Opinion: Trial of FTX’s Sam Bankman-Fried is about more than crypto

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Gus Carlson is a U.S.-based columnist for The Globe and Mail.

All investors, whether or not they have any interest in cryptocurrency, should pay close attention to what’s going on in a Manhattan courtroom over the next few weeks.

That’s where disgraced FTX Trading Ltd. founder Sam Bankman-Fried stands trial for fraud and money laundering in one of the world’s biggest financial scandals. It involves the collapse of his company, which once had a market value of more than US$32-billion; the evaporation of billions of crypto investors’ money; and the seismic shocks of the implosion on the cryptocurrency market.

The case is seen as a referendum not only on the collapse of FTX, but also on the sketchy credibility of the crypto world and the fast-and-loose behaviour of some of its key players more broadly. The sex appeal of the platform and its high-flying profile as the next big thing attracted huge volumes of investment money, including billions from average individual retail investors with visions of sugarplum-like returns dancing in their heads.

But the trial of Mr. Bankman-Fried is more than that, which is why even investors who don’t care a whit about crypto could learn something. It is yet another reminder of the gullibility of investors and their age-old penchant for chasing any shiny new lure in hopes of getting rich quick – and scarcely caring about where they put their money in their breathless pursuit.

No matter how many times people are told something seems too good to be true, they don’t want to believe it. Due diligence? Too much work. Like Bernie Madoff, Mr. Bankman-Fried seemed like a nice, trustworthy guy who knew what he was doing. As Forrest Gump said, “Stupid is as stupid does.”

In building their case against Mr. Bankman-Fried, prosecutors have painted him as a skilled con artist who lied to the world. Investigation into the FTX collapse last November uncovered what they say was massive misuse and misappropriation of investors’ funds, the granting of loans and home mortgages by Mr. Bankman-Fried to FTX employees without proper documentation, and the incorporation of the company in the Bahamas, which is on several global watchlists as a tax haven and money-laundering centre.

Michael Lewis dives into the mind of Sam Bankman-Fried in his new book Going Infinite

They point to Mr. Bankman-Fried’s lavish lifestyle, private-jetting from place to place, rubbing of shoulders with celebrities and supporting prominent Democrat politicians, and huge spending on marketing, including the sponsorships of sports and entertainment venues. It was not the sort of conduct one might expect from the mild-mannered leader of a startup with the best interests of his investors in mind.

As Mr. Bankman-Fried’s profile and that of FTX grew, so did the number of red flags fluttering over them. More people did homework on his credentials and pedigree. What they found were perhaps the building blocks of a promising future career – a degree from MIT, a short stint on Wall Street and the support of parents with impeccable credentials as Stanford law professors – but hardly the chops that would give most investors the confidence to send big money his way at such an early stage in his development.

By all accounts, what Mr. Bankman-Fried may have lacked in hard-boiled experience, he made up for in disarming personal charm. He was affable, and his geeky quirkiness attracted people. Like Mr. Madoff, people liked him and trusted him to the point where he attained near cult status – a point prosecutors will say enabled him to pull the wool over the eyes of so many followers.

In their opening remarks at trial this week, Mr. Bankman-Fried’s lawyers suggested the portrait of him as a slick operator keen to separate fools from their money is a gross mischaracterization. In reality, they say, he is a well-meaning math nerd who operated in good faith but got out over his skis and didn’t know how to get back. It was the business that went bad – as businesses sometimes do – not Mr. Bankman-Fried. He was, in some ways, a victim of his own inexperience.

The defence faces a tough slog in proving their portrait of Mr. Bankman-Fried as naive rather than nefarious. Several of FTX’s top executives, including his girlfriend, have pleaded guilty to fraud and are set to testify against him. And many investors who were bilked by FTX have already said their piece in the court of public opinion.

Whether or not the trial reveals the truth about Mr. Bankman-Fried’s intentions, motivations and self-awareness remains to be seen. But what is clear even in the first week of the proceedings – and regardless of its outcome – is that the well-worn warning of buyer beware is as valid now as when it was coined centuries ago.