the money game

These Skeptics Saw ‘Scam Bankman-Fraud’ Coming

Bankman-Fried was “dirty and rotten to the core,” according to short seller Marc Cohodes, one month prior to FTX’s implosion. Photo: Alex Wong/Getty Images

There is a stereotype — often accurate — of a successful Silicon Valley investor: Vested with both Patagonia and series-A wealth, this venture capitalist has dispensed with the drudgery of dour Wall Street concerns (balance sheets and the like) and instead sees the world through a sunny California lens where business is life and life is people and the best businesses are produced by the few visionary founders able to grasp and embody that — Steve Jobs, Mark Zuckerberg, Jeff Bezos, and so on. But, of course, these founders’ ideas could only become realized with a few billion dollars of other people’s money. For the VC, finding one of these rare, transformative individuals is at the heart of everything they do — the quest has almost a spiritual significance. It is changing the world, and it is getting extremely rich in the process. (The nine- or ten-figure payoff is just the universe saying you backed the right founder.) Up until this month, Sam Bankman-Fried, founder of the wildly successful FTX crypto exchange and an associated hedge fund called Alameda Research, was on his way to the top of tech’s Mount Olympus: He was “the J.P. Morgan of crypto,” “the next Warren Buffett,” a man with the influence to keep the rule-makers at bay while reinventing money itself, and in turn liberating the world’s 8 billion people to enjoy a newfound financial freedom. (All that for a small service fee.) Billionaire? This guy was going to make a trilly.

It was Silicon Valley’s narrative, but it had remarkable buy-in across finance, media, politics, and even among average people around the world — millions of whom put their savings on FTX (and have now lost it). There were not many Sam Bankman-Fried doubters out there.

But there were a few. A small, loosely connected group of investors and researchers saw the broader economic carnage in crypto markets in the first half of 2022 and asked the difficult, if retrospectively obvious, question: How did this one guy have so much money when everyone else in his industry was going broke? What Bankman-Fried (allegedly) did was old-fashioned fraud — stealing his customers’ deposits on FTX, the crypto exchange he founded, and spending and investing it for his own ends. But that stark fact remained more or less hidden until this month, in no small part because in the world of crypto, where down can often feel like up and people bring religious levels of conviction to their investments (or non-investments), it’s often very hard to know what’s real. Sure, there have been plenty of skeptics who’ve dismissed crypto overall as a scam, but what made Bankman-Fried so noteworthy was his ability to win over those skeptics — he was a plausible figure for taming this Wild West market and making a lot of people rich in the process. To be skeptical of the shaggy boy wonder wasn’t just having a dim view of crypto, it was to be against a better world.

“When you hear of a 30-year-old guy with $10 or $11 billion, you pay attention, because most people like that, in my mind, are special, right?” said Marc Cohodes, a short seller who’s made his career betting against fraudulent companies. “So when I started paying attention to this guy, he said a lot of words, but nothing made any sense.” Case in point: the Bankman-Fried origin story. The way Bankman-Fried tells it, he figured out how to buy bitcoin in the U.S., where it was cheaper and easier to get, and then sell it in Japan and Korea, where prices were higher and there were more barriers to foreigners. (Apparently, he had a friend in Japan who could open an account for him.) But there were too many other questions that Cohodes, who’s been an investor for decades, couldn’t square. “Where’d you get the couple hundred million to do this trade, which is a complex trade?” Cohodes asked. The fact that Bankman-Fried didn’t have a mentor and spent no serious time at a major Wall Street institution heightened his suspicions. “There was nothing ever specific about him that he could articulate that made me think, Ah, that makes sense.”

A video of Cohodes declaring, about a month before FTX blew up, that Bankman-Fried was likely “dirty and rotten to core” has been making the rounds on Twitter as proof that there were some financial observers who saw the signs:

Now the rot is in plain view. On November 16, Vox published what will likely be the defining interview for Bankman-Fried, where he reveals a version of himself that few people had ever seen before: one who was contemptuous of all regulation, who mocked one of his own former co-founders for having ethical concerns, who saw his own philanthropic pledges as “this dumb game we woke westerners play where we say all the right shibboleths and so everyone likes us.” The next day, the current FTX CEO, John J. Ray III — who’d restructured Enron some 20 years ago — further popped the aura of invincibility around Bankman-Fried and his company, referring to them as “a very small group of inexperienced, unsophisticated, and possibly compromised individuals” in bankruptcy filings. The picture emerging now is one of a giant pile of money that Bankman-Fried had no control over, except to funnel it into his own personal fortune.

Being a skeptic is a lonely job. In Virgil’s Aeneid, Poseidon summoned snakes to tear apart Laocoön for trying to warn the Trojans that the wooden horse the Greeks rolled up to Troy’s gate was a ruse. These days, crypto doubters are more likely to be swarmed with tweets smearing them for spreading FUD (“fear, uncertainty, doubt”) or snarking that they’re NGMI (not gonna make it). But for anyone looking with clear eyes, the red flags were there. In 2019, a group calling itself Bitcoin Manipulation Abatement LLC sued Alameda Research for market manipulation, though the suit was dismissed. Two years later, another crypto-finance company accused the hedge fund of pumping and dumping its digital currency, though Alameda disputed it did anything wrong. Of course, while these do now look like warning signs, they were not at the level of the self-dealing that would ultimately cause FTX to implode, and the fact that they never went anywhere reinforced SBF’s aura as the markets went up and up and up in 2020 and 2021.

This year has been a lot different. While last year was a party — who wouldn’t go a little nuts with bitcoin peaking at $69,000? — the fun really came to an end in April, when a pair of digital currencies called TerraUSD and Luna collapsed, wiping at $60 billion and shuttering one of the biggest crypto hedge funds in the market, Three Arrows Capital. Bankman-Fried all of a sudden became a lender of last resort, buying up or lending money to industry players that were left illiquid or insolvent by the turmoil. The conventional wisdom was that this was the beginning of SBF’s imperial phase, and for a few months the comparisons to the world’s greatest investors seemed plausible. Except — what if the motivation for stepping in to save those other companies was more about self-preservation than expansion? “I thought it was very clear that he was trying to get other people essentially to save him money,” said Cory Klippsten, CEO at financial services firm Swan Bitcoin, who’s been calling out Bankman-Fried for months on Twitter. “If he could put some money into some of these other firms that he had exposure to and use other people’s money to go and prop them up, he could get his money out.” In short, Klippsten came to believe his grand gestures were motivated by carefully concealed financial weakness, not financial strength.

Previous crashes have had their big winners: Michael Burry pulled off his Big Short in 2008; George Soros saw the Bank of England careening toward the disaster. Ishan Bhaidani, a crypto investor who writes The DeFi Roast newsletter, shorted FTX’s native digital currency in October, on skepticism about FTX’s dominance and Bankman-Fried’s scattered attention, among other reasons. He told me he made $45,000 on a $9,000 bet, using ten-times leverage, but still has “very mixed” feelings about being right. “It’s hard to feel great when many top firms, projects and investors were misled to this extent,” he told me. The biggest winner, though, appears to be Changpeng Zhao, the head of another crypto exchange, Binance, and Bankman-Fried’s personal rival. The story between Zhao and Bankman-Fried goes back years, with the former being an early investor in FTX, only to have their relationship crumble as the latter sought more influence in Washington. Last year, Zhao pulled out, getting paid partially in FTX’s own digital currency, FTT. This month, those huge FTT holdings gave him the means to kneecap FTX by driving down the price of the asset that was keeping the company’s balance sheet afloat. It’s not clear how long CZ had his doubts about FTX, but after a revelation by industry publication CoinDesk that Alameda might be insolvent, he publicly cast doubt on FTX and set off the cascade that ended with bankruptcy a few days later. CZ said he didn’t sell off the specific cryptocurrencies that funded Bankman-Fried’s empire, but that doesn’t mean he didn’t profit in other ways. (Cohodes and Klippsten said they didn’t make money off the crash.) Like most exchanges, Binance makes money whether people buy or sell, and lucky for Zhao, there was a surge in traffic as he consolidated Binance’s standing as the world’s biggest and most liquid crypto exchange. (He’s since said that he’s going to put together a fund to rescue companies that are verging on collapse from the fallout of Bankman-Fried’s bankruptcies. Sound familiar?)

Still, spotting these kinds of signs can be incredibly difficult. Kevin Zhao was one of the most prominent investors to have predicted the April crash of TerraUSD and Luna. But he missed this one. “For the record, yes, we did have significant funds stuck on FTX,” he tweeted from the account of his hedge fund, Galois Capital. “Sorry I was wrong. I thought I was more clever than I actually was.” Travis Kling of Ikigai Asset Management, whose fund also has client money stuck on FTX, lashed out: “I’m at a loss for words at the depth & breadth of the pieces of shit that permeate crypto. So many fucking sociopaths were granted the opportunity to do so much damage.”

It’s not like this is the end of crypto all of a sudden — Klippsten and CZ aren’t leaving the market. (Cohodes was more ambivalent about the question when I spoke with him.) Bitcoin isn’t worth that much less than what it was a few weeks ago. But there’s a palpable change in tone on Twitter, where the former FTX chief is more likely to be called “Scam Bankman-Fraud.” The story has shifted to favor the skeptics rather than the Big Ideas people trying to change the world. “I did this one specifically for society,” Cohodes said, “to get this horrifically bad thing off the planet.”

Update: This story was updated to include Ishan Bhaidani’s successful short of FTX’s cryptocurrency, and to clarify that Klippsten’s business is a financial services firm focused on bitcoin.

These Skeptics Predicted Sam Bankman-Fried’s Collapse