$8 Billion Missing: How FTX Collapsed in Ten Days

Sam Bankman-Fried, founder of cryptocurrency exchange FTX, was sentenced on March 28, 2024, to 25 years in federal prison following his November 2023 conviction on seven counts of fraud and conspiracy related to the collapse of FTX and its affiliated trading firm Alameda Research, in what prosecutors described as one of the largest financial frauds in U.S. history.DOCUMENTED

U.S. District Judge Lewis Kaplan, who presided over the case in the Southern District of New York, also ordered Bankman-Fried to forfeit more than $11 billion, reflecting the scale of customer and investor funds prosecutors alleged were misappropriated through the scheme.DOCUMENTED

The business model behind the collapse

FTX marketed itself to millions of retail and institutional customers worldwide as a secure, well-regulated cryptocurrency exchange, spending heavily on advertising, celebrity endorsements, and a Super Bowl commercial to build an image of trustworthiness distinct from less-established competitors in the crypto industry. Bankman-Fried simultaneously operated Alameda Research, a crypto trading firm, which prosecutors alleged received privileged access to FTX customer funds not available to any other trading firm using the exchange.DOCUMENTED

According to trial evidence and prosecutors' allegations, Bankman-Fried directed that Alameda be permitted to borrow essentially unlimited amounts of FTX customer deposits, which Alameda then used for trading, venture investments, real estate purchases, and other purposes entirely disconnected from FTX's own operations — all while FTX's terms of service and public statements told customers their deposited funds were held separately and would not be lent out or otherwise put at risk.DOCUMENTED

Ten days in November

The scheme unraveled rapidly in November 2022 after a report revealed the unusually close financial relationship between FTX and Alameda Research, prompting a wave of customer withdrawal requests that FTX proved unable to meet, since much of the customer funds those withdrawals were meant to draw from had already been transferred out and spent. Within roughly ten days of the initial reporting, FTX halted withdrawals entirely and filed for bankruptcy, leaving an estimated one million or more customers unable to access their deposited funds.DOCUMENTED

The trial and conviction

Bankman-Fried's trial in the U.S. District Court for the Southern District of New York centered heavily on testimony from his former closest associates and, at times, romantic partner, Caroline Ellison, who served as CEO of Alameda Research and pleaded guilty to fraud charges before testifying against Bankman-Fried as part of a cooperation agreement. FTX co-founder Gary Wang and FTX's former head of engineering, Nishad Singh, also pleaded guilty and testified for the prosecution, providing detailed internal accounts of how customer funds were allegedly diverted and spent.DOCUMENTED

Following a trial that lasted approximately one month, a federal jury convicted Bankman-Fried in November 2023 on all seven counts he faced, including wire fraud against both FTX customers and Alameda lenders, conspiracy to commit wire fraud, conspiracy to commit securities fraud, conspiracy to commit commodities fraud, and conspiracy to commit money laundering.DOCUMENTED

The sentencing

At sentencing in March 2024, Judge Kaplan imposed a 25-year prison term, below the sentence prosecutors had requested but substantially longer than what Bankman-Fried's defense had sought. Kaplan cited both the scale of the financial harm and what he characterized as a risk that Bankman-Fried could attempt similar conduct again given his lack of remorse expressed throughout the proceedings. The $11 billion-plus forfeiture order reflected the government's calculation of funds implicated in the fraud, though actual recovery for FTX's customers has depended primarily on the separate bankruptcy proceeding rather than the criminal forfeiture order itself.DOCUMENTED

Political and philanthropic spending under scrutiny

Beyond the core allegations of customer-fund misappropriation for trading losses, prosecutors and subsequent reporting highlighted that Bankman-Fried had used misappropriated funds to make substantial political campaign contributions across the political spectrum and to fund a variety of philanthropic commitments associated with the effective-altruism movement he publicly championed — spending that, regardless of its stated purpose, prosecutors argued was drawn from the same pool of misappropriated customer and investor funds at the center of the fraud.DOCUMENTED

A landmark case in crypto's brief history

The FTX collapse and subsequent prosecution stand as one of the most consequential fraud cases in the short history of the cryptocurrency industry, both for the scale of customer losses involved and for how directly it undercut the industry's broader efforts to present itself as maturing toward institutional-grade trustworthiness. The bankruptcy proceeding that followed FTX's collapse has since recovered a substantial portion of customer funds through asset sales and litigation, though the process took years and left many customers uncertain about the ultimate value of their recovery for a significant period after the exchange's failure.

The speed of FTX's collapse, unfolding over roughly ten days after years of apparently successful operation, has become a frequently studied case in how quickly a business built on customer trust rather than transparent, verifiable reserves can unravel once that trust is punctured. Unlike a traditional bank run, where regulators and deposit insurance mechanisms exist specifically to manage sudden withdrawal surges, FTX's customers had no equivalent protection, meaning the exchange's actual solvency, once customer funds were revealed to have been diverted to Alameda Research, could not withstand even a modest surge in withdrawal requests relative to its total customer base.REVIEWED

The FTX bankruptcy estate's subsequent asset recovery effort, pursued separately from the criminal case, has focused heavily on clawing back venture investments, real estate, and other assets Alameda Research acquired using misappropriated customer funds, a process that legal experts note tends to recover only a fraction of nominal losses once assets have already depreciated or been resold at reduced value following a company's collapse.REVIEWED

Have documents relevant to this story? Reach us through our tips channel.