Sam Bankman-Fried and Changpeng Zhao: Two of the biggest crypto titans are sentenced | Opinion

by

It is important to note that while Changpeng Zhao’s sentence may seem minimal compared to the scope and ramifications of his misconduct at Binance, prison sentences, especially for wealthy individuals, serve as deterrents and reminders of the consequences of breaking the law.

As a crypto investor, I had the opportunity to participate in an exclusive three-part interview series with William Quigley, a renowned figure in the world of cryptocurrencies and blockchain, conducted by Selva Ozelli for crypto.news. In this first part, we delved into the legal issues surrounding Sam Bankman-Fried’s and Changpeng Zhao’s recent prison sentences. Stay tuned for Part Two, where we discuss the intersection of cryptocurrencies and banking, and Part Three, which explores the exciting future possibilities of NFTs.

1) For the benefit of crypto.news readers, please tell us about your career path that led you to becoming a successful technology-focused venture capitalist.

Following my graduation from the University of Southern California with a bachelor’s degree in accounting and an MBA with honors from Harvard Business School, where I was recognized as a Kauffman Fellow, I began my career at Arthur Andersen. In this role as a Senior Consultant within their Financial Services Group (Andersen), I provided support to banks and S&Ls in their initiatives for asset securitization and risk categorization. Additionally, I offered guidance to Japanese banks regarding their approaches to entering the US market.

Following Andersen, I spent a seven-year tenure at The Walt Disney Company (Disney), the globe’s leading consumer products licensor. During my time at Disney, I held various roles in business planning and new ventures. My responsibilities encompassed finance and operations at Euro Disney and the Disney Store retail chain, as well as overseeing strategic planning and financial operations for Disney Licensing.

As a technology-focused venture capitalist, my career took off after joining Idealab! Capital Partners (ICP) as the Managing Director. ICP was the world’s first consumer Internet venture capital firm, having made early investments in trailblazing Web1 era companies such as PayPal, Netzero, MP3.com, and Goto.com. Subsequently, I co-founded Clearstone Venture Partners, a $700M early-stage venture capital firm where I channeled my investments into communications and consumer technology sectors. Additionally, I co-founded and co-managed Crypto Currency Partners, a blockchain equity investment fund. Through this fund, I incubated and invested in over 30 Bitcoin, blockchain, and cryptocurrency-related startups, with early investments in notable companies like Coinbase, Kraken, Bitfury, Authy, ChangeTip, and Circle.

I played a key role in creating the initial crypto derivative for trading pre-launch Ethereum. Additionally, I was among the founders of several groundbreaking crypto businesses, such as Tether – the world’s first fiat-backed stablecoin and currently the most traded cryptocurrency – and GoCoin, an early adopter in crypto payments processing. Furthermore, I helped establish WAX, a blockchain specifically designed for video game and NFT virtual item trading.

As an early backer of PayPal, I have my doubts that the payments behemoth will introduce significant advancements in the realm of stablecoins.

2) Please tell us about your thoughts concerning Sam Bankman-Fried’s 25-year prison sentence. The former FTX CEO was found guilty of six counts of fraud and one count of money laundering. 

In November 2022, a flawed Alameda balance sheet revealed by CoinDesk caused Sam Bankman-Fried’s net worth to plummet from over $26 billion, knocking him out of the top three crypto tycoons. The disclosure sparked widespread anxiety and apprehension within the industry regarding FTX, a prominent centralized cryptocurrency exchange. FTX is known for dealing in highly leveraged positions, derivatives, options, and related products.

In the course of unfolding events, it came to light that the losses at FTX and Alameda, which later filed for bankruptcy, were significantly larger than anticipated: During the crypto and NFT market’s bull run in 2021, executives, including Sam Bankman-Fried, allegedly misappropriated over $10 billion from customers’ funds. By March 2024, a court found Bankman-Fried guilty of fraud for this theft, sentencing him to 25 years imprisonment and mandating a fine of $11 billion. Bankman-Fried has since appealed the prison sentence.

I’d like to discuss several potential factors that may have played a role in Sam Bankman-Fried’s alleged fraud. Sam holds a physics and mathematics degree from MIT with minimal experience in cryptocurrency, blockchain, or derivatives when he established both FTX and Alameda Research in 2018. It is essential to clarify that Exchange-Traded Funds (ETFs) are not derivatives; they are investment vehicles that only gained SEC approval for investing in Bitcoin this year. Consequently, SBF was unprepared to oversee a highly leveraged crypto exchange and a hedge fund, which filed for bankruptcy on November 11, 2022, resulting in one of the most significant financial frauds in American history. The collapse of FTX had a ripple effect on the unstable crypto market, causing billions in losses and dropping below a $1 trillion valuation.

Sam Bankman-Fried’s meteoric rise to prominence in the crypto world can be attributed to the media, influencers, and celebrity endorsers who portrayed him as a brilliant investor, drawing comparisons to finance titans like JP Morgan and Warren Buffett. However, it is important to note that these figures dressed rather unconventionally with disheveled hair. A more straightforward way of expressing this could be: Mainstream media influencers played a significant role in amplifying Sam Bankman-Fried’s reputation, even as allegations against him and his company, FTX, came to light following bankruptcy filings. Notably, Michael Lewis’s book, “Going Infinite: The Rise and Fall of a New Tycoon,” was published on the same day as Bankman-Fried’s criminal trial commenced in Manhattan federal court on October 3, 2023.

In June 2023, a single legal proceeding consolidated numerous lawsuits against Sam Bankman-Fried, his team, FTX investors, and prominent endorsers. More suits are yet to be filed. Some of these class actions are being resolved through settlements. Additionally, Sam Bankman-Fried is assisting FTX customers in pursuing legal action against celebrity promoters and influencers.

As an analyst, I would rephrase it as follows: I have come to the conclusion that certain investors in FTX, including Binance and esteemed venture capital firms like NEA, IVP, Third Point Ventures, Tiger Global, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Temasek, Thoma Bravo, Paradigm Operations, and others, were also involved in the fraudulent activities of Sam Bankman-Fried. However, it is concerning that these investors apparently neglected to conduct thorough due diligence on FTX’s financial statements, which were reportedly prepared using “Quick Books.”

3) The investor’s role in FTX’s fraud has not been addressed until now, and I am glad you are speaking about this. In February 2023, Robbins Geller, a well-known class action law firm, filed a first-of-its-kind lawsuit against venture capital firms that backed FTX. 

I. In the rapidly developing crypto industry, inexperienced and untrained venture capitalists, unfamiliar with cryptocurrencies, derivatives, financial risks, blockchain technology, and the identity of Satoshi Nakamoto – recently ruled out to be Craig Steven Wright by U.K. Judge James Mellor last month – are easily swayed. II. Young and inexperienced venture capitalists, lacking knowledge in crypto, derivatives, risk management, blockchain, and the true identity of Satoshi Nakamoto as determined by U.K. Judge James Mellor just last month, are readily influenced by the extensive media coverage surrounding Sam Bankman-Fried.

As an analyst, I’ve come across various investment pitches, and I can tell you that Sam Bankman-Fried’s approach during his meeting with Sequoia Capital was quite distinct. Instead of delving into the technicalities or financial risk exposure of his crypto exchange, FTX, or his hedge fund, Alameda Research, SBF spoke about the accessibility and convenience of his platform using an analogy of buying a banana.

As a crypto investor looking back on the situation, I now realize that the venture capitalists involved in FTX had a significant part in its fraudulent activities. They weren’t just passive investors; they knew the company would use their investments for deceptive practices, such as banana trading, which clearly violated regulations. And to make things worse, they actively promoted FTX through various channels, including their websites, social media, public interviews, and industry events. By doing so, they represented FTX platforms as trustworthy and secure to investors and consumers, despite the ongoing deceit.

4) I want to ask your opinion about another lawsuit related to Sam Bankman-Fried. Sam’s parents, Joseph Bankman and Barbara Fried, are both Stanford Law School professors, one of the best law schools in our country. They were recipients of fraudulent cash transfers and real estate valued at $26 million from Sam Bankman-Fried. Debtors of FTX and Alameda Research sued Sam’s parents in September 2023 in a clawback lawsuit to recover damages.

As a researcher investigating the ongoing lawsuit against Sam Bankman-Fried and FTX, I’ve come across some intriguing perspectives from his parents, professors Joseph Bankman and Barbara Fried at Stanford Law School. They argue that the lawsuit is attempting to exploit Sam’s past role as a founder and executive of FTX without providing any evidence that they held control over the company or were privy to issues leading to its downfall. Moreover, they received $26 million in payments from their son without raising any suspicions.

As a crypto investor, I may not hold a law degree from Stanford University or be related to Sam Bankman-Fried. However, I can’t help but draw parallels between the unique actions of Oakland County prosecutor Karen McDonald and the recent events in the crypto world. Although stealing $10 billion isn’t equivalent to committing a mass school shooting, the concept of accountability remains crucial.

5) My final question to you, William, for part one of our interview series is also regarding sentencing. Today, Changpeng Zhao was sentenced to four months in prison. Any thoughts on one of the richest people being sentenced to prison on money laundering charges?

In November 2023, Changpeng Zhao, the founder of Binance and estimated to have a net worth of $33 billion, admitted guilt and relinquished his position at the company as part of a deal with the US Department of Justice. The arrangement permits CZ to forgo any appeal for a sentence of up to 18 months in prison. Additionally, he is required to pay a fine of $50 million. Binance itself will pay a substantial penalty of $4.3 billion.

Prosecutors had asked for a three-year prison sentence for Changpeng Zhao (CZ), more than twice the suggested 18-month penalty, due to the significant impact of his misconduct at Binance. However, CZ was recently informed that he will only serve a four-month jail term for Bank Secrecy Act violations during his tenure with the company. This sentence appears lenient in comparison.

Read More

2024-05-12 13:26