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In the nearly five months since a jury found Sam Bankman-Fried guilty, a narrative has started to take shape in crypto circles that the business model behind FTX was sound and that SBF would have been successful had he not dipped into customer funds.But on the eve of his sentencing, Bloomberg’s Max Chafkin and Zeke Faux join The Big Take Podcast to discuss how they found — after interviewing insiders and carefully examining trial testimony and thousands of pages of documents — that fraud was at the very core of FTX’s meteoric rise.Read more: FTX’s Original Sin Is a Warning to All of Crypto

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Here is a lightly edited transcript of the conversation:

David Gura: You can expect to see a familiar name… or at least a familiar set of initials… in your newsfeed this week. SBF – Sam Bankman-Fried – will be back in a New York City courtroom, where he’ll be sentenced. In November, a jury found the disgraced crypto mogul – the former head of the cryptocurrency exchange FTX – guilty of orchestrating one of the largest financial frauds in history. 

BTV: A jury here in New York has reached a verdict in the Sam Bankman-Fried trial…

BTV: A one month-long trial and the verdict coming out after less than five hours of deliberations…

BTV: SBF faces decades in prison after a swift, guilty verdict.

Gura: I covered that month-long trial, and … it was a spectacle. Reporters would line up, every day, hours before sunrise, hoping to score one of just a few dozen seats in the courtroom. 

Gura: Do you think that people will camp out again?

Zeke Faux: Yes, and I actually, I mean, I've been wrong before, but I think it will be worse.

Gura: That’s Zeke Faux, an investigative reporter here at Bloomberg, and someone I bumped into a few times in that predawn darkness. 

Faux: Everyone's rested and there's only one day. And I don't think it's going to be like a show up at six and you're, you get in day,

Gura: I've made that misjudgment once.

Gura: Zeke and Max Chafkin, who's a senior reporter at Bloomberg Businessweek,  have been digging into what was uncovered during that trial, and the history of FTX, and their latest story – out today – upends a lot of what we think we know about SBF’s downfall, and how his crypto empire collapsed. Today on the show: The sentencing of Sam Bankman-Fried.… His defenders argue he was a brilliant entrepreneur who got in over his head and took a few wrong turns… but our reporters uncovered a very different story: That financial recklessness and a blatant disregard for the rules, may have been the key to Bankman-Fried’s success from the start. I’m Gura, and this is The Big Take from Bloomberg News.

Gura: Sam Bankman-Fried was once the “golden boy of crypto”. And with a few friends, he built FTX into a company that was at one time valued at $40 billion. SBF also presided over its implosion.He’s now 32 years old, and Thursday, he’ll learn how much of his life he’ll spend behind bars. Once again, he’ll face Judge Lewis Kaplan, in a federal courthouse in Lower Manhattan. 

Max Chafkin: The setting — I mean, one thing that is sort of different from what you might see on television is it's incredibly quiet, right? Like there, like there's not a lot of movement, no one's, with a few exceptions, they're not reacting to things. It's almost, it's deliberately shorn of emotion and all of the kind of pomp and circumstance that somebody like SBF kind of relied on for a lot of his, you know, sort of rise like he was this media darling He's like often playing to crowds in various ways or playing to Twitter. 

Gura: Max Chafkin says it’s one reason why Sam Bankman-Fried’s decision to take the stand in his own defense backfired so spectacularly. 

Chafkin: And I think one it was sort of staggering watching him. When he testified, he kind of gave the same testimony that he had been doing on, like, podcasts and in interviews, like, sort of trying to just, like, talk and talk and talk, talk about all the nuances and complexities,

Gura: There were no cameras or recorders allowed in the courtroom… but by the time SBF testified, he’d talked to reporters hundreds and hundreds of times. 

Joe Weisenthal: So it's a thrill to have him here and get his perspective. Sam, thank you so much for joining us.  

Sam Bankman-Fried: Yeah. Thanks for having me as always. 

David Rubenstein: So today, you're running FTX. What does it actually do?

Sam Bankman-Fried: It's sort of all of those things. It's a back end, you know, matching engine, risk engine, custody system, say front end mobile app website, API. And everything in between so that, you know, if you want to buy or sell a Bitcoin, you can go to FTX.

Faux: Before I feel like you would hear that and you would think, “Wow, this must be the quirky kind of thinking that's turned him into the richest person under 30 in history.”

Gura: Someone who seemed so at ease in front of TV cameras and congressional committees was out of his element in court. 

Faux: And now he's up there accused of fraud. And you're like, “Oh, no, like this is like a kind of made up story that doesn't even hang together very well.”

Gura: But for a long time it did… Bankman- Fried was this almost mythical figure…with a compelling story: He was seen as a genius, one of the youngest self-made billionaires ever, and a man on the mission to save the world … by getting… rich: 

Chafkin: So Sam Bankman Freed, before he got into cryptocurrency was a trader, very smart, MIT educated. A trader who worked for Jane Street and was also closely involved with the Effective Altruism Movement, which is a charitable, sort of extremely online, kind of hip with the kids, charitable thing where it's, it's about trying to— essentially trying to give your money in the most effective way, in a way that benefits people. Sam Bankman-Fried bought into, like, a very specific version of that, which was that Earning to Give, it's called. And it's where you try to earn as much money and then give it away. 

Gura: Max has written the definitive piece on SBF’s mom and dad, who are on the faculty at Stanford Law School: 

Max Chafkin His parents are both famous in different ways. His father is a tax lawyer who's friendly with a lot of business people in Silicon Valley. His mother is an ethicist, a, a pretty well respected ethicist. And I think that second thing, his mother's identity really gave some credibility to his whole thing with effective altruism. It was like, there were, there were pieces written about him— serious pieces that essentially said, you gotta believe this guy because of who his parents are. Which, now when you say it in retrospect, seems kind of crazy. But I mean, that's, it's kind of like an example of the way that privilege protects people. I mean, he, he was a very, very privileged guy and he used it to his advantage.

Gura:  SBF basically grew up on the Stanford campus, very familiar with the unique culture of Silicon Valley. And he looked the part… 

Chafkin: he had this kind of crazy curly hair. He wore t shirts and these like really, like, baggy, saggy shorts and these like old running shoes. And like, it was all a part of this presentation, which suggested I think, to a lot of people, especially a lot of very sophisticated investors who in one way or another have internalized a lot of stereotypes from Silicon Valley about, like, what a brilliant guy looks like, that this was another Mark Zuckerberg.

Faux: He seemed above it all, you know. And that really impressed the venture capitalists who backed FTX at this big valuation. I mean, famously, he would play video games during interviews or important pitches. And when people noticed this,  they were only more impressed. They're like, “Wow, this is a guy who, he really doesn't need our money.He's playing League of Legends. Well, he. Pitches us on investing at a 40 billion valuation. Let's give him a even bigger check.”

Gura: SBF presented himself as someone who wasn’t concerned with appearances or with impressing people… 

Faux: He had this image that he was, Kind of the, the responsible one in crypto, the one who was advocating for sensible regulations that would tame the market and make it safe for investors. He became like the face of, of crypto.

Gura: And FTX became one of crypto's flagship companies... an exchange where anybody could buy and sell  bitcoin and other cryptocurrencies. 

Faux: So, I mean, if you think of FTX, like ETRADE, a customer might send in a thousand dollars. They buy a share of Apple, they open their E Trade app, they see that they have one share of Apple. It's just something that you don't really question. It's the same with FTX and you, the customers sent in money, they're, buy Bitcoin or whatever, and they'd see it when they'd open the app.   

Gura: FTX promised it would keep customers' money safe. But Bankman-Fried and his colleagues were taking that money, unbeknownst to customers, and they were using it — to buy luxury real estate, and to make big, speculative investments. And when that came to light, there was basically a bank run. FTX customers tried to take out what they had on the site. 

Faux: There was a rush of customers wanting to withdraw their money, and what they found was, it wasn't there. There was a 8 billion hole. 

Gura: Investors panicked, crypto prices collapsed, FTX went bankrupt, and then, Bankman-Fried was arrested. He was convicted less than a year later… and right after the verdict was delivered U.S. Attorney Damian Williams stood outside the courthouse and told reporters the case was designed … to send a message. 

Damian Williams: It's a warning, this case, to every single fraudster out there who thinks that they're untouchable,  or that their crimes are too complex for us to catch,  or that they're too powerful for us to prosecute,  or that they could try to talk their way out of it when they get caught and cut it out.  And if they don't, I promise we'll have enough handcuffs for all of them. 

Gura: Sam Bankman-Fried could spend the rest of his life in prison, and his fate rests in the hands of Judge Lewis Kaplan, who will decide on a sentence based on his understanding of the events that led to FTX’s collapse.After the break, what Max and Zeke have discovered… and the real story behind SBF’s downfall.

Gura: Ever since Sam Bankman-Fried was found guilty, a narrative has emerged that SBF was … a bad apple – that his decisions tanked a multibillion-dollar company:  

Faux: Naturally, people are comparing Sam Bankman-Fried to other famous fraudsters like Elizabeth Holmes or Bernie Madoff. And they're saying, hey, look at FTX. I mean, the app worked. It was kind of popular. Therefore, this isn't like a fake blood testing machine. There was something real there. 

Gura: Which is what journalist Michael Lewis said he believes. He wrote a biography of SBF, and it’s a conclusion you can hear him emphasizing in response to a question on CBS News’ 60 Minutes:

Jon Wertheim: What's your response to someone who hears this and says  It's a fun story, and it's crypto in the Bahamas, but this is the oldest architecture of a financial collapse that's been going on for centuries

Michael Lewis: This isn't a Ponzi scheme. Like, when you think of a Ponzi scheme, I don't know, Bernie Madoff. The problem is, there's no real business there.The dollar coming in, is being used to pay the dollar going out. And in this case, they actually had a great real business. If no one had ever cast aspersions on the business, if there hadn't been a run on customer deposits, they'd still be sitting there making tons of money.

Gura: Max and Zeke … say that’s just not true. After poring over thousands of pages of court documents and interviewing insiders… They say the narrative of a “good business gone bad” doesn’t square with what they uncovered. 

Faux: And I think what the record shows is that, in fact, this app would not have ever gotten to this level without the fraud.From the start, he, it was bolstered by access to this misuse of the customer funds and by his willingness to, to lie to banks, to venture capitalists, to customers, to Congress.

Chafkin: the thing that's funny about this is he's supposed to be this like ridiculously rich guy, and he's splashing money, but when you kind of scratch below that, he had money, he had cash flow problems, like almost, from before the beginning, right? The only way he was able to get this money to invest, he had a lot of friends on Wall Street, but the money didn't come from them, mostly it came from effective altruists, and they charged him, uou know, insanely high interest rates. He's paying, yeah, 43%. Like, he's, he's having to pay these, like, usurious — is that a word? —usurious, you know, interest rates, you know, this is not, like, nothing about this screams good business. And I think one of the reasons — not just because Michael Lewis is a famous journalist and a great writer — that this has taken on, but also because the crypto industry, which is a you know, multi billion dollar industry. There are lots of other people who are very invested in this. Not in FTX, but in the idea that this is a good business, very much wants to believe that. Very much wants to believe the story that Sam Bankman Fried was telling on the way to committing this massive fraud.

Faux: Like, there was nothing fundamentally wrong with FTX. There's nothing fundamentally wrong with this idea that a crypto hedge fund could make billions of dollars. Like, actually, Sam was this bad apple who kind of inexplicably torpedoed the whole thing by stealing the customer money. But it, I think the truth is really that if he was, if he wasn't cheating from the beginning, he never would've gotten there.

Gura: Zeke and Max say Bankman-Fried used FTX as a piggy bank.In 2021, FTX faced a $1 billion loss, after a trader exploited a bug in its software. A loss of that size could have been devastating to FTX. But Bankman-Fried used his hedge fund to make it disappear. This chapter of SBF’s life could end in one of a few ways... The judge could side with Bankman-Fried’s lawyers, and give him a pretty short prison sentence. He could go with what the prosecution suggests. That’s 40 or 50 years. Or Judge Kaplan could sentence SBF to decades more: 

Chafkin: there's a big leeway, in the prosecution memo, they essentially say that, you know, he's very young and, you know, although we want to make sure that he doesn't become a recidivist, doesn't like come out of prison and start another crypto company. He needs to be basically in prison during his working, the rest of his career, but that when he's an elderly person he can get out. That's what the prosecution is asking for. His lawyers are essentially saying he's such a good guy, look at his charitable giving. I mentioned the effect of altruism. He's got his whole life ahead of us, that's why, ahead of him, that's why, you know, five or six years would be more appropriate.

Gura: It is up to Judge Lewis Kaplan. He’s been a federal judge since the early 1990s, and Kaplan presided over SBF’s trial, during which Bankman-Fried tried his patience over and over again.

Gura: Let me ask you first just about the role that Judge Lewis Kaplan is going to play in all of this. It's his decision, ultimately, I think he was eyewitnessed over the course of, yes, the trial, but the pretrial proceedings, a frosty, dare I say, skeptical outlook that the judge had toward Sam Bankman-Fried.There were all of these missteps that he made throughout the course of this. 

Faux: Right. I mean, even before the trial began, he had Sam He was sent to prison. Sam had been on house arrest at his parents house, and then just kept violating the rules of this house arrest. Among other things, he used a VPN to watch the Super Bowl. And 

Chafkin: That’s what he said he did.

Faux: Yes.

Gura: Judge, very skeptical of this argument. 

Gura: The defense is holding out hope the judge will be sympathetic to a new argument tied to a pretty significant development. Something unexpected that’s come up in FTX’s bankruptcy proceedings. 

It turns out, many FTX customers may get their money back.  

And that’s because bankruptcy lawyers have been very successful clawing back assets… and also some of the investments SBF made have done pretty well. 

Faux: And Sam's lawyers are arguing, “Well, in that case, this guy should not be sentenced like he was the architect of an eight billion dollar fraud and they're asking for a six and a half year sentence. 

Gura: The defense is arguing… if customers are likely to get their money back… who did SBF’s actions really hurt? They’re making the case that a harsh sentence isn’t justified. 

Faux: And this question of how much money was lost really is critical, because The sentencing guidelines depend on the amount of the fraud and the prosecution cited a number of other fraudsters in the sentences they got and noted how much money was lost in those frauds to say, well, in this case, we think even longer sentence would be appropriate.

Gura:  But what Zeke and Max’s reporting concludes, and what prosecutors have argued in court, is that’s just not how this works. 

Faux: The weird thing is that I. Just because the money has been found now, it doesn't mean that the fraud didn't happen. And the defense had actually tried to introduce this argument during the trial. And the judge had ruled before the trial, he didn't think that that was relevant. And he actually had sort of a biting put down of this argument. And he told Sam's lawyers trying to say that the money has now been found, it would be like if you robbed Fort Knox, you went and bought a lot of lottery tickets, you hit the lotto, and then you said it meant that you shouldn't be found guilty of, you know, breaking into the fort and stealing the gold bars. So now they're trying that argument again. Maybe it's a, maybe the judge will find it more relevant at sentencing, but he seemed pretty skeptical of it before.

Gura: There were people then who thought the collapse of FTX and SBF’s conviction could spell the end of crypto. But today, the world of bitcoin is booming again. 

Chafkin: I honestly don't think it, it makes any difference to what's happening in crypto because what is going on in the crypto industry? It is good times are happening, you know, and, and it's not just that the prices are going up, you have  industry players, you know, going on TV. And, and writing huge checks to members of Congress and political candidates all trying to essentially make this industry less regulated than the one that, you know, allowed for crimes. It's kind of wild how, how successful the industry has been at sort of cutting itself off from the bad actors. And that's their argument, right? Their argument is that, “Hey, we've gotten the bad actors out, this is, you know, now we're ready to build strength on strength or whatever, and it's clean and, and, and, like, giddy up.”

Gura:  Prosecutors said they wanted this case to send a message. The length of the sentence the judge imposes will determine how powerful it will be. But as Max said, many in the crypto industry have moved on – Bitcoin is back, trading near record highs, and it’s unclear how much that message will resonate. What is clear … is the three of us – Max, Zeke, and I – have an early bedtime before we go back to the courthouse one more time. 

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