• Show Notes

Dear Reader,

A sentencing hearing for Sam Bankman-Fried is scheduled for March 28, 2024. Bankman-Fried, you may recall, was the founder and head of the cryptocurrency exchange FTX. When the exchange could not pay all the customers who wanted to cash out their holdings, the company was forced into bankruptcy, and Bankman-Fried was charged and ultimately convicted of federal fraud offenses. The government presented evidence at Bankman-Fried’s month-long trial that he was funneling money from FTX to Alameda Research, his cryptocurrency trading firm. At trial, Bankman-Fried argued he had no intent to commit fraud and that he was clueless about how the money was being passed back and forth between the two entities. The jury sided with the government, so Bankman-Fried now faces sentencing.

Federal prosecutors are recommending a sentence between 40 and 50 years, and the U.S. Probation Department is recommending a sentence of 100 years. I hope these recommended sentences give you pause because it should not be considered normal for a 32-year-old who was convicted of a first-time, nonviolent offense to be contemplating what is effectively a life sentence. Yet that kind of astronomical recommendation is all too common under the federal Sentencing Guidelines, and the Bankman-Fried case is a good lens for viewing some of the major problems with federal sentencing practices.

The government claims that more than $8 billion of customer money was misappropriated from FTX, and that Bankman-Fried is also responsible for a $1 billion loss to FTX’s equity investors and more than $1 billion in losses to Alameda’s lenders. Bankman-Fried argues in his sentencing memorandum to the court that the real loss amount is zero because debtors’ counsel in the bankruptcy proceeding have indicated that those who can prove their losses are expected to get back their money. The amount of loss will be a key aspect of the sentencing because the Sentencing Guidelines place disproportionate weight on such amounts in cases of fraud, and the loss amount is the main driver in the government’s sentencing recommendation. A similar dynamic exists in drug cases, where the quantity of drugs involved plays the greatest role in establishing the recommended sentence.