How’s this for a modern-day version of the sitcom hit “Friends?”:  A group of tech nerds are given $2 billion by some of the smartest people in Silicon Valley and Wall Street to create a crypto exchange. Instead of living in a Manhattan apartment they live in a $30 million, five-bedroom penthouse in a luxury residential complex in the Bahamas. To spice things up, some of these friends formerly dated each other.

The group’s leader, the 30-year-old son of Stanford law professors who are luminaries in their respective fields, professes to be an altruist, hoping to become a trillionaire so he can donate his riches to charity. In the interim, he became the second biggest contributor to the Democratic Party, including at least $5 million for President Biden. The woman who was instrumental in helping the leader raise considerable funding is the daughter of a former Buddhist monk with an undergraduate degree in human biology who gave a keynote address at her 2015 Brown University graduation.

With such formidable financial backing, powerful political connections, and selfless goals, what could possibly go wrong?

If the proposed sitcom seems far-fetched, then you obviously haven’t been following the collapse of FTX and the exploits of Sam Bankman-Fried, once the toast of the crypto world who amassed a fortune at one time exceeding $26 billion thanks to FTX’s success as a leading exchange for digital currency. Bankman-Fried’s current net worth is uncertain, as much of his fortune, and that of others who trusted him, has gone poof!

As someone who feared I wasn’t smart enough to understand cryptocurrency, the collapse of FTX has led me to believe that my financial intellect might be a tad superior to what I give myself credit for. The crypto industry always struck me as being run by cocky and utopian tech nerds with no experience running successful financial services businesses, let alone a detailed understanding of the inherent risks of unregulated virtual currencies manufactured by elaborate computer systems that can easily be hacked.

The sudden and dramatic fall of FTX confirms my instincts were correct. The story is still unfolding but let me walk you through what’s already publicly known. Don’t be intimidated because the story involves cryptocurrency; you don’t need to understand the underlying product to appreciate the magnitude of the scandal.

Who is Sam Bankman-Fried?

Sam Bankman-Fried could be described as a poster boy for white privilege. He is a native Californian, the son of Stanford law professors Joseph Bankman and Barbara Fried, a powerhouse legal couple. Bankman-Fried is known as SBF, so that’s how I’ll refer to him going forward.

The elder Bankman, a Yale law graduate, is a renowned tax law expert, specializing in arcane subjects such as tax progressivity, consumption tax and the role of tax in the structure of Silicon Valley start-ups. Bankman’s Stanford bio says he’s also a clinical psychologist who teaches mental health law and writes about the intersection of law and psychology. Bankman has developed a course on anxiety psychoeducation that has been taught at Stanford and Yale law schools and written on how insights from social psychology might be used to reduce tax evasion.

Fried’s Stanford bio says her scholarly interests lie at the intersection of law, economics, and philosophy. She has written extensively on questions of distributive justice, in the areas of tax policy, property theory and political theory. Fried, who holds undergraduate, graduate, and law degrees from Harvard, is a three-time recipient of an award given for excellence in teaching. She is co-founder of a political fundraising group for progressive candidates.

SBF graduated from MIT with a degree in physics and mathematics and worked at a respected trading firm called Jane Street Capital known for attracting brainiacs and rumored to be paying interns $16,500 a month. In 2017, SBF founded Alameda Research, a trading firm focused on digital currencies. Two years later, he founded FTX, an exchange for trading crypto currencies.

Alameda and FTX were originally headquartered in Singapore, but the operations were subsequently moved to the Bahamas, where crypto regulation is much laxer.

Get to the “Friends” stuff already!

According to this joint report by Fortune and the trade publication CoinDesk, SBF was surrounded by an inner core of about 10 people whom he met at Jane Street or MIT. All 10 are, or used to be, paired up in romantic relationships with each other. That includes Alameda CEO Caroline Ellison, who at times dated SBF.

SBF resting/@SBF_FTX/ Twitter

Among SBF’s nine housemates are FTX co-founder and Chief Technology Officer Gary Wang, FTX Director of Engineering Nishad Singh and Ellison. The remaining six are also FTX employees.

“The whole operation was run by a gang of kids in the Bahamas,” CoinDesk quoted an anonymous source.

According to this profile in eFinancial careers, Ellison, 28, graduated from Stanford in 2016 with a bachelor’s degree in mathematics and worked as a junior trader at Jane Street for 19 months before joining Alameda. In a podcast two years ago, she said that she regretted not gaining more experience at Jane Street but when she arrived at Alameda quickly discovered that she had “kind of more trading experience than a lot of Alameda traders.”

Ellison said she found herself making “a bunch of decisions,” a lot of which were “really uncertain” and “terrifying.”

FTX’s chief operating officer is Constance Wang, who the trade publication asiaMarkets reported previously worked at Credit Suisse as a “risk manager” among other jobs between 2016 and 2018. Wang, who graduated with a finance degree from the National University of Singapore, reportedly left Credit Suisse because she wasn’t enjoying compliance training.  

The FTX grownup appears to be Mark Wetjen, the head of policy and regulatory strategy, who served as commissioner on the Commodity Futures Trading Commission under former president Barack Obama. Wetjen accompanied SBF to some meetings with White House staffers in April and May, according to the Washington Free Beacon.  

Who funded the romper room gang?

According to Forbes, FTX received its funding from some well-known venture capital funds, including Sequoia Capital, SoftBank, and Paradigm. Other investors included Singapore-government owned investment firm Temasek, Tiger Global Management and the Ontario Teachers’ Pension Plan. By January of this year, FTX had a $32 billion valuation.

Insider reported that SBF’s point person at Sequoia was Michelle Bailhe Fradin, whose LinkedIn bio says joined the firm as a partner in 2020 after working as a “private equity associate” at Hellman & Friedman for a year. Bailhe Fradin also worked at Google and McKinsey.

Bailhe Fradin graduated from Brown University in 2015 with a degree in human biology and delivered a keynote address at her graduation. Bailhe Fradin, who was raised by a former Buddhist monk and a banker, has given multiple media interviews on crypto, an expertise her bio says she developed while working as a team lead at Google.  

According to a fawning FTX profile Sequoia until recently featured on its website, when SBF did a Zoom call to pitch his business to the firm he was playing ‘League of Legends,’ an online battle game. Despite the distraction, he wowed those who attended the meeting.

“We were incredibly impressed,” Bailhe Fradin said in the article. “It was one of those your-hair-is-blown-back type of meetings.”

What went wrong?

According to the Wall Street Journal and other outlets, FTX lent Alameda $10 billion dollars of customer assets to fund risky bets that reportedly went south. FTX about a week ago was hit with $5 billion in customer withdrawal requests, but the firm didn’t have the money. FTX has declared bankruptcy and SBF has resigned. The Journal reported over the weekend that FTX was hacked after filing for bankruptcy and that more than $370 million worth of crypto funds appears to be missing. The Department of Justice and the SEC are reportedly investigating.

It’s a telling comment on the crypto industry that Binance emerged as FTX’s potential savior. Readers of this blog know Binance, which I wrote about last month after the company  disclosed that scammers stole $580 million of its digital currency, exploiting “an exploit” in the company’s system that led to extra production of the exchange’s dedicated virtual monies., another exchange, mistakenly transferred more than $10 million to a customer’s account but it took more than seven months to discover the error.

Perhaps crypto has some potential benefits, but they will never be realized until some experienced grownups step up to the plate and safeguards against what appears to be an industry rife with management wrongdoing and ineptitude.

For now, I’m sticking with Fidelity.

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