Mike Kimelman: Crypto, FTX, and Life After an Insider Trading Conviction

We were honored to host Mike Kimelman, a former M&A lawyer and hedge fund founder who served 21 months for insider trading, as our December 2022 White Collar Support Group Tuesday Night Speaker Series presenter. Mike came to us three weeks after FTX filed for bankruptcy, to explain what had actually happened inside the exchange. You can watch the full recording above.

Two things put Mike in a room of one here. He was offered a seat in FTX early, when the company was valued at about $40 million, and turned it down because the founder’s story did not add up. He had also been pulled out of his own house in handcuffs at five in the morning over a single $30,000 trade. If you are sitting with your own case and wondering why the rules bend for some people and not for you, this is your hour.

How was FTX ever worth $40 billion?

Almost every account that month started with the collapse. Mike started two years earlier, with the founding legend. Sam Bankman-Fried had been a junior analyst at Jane Street before leaving to start a hedge fund called Alameda Research, and the story of how Alameda got rich was the Kimchi trade, an arbitrage that bought a coin cheap in the United States and sold it higher in Asia. Mike traded for a living, and that is the sentence he could not get past. Spreads that wide close fast, because everyone piles into free money. Tens of millions sitting on the table for one young fund is not how markets behave.

From there the structure did the rest. Sam ran a hedge fund and an exchange under one roof, without the separation traditional finance was forced to rebuild after 2008. Then the exchange issued its own token, FTT, and carried it on its own balance sheet.

So he took tokens that were worth, you know, in reality, if you had to sell them, probably not that much, but he took a lot of the supply off and then bid it up so that these things were now worth 20, 30 billion dollars at one point.

That is how a company is worth $40 billion on paper and nothing in practice. Mike spends the middle of the hour on what happened when Luna, Three Arrows Capital and then Changpeng Zhao each took a turn pulling at that thread.

Where a bad business becomes a crime

Mike is careful here, and the care is the point. Bad valuations, an inflated balance sheet, controls so poor the restructuring lawyer brought in from the Enron bankruptcy said he had never seen anything like it: none of that, standing alone, is the crime, though getting a forensic accountant into the documents early is how anyone finds out which side of that line their own numbers fall on.

He puts the line in exactly one place. Customer money is supposed to be segregated and custodied, and it cannot be touched. Once it is used to fill a hole somewhere else in the family, you are in wire fraud territory in any market, and fund managers get years for spending investor money on far less. Anyone who sat through the Women’s White Collar Defense Association panel on restitution and forfeiture will recognize the distinction on sight.

He also lays out four explanations for how an unknown young trader raised billions and had senators fawning over him, running from an extraordinary run of luck to a money laundering channel to a business built so somebody could watch everyone who walked through it. He labels all four as speculation. Hearing him weigh them is the most interesting stretch of the hour.

Why a $30,000 trade drew more force than the FTX collapse

Then Mike does the arithmetic a general audience would miss. One count of insider trading on a fifth-hand tip, passed along by a partner who came to him from Raj Rajaratnam’s Galleon. A government that offered him a plea with no jail and no fine and told him plainly it did not want him in the case, the kind of offer P.G. Sittenfeld also turned down before a jury convicted him on two of six counts. He went to trial anyway, sat between his two partners while seven cooperating witnesses testified, and lost, with Occupy Wall Street happening down the road.

this guy had a lot of red flags on him and I choose to ignore them because I was greedy and wanted to benefit from his information and from his connections in the space.

That is not a man asking for sympathy, which is why the comparison lands. Three weeks after the largest failure in his industry’s history, the founder of FTX had not been arrested, had not been charged, and was still giving interviews, while Maxine Waters invited him to testify in a tone Mike described as something other than adversarial.

Mike’s read on why one case moves at five in the morning and another does not move at all is the reason to watch. Tom Hardin gave our group the view from the other side of that same era of insider trading prosecutions, and Amy K. Nelson the view from four years as a federal target the government never charged at all.

About Mike Kimelman

Mike Kimelman practiced mergers and acquisitions at Sullivan and Cromwell, then moved to the buy side, working up from analyst to portfolio manager before founding a fund that ran roughly $250 million at its peak. He was convicted at trial on one count of insider trading, sentenced to 30 months, and served about 21, including time in a Bronx halfway house. He wrote Confessions of a Wall Street Insider about that case, and later co-wrote Mastering the Basics of Bitcoin and Crypto with Charlie Shrem, the former Bitcoin Foundation head who served his own sentence at Lewisburg, where Mike had done his time. He is a co-founder at Dekryption Labs, and he found our group after his sentence ended.