fried has disputed reports that FTX intentionally loaned customer funds to Alameda. In a text exchange published by Vox on Wednesday, he blamed “messy accounting,” including: “I didn’t understand [the] full measurement of it till a number of weeks in the past.”

The hidden loans turned the flood of withdrawals into a deathblow. Mr. Bankman-Fried wrote in a tweet on Nov. 7, which has since been deleted, that “FTX is fine. Assets are fine.” Behind the scenes he was scrambling to discover a deep-pocketed investor to plug the opening. He approached rival crypto exchanges Coinbase and Kraken, in accordance with folks aware of the talks, however these discussions went nowhere.

He was pressured to show to his nemesis: Binance.

The night of Nov. 7, Mr. Zhao was in his workplace in Dubai enhancing notes for his upcoming speech at a convention of worldwide leaders in Bali when he acquired a message from Mr. Bankman-Fried over Signal, an encrypted messaging app, an individual aware of the matter mentioned. The FTX CEO congratulated his rival and described Binance as the proper purchaser for FTX, the individual mentioned.

On the morning of Nov. 8, Mr. Bankman-Fried despatched a message to his workforce. He apologized for the chaos and thanked them for his or her efforts.

“It was clear the sport was over,” says Nathaniel Whittemore, who was a senior marketing specialist at FTX.

That morning, Binance announced a non-binding deal to acquire FTX. The news shocked investors who had believed in Mr. Bankman-Fried’s vision and stunned his employees, the vast majority of whom had no idea of FTX’s problems.

As Binance executives pored over FTX’s books, they were confronted with a confusing mess, a person familiar with the matter said. Moreover, the hole that needed to be plugged was growing: FTX first put it at $2 billion, then $5 billion, then finally more than $8 billion, the person said.

Many of FTX’s lawyers quit while the talks were under way, part of a broader exodus of employees from the company, according to people familiar with the matter.

On Nov. 9, Mr. Bankman-Fried messaged Binance to ask for an update: “Hey all, we are still extremely excited to work on this with you guys. We are obviously seeing a lot of public pieces coming out claiming leaks but obviously we don’t know if that is real. We would love to get clarity from you guys about this.”

Three minutes later, Mr Zhao wrote again to the FTX chief. “Sam, I’m sorry,” he said, “we won’t be able to continue this deal. Way too many issues. CZ.”

Fallout

Mr. Bankman-Fried hustled to lift cash from different buyers, who pressed him on what occurred to the shopper funds. In one name on Nov. 9, he advised potential buyers that FTX had taken in $16 billion of buyer belongings denominated in numerous cryptocurrencies and loaned greater than half of it to Alameda.

Mr. Bankman-Fried looked for phrases. “There was a… a… a… let’s name it ballpark $8-ish-billion of um um um margin place measurement and it was rapidly going to get to the purpose the place we aren’t gonna have sufficient liquid belongings to fulfill withdrawals,” he told the prospective investors, according to a recording of the call heard by the Journal.

In a Nov. 9 video meeting with Alameda employees, Ms. Ellison, the CEO, apologized and said that she had disappointed the staff, according to a person familiar with the matter.

Ms. Ellison said she, Mr. Bankman-Fried and two other FTX executives knew about the decision to send customer funds to Alameda, people familiar with the matter said.

Stunned by the revelations, many Alameda employees quit the next day, according to people familiar with the matter.

With her large-framed glasses, Ms. Ellison was known to be sociable with those who shared similar interests, one former colleague said. But she tended to turn quiet during high-pressure trading situations, the person said, and could get bulldozed by louder and more outwardly confident peers, especially Mr. Bankman-Fried.

On Nov. 10, the Journal reported that FTX had used customer funds to prop up Alameda. The crypto community was turning sharply against the FTX chief, who was being called “Scam Bankrun-Fraud” on social media.

“I’m actually making an attempt to regulate my rage,” Kraken CEO Jesse Powell tweeted. “This isn’t about aiming high and missing. This is about recklessness, greed, self-interest, hubris, sociopathic behavior that causes a person to risk all the hard-won progress this industry has earned over a decade, for their own personal gain.”

The subsequent day, FTX filed for chapter.

Its collapse has shaken the crypto world. BlockFi halted withdrawals on Nov. 10 and is making ready to file for chapter. Crypto lender Genesis, which paused withdrawals on Nov. 16, mentioned in a tweet it has employed advisers and is exploring all choices.

FTX employed a Bahamian safety agency to protect FTX headquarters shortly earlier than the collapse. After the information, the vast majority of non-local FTX staff left the island. The safety guards mentioned they discovered themselves defending almost vacant buildings.

Mr. Bankman-Fried and a skeleton crew of remaining staff spent the previous weekend making an attempt to lift funds to plug FTX’s $8 billion gap and repay prospects.

Before the corporate collapsed, FTX staffers frequented Island Brothers, an upscale French bistro a stone’s throw from the corporate’s headquarters, restaurant staff mentioned. The proprietor acquired to know Mr. Bankman-Fried’s father, Stanford tax-law scholar Joseph Bankman, throughout his visits to Nassau to spend time along with his son.

Last week, FTX’s downfall introduced Mr. Bankman to Island Brothers in a somber temper. After a number of pleasantries, the restaurant proprietor mentioned, Mr. Bankman broke down in tears.

 

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