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

This is Part One of a three-part series interview with William Quigley, a cryptocurrency and blockchain investor and co-founder of WAX and Tether, conducted by Selva Ozelli exclusively for crypto.news. Part One is about Sam Bankman-Fried’s and Changpeng Zhao’s prison sentences. Part Two is about cryptocurrency and banking. Part Three is about the future 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.

After graduating from the University of Southern California with a degree in accounting and an MBA with distinction from Harvard Business School, where I was appointed a Kauffman Fellow, I worked for Arthur Andersen as a Senior Consultant with their Financial Services Group (“Andersen”). At Andersen, I assisted banks and S&Ls in their asset securitization and risk segmentation efforts. I also advised Japanese banks on their US market entry strategies.

After Andersen, I spent seven years in business planning and new venture roles at The Walt Disney Company (Disney) the world’s largest consumer products licensor. My tenure at Disney included finance and operational roles at Euro Disney, the Disney Store retail chain, and Disney Consumer Products. I also oversaw strategic planning and financial operations for Disney Licensing.

After Disney, my career as a technology-focused venture capitalist began when I became the  Managing Director at Idealab! Capital Partners (“ICP”), the world’s first consumer Internet venture capital firm that was an early investor in some of the leading Web1 era companies including PayPal, Netzero, MP3.com, and Goto.com. I later co-founded Clearstone Venture Partners, a $700M early-stage focused venture capital firm where I concentrated my investments on communications and consumer technology companies. And I also co-founded and co-managed Crypto Currency Partners, a blockchain equity investment fund where I incubated and invested in more than 30 Bitcoin, blockchain, and cryptocurrency-related investments with early notable investments in Coinbase, Kraken, Bitfury, Authy, ChangeTip, and Circle.

I co-developed the first crypto derivative used to trade pre-release Ethereum. I also co-founded many other transformative crypto companies, including Tether, the first fiat-backed stablecoin and the world’s most traded cryptocurrency, and GoCoin, a pioneering crypto payments processor. I co-founded WAX, a blockchain built for video game and NFT virtual item trading.

I was also an early investor in PayPal, and highly doubt the payments giant will bring much innovation to the stablecoin space.

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. 

Sam Bankman-Fried swiftly fell from the top three crypto titan spots with a personal net worth once exceeding $26 billion after CryptoX unveiled a faulty Alameda balance sheet in November 2022. This, in turn, resulted in industry-wide panic and concern about FTX, a centralized cryptocurrency exchange, and its liquidity. FTX traded in highly leveraged spots, derivatives, options, and products.

As the story unraveled, we learned that FTX’s losses were much, much bigger than many originally thought: The executives behind the now-bankrupt FTX and Alameda stole over $10 billion in customer funds during 2021, a crypto and NFT bull market. Sam Bankman-Fried was found guilty of fraud for stealing at least $10 billion from customers and investors , and in March 2024, he was sentenced to 25 years in prison and ordered to pay $11 billion in fines. Sam Bankman-Fried has appealed his prison sentence.

I would like to touch upon multiple factors that might have contributed to Sam Bankman-Fried’s fraud. Sam is a Massachusetts Institute of Technology (MIT) graduate with a degree in physics and a minor in mathematics; he is a former Jane Street Capital international exchange-traded funds (ETFs) trader. He had slim to non-work experience in crypto, blockchain or derivatives when he founded both FTX and the crypto trading company Alameda Research in 2018. I would like to point out that ETFs are not derivatives; they are investment funds that were only approved by the Securities Exchange Commission (SEC) to invest in BTC at the beginning of this year.  Therefore, SBF was ill-equipped to manage a highly leveraged crypto exchange and a hedge fund, which declared Chapter 11 bankruptcy on November 11, 2022, marking one of the biggest financial frauds in American history. The failure of FTX shook the volatile crypto market, which lost billions at the time, falling below a $1 trillion valuation.

SBF’s quick rise to fame in the crypto industry was fueled by the media, influencers, and celebrity spokespeople who made him into this investment genius, likening him to JP Morgan and Warren Buffet, who dressed like a beach bum with unwieldy hair. You could say that mainstream media influencers were complicit in SBF’s fraud, providing him with extensive coverage even post-FTX bankruptcy. Think about it: Michael Lewis’s book, “Going Infinite: The Rise and Fall of a New Tycoon,” was released on October 3, 2023, the same day the criminal trial against Sam Bankman-Fried began in federal Manhattan court. 

In June of 2023, dozens of lawsuits against Sam Bankman-Fried, his colleagues, FTX investors, and celebrity spokespeople, influencers were combined into one legal proceeding, with many more lawsuits still waiting to be filed. Some of these class action suits are being settled. And Sam Bankman-Fried has agreed to help FTX customers go after celebrity promoters and influencers by flipping.

But investors of FTX were also complicit in Sam Bankman-Fried’s fraud. These FTX investors included Binance and the best of the best venture capital firms such as NEA, IVP, Third Point Ventures, Tiger Global, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Temasek, Thoma Bravo, Paradigm Operations, and others. These investors must not have done any due diligence on the financial statements of FTX and Alameda Research, which were likely prepared on “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. 

These venture capital firms employ young, untrained people who know nothing about crypto, derivatives, financial risk, blockchain, or who Satoshi Nakamoto is—last month, U.K. Judge James Mellor decided that Craig Steven Wright apparently is not Satoshi Nakamoto—as the industry is very young. These young, untrained venture capitalists who can’t even read a financial statement were impressed with Sam Bankman-Fried based on the intensely orchestrated media hype about him. 

For example, I read that when venture capitalists at Sequoia Capital, the legendary firm that funded Apple, Google, and Instagram, met Sam Bankman-Fried, he did not so much to talk about the technology or the financial statement risk exposure of his crypto exchange, FTX, or about his hedge fund, Alameda Research. What SBF talked about was bananas—the yellow fruit. Apparently, Sam Bankman-Fried said things like, “I want FTX to be a place where you can do anything you want with your next dollar. You can buy Bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.” Frankly, if I heard this type of gibberish in an investment meeting, I would start running for the hills. Instead, the venture capitalists at Sequoia loved what Sam Bankman-Fried was saying and promoted FTX and its services to induce customers to use the FTX platform for crypto trading and investing to increase the value of their significant investments in FTX.  

So, the venture capitalists backing and active support were integral to FTX’s fraudulent scheme.  The VCs invested in FTX, knowing that the company would use the funds to conduct misleading activities—including banana trading—violating the law. And they actively supported these efforts by promoting FTX through their own websites, social media feeds, public interviews, and appearances at industry events, representing to investors and consumers that the FTX platforms were trustworthy and safe.

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.

Yes, I read that Sam’s parents, Stanford Law School professors Joseph Bankman and Barbara Fried, are saying that FTX’s lawsuit is seeking “to capitalize on the sheer fact” that their son was a founder and executive of FTX without ever proving that they held power over the company or were aware of problems that led to its collapse while accepting ill-gotten gain payments amounting to $26 million from their son without any questions. So far, Sam Bankman-Fried’s parents have not been charged with any crime relating to FTX, Alameda Research, or their son’s criminal conduct. If Sam were my son, as a parent in the legal profession, I would have at least asked how he was able to gift me $26 million in cash and real estate and maybe asked a few questions about FTX’s apparent role as a money-laundering operation.

However, I am not a lawyer, especially not one who teaches at Stanford Law. Nor am I the father of Sam Bankman-Fried. While stealing $10 billion in investor funds is not the same as killing teenagers in a mass school shooting, I would like to mention Oakland County prosecutor Karen McDonald, who did something extraordinary and first of its kind after saying, “I am angry. I’m angry as a mother. I’m angry as the prosecutor. I’m angry as a person that lives in this county”. She stood up at a press conference three days after a massive school shooting that killed four teenagers and injured seven and announced she would be charging the school shooter’s parents for grossly neglecting their parental duty by not averting the obvious danger their son presented—and so were directly responsible for the deaths in the son’s mass shooting. This prosecutor won her first-of-its-kind case. The parents of the mass school shooter were found guilty of involuntary manslaughter even without pulling the son’s gun’s trigger. These parents are the first US parents to be charged in a mass school shooting committed by their child.

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?

Binance founder Changpeng Zhao, with an estimated $33 billion fortune, pleaded guilty and stepped down from Binance as part of a settlement with the US Department of Justice in November of 2023. As part of the agreement, CZ waived the right to appeal any sentence up to 18 months in prison. CZ also agreed to pay a fine of $50 million. Binance agreed to pay $4.3 billion in fines.

While prosecutors had requested three years of prison time for CZ, double the sentencing guideline of 18 months, because the “scope and ramifications of CZ’s misconduct at Binance were massive.” Today, Changpeng Zhao found out that he will serve four months of  jail time for violations of the Bank Secrecy Act during his time at Binance which seems minimal.