Was FTX Collapse as Bad as Enron? In sentencing SBF, Judge Kaplan Says Yes

By: Jeffrey Hamlin

On Thursday, March 28, 2024, 32-year old Sam Bankman-Fried was sentenced to 25 years in prison for his role in one of the largest financial frauds in U.S. history—a fraud perpetrated through two cryptocurrency entities he founded—FTX and Alameda Research. In late-2023, a jury convicted him on various conspiracy and substantive counts for wire fraud on FTX’s customers, securities fraud on FTX’s customers and investors, wire fraud on Alameda Research’s lenders, and money laundering.

According to the jury, Bankman-Fried induced customers to deposit fiat and cryptocurrency into accounts with FTX, which the customers could use to buy and sell cryptocurrencies, convert dollars to cryptocurrency and vice versa, and trade in crypto derivatives. Bankman-Fried assured customers that their assets were safe and would not be used by FTX to make risky loans or other investments. Jurors found that, despite these promises, Bankman-Fried and his codefendants had FTX customers deposit funds into accounts owned by FTX’s sister company, which was outside the U.S. and, therefore, subject to less regulatory scrutiny. As a result of the misappropriation, FTX customers were unable to withdraw their funds on demand and FTX, Alameda Research, and a few related companies went bankrupt. As a result of these crimes, Bankman-Fried’s victims allegedly lost more than $8 billion, making it one of the top financial frauds of the decade.

Although the transcript of the sentencing hearing is not yet publicly available, it appears that sentencing judge Lewis A. Kaplan imposed a guidelines sentence based on a loss amount that well exceeded $550 million, the amount that corresponds to the maximum enhancement of 30 points available for loss. By all accounts, Bankman-Fried had no criminal history which gave him a criminal history score of zero and put him in Criminal History Category I for purposes of the guidelines. With a base offense level of 6, a 30-point enhancement for loss, and additional points for various aggravating factors, which likely included 2 points for the number of victims, 2 points for fraudulent activity during the course of a bankruptcy, 2 points for use of sophisticated means, 2 points for his role in the offense, and 2 points for obstruction of justice. Without more, these enhancements would have given him an adjusted level of 46, a number that exceeds the maximum level by 3. The guidelines recommend a life sentence for defendants with no criminal history and an adjusted sentencing level of 43.

Judge Kaplan apparently discounted the recommended sentence by roughly half, opting for an aggregate sentence of 25 years, rather than 50 years or more. He may have done so on the ground that Bankman-Fried will likely complete his sentence when he is in his mid-fifties, at which point he will be able to live out his years as a free man.

The sentencing judge is tasked with imposing a sentence that is sufficient, but not greater than necessary to achieve the purposes of sentencing—i.e., incapacitation, deterrence, punishment, and rehabilitation. The guidelines are supposed to assist courts in finding that sentence, while minimizing unwarranted sentencing disparities nationwide, among other things. It is worthwhile to ask whether those goals were achieved in Bankman-Fried’s case? The parties likely think not: prosecutors argued for a sentence twice as long (i.e., 40 to 50 years), and Bankman-Fried argued for a sentence one-fifth as long (i.e., 5.25 to 6.5 years) relative to the sentence imposed. But a review of other high-profile financial-fraud cases resulting in a loss amount comparable to $8 billion suggests Judge Kaplan had precedent on which to rely.

• Jeffrey Skilling was sentenced to 24 years based on estimated losses upwards of $70 billion.
• Bernard Madoff was sentenced to 150 years based on $13 billion in losses.
• Bernie Ebbers was sentenced to 25 years based on the $11 billion dollar WorldCom fraud.
• Robert Stanford was sentenced to 110 years based on $5.9 billion in losses.
• Lee Farkas was sentenced to 30 years based on $2.9 billion in losses.

The foregoing cases are listed in descending order of the loss estimates and show that, at least at a glance, the sentence imposed on Bankman-Fried is not beyond the pale, even if one thinks that a lesser sentence would be more appropriate given the facts of that case.