Sam Bankman-Fried, founder of the collapsed exchange FTX, always stood apart from other cryptocurrency entrepreneurs, and it wasn’t for his baggy shorts or taste in videogames.

Both his parents, as Bankman-Fried would note in meetings with Washington policymakers, are professors at Stanford Law School. Their reputations were a credential to their son as he grew his crypto empire, even to those inclined to see little value in the industry.

FTX failed last month, brought down after revelations that it used customer funds to prop up a sister trading firm. The company is in bankruptcy proceedings. Regulators and prosecutors are investigating. Customers don’t know if they will ever get their money back. And now Bankman-Fried has been arrested in the Bahamas.

Joseph Bankman and Barbara Fried remained by Bankman-Fried’s side — as legal advisers, one person familiar with the matter said, but mainly as parents to a son who is in deep trouble.

Before FTX’s collapse, Bankman was a paid employee of the company for almost a year. He joined his son in meetings with Washington policymakers, expanded its philanthropic endeavours and helped connect his son to at least one major investor. And when Bankman and  Fried visited their son in the Bahamas, where FTX is based, the company provided a place for them to stay.

They have been in the Bahamas with their son for more than a month, as the company’s problems have cascaded. They have told friends that their son’s legal bills will likely wipe them out financially.

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“We hope this gives us some wisdom,” Bankman said recently, according to people close to him. “Otherwise, it would be too hard to take.”

A spokeswoman for Bankman and Fried wouldn’t comment on whether they are giving their son legal advice. Their friends, some of them legal scholars themselves, have said Bankman-Fried’s frequent media appearances are a mistake that could put him deeper in legal jeopardy.

“They want him to protect himself, and he won’t,” said Larry Kramer, a former dean at Stanford Law and longtime family friend. “They’ve decided, ‘We’re not going to fight with our son.’”

Bankman-Fried was arrested in the Bahamas after the United States filed criminal charges, the Office of the Attorney General of the Bahamas said on Monday.

US authorities are likely to request Bankman-Fried’s extradition, the Bahamas attorney said. The US attorney’s office for the Southern District of New York said late Monday the government expects to unseal on Tuesday an indictment filed against Bankman-Fried.

On an FTX podcast in August, Bankman confirmed that he had become increasingly involved with FTX’s philanthropy over the past year. One project was figuring out how to get bank accounts and crypto wallets to unbanked Americans, he said.

Bankman said on the podcast that he started working with his son at Sam’s request.

“I think any parent would love to hear that,” Bankman said then.

Bankman helped his son find outside counsel for his crypto-trading venture, Alameda Research, in 2017, the year Alameda started, according to a person familiar with the matter.

There was certainly a need.

“I mean the company didn’t have any lawyers,” Bankman said in the August podcast. “So I think my utility there was pretty obvious.”

Bankman later served as a paid employee of FTX for 11 months, primarily focused on its charity efforts, the spokeswoman said. Ms. Fried wasn’t involved in the company, the spokeswoman said.

Bankman-Fried visited Washington often to lobby for the crypto industry. On several occasions, Bankman joined his son and his team for meetings with policy makers and other officials, people familiar with the matter said. Bankman didn’t contribute during the meetings, one former FTX executive said, but the team found his insights helpful.

Last year, Bankman spoke to Orlando Bravo, the private-equity titan. Bravo had been Bankman’s law student and the two remained friends. Bravo was interested in investing in FTX and Bankman helped connect him to his son, people familiar with the matter said. The discussions were reported previously by the Financial Times.

Bravo’s firm, Thoma Bravo, would later invest $130m in the upstart exchange.

In the Bahamas, FTX spent millions of dollars on housing for employees in exclusive beachside developments, The Wall Street Journal previously reported. FTX also bought a home that Bankman and Fried frequently occupied.

Reuters reported that Bankman and Fried were listed as signatories on one home in Old Fort Bay, a gated community.

“Joe and Barbara never intended to and never believed they had any beneficial or economic ownership in the house,” their spokeswoman said. “Over the summer, they requested FTX counsel and outside counsel take steps to clarify the company’s beneficial ownership of the house.”

They are no longer staying at the house, the spokeswoman added.

 Fried and Bankman met in the late 1980s, when they were both teaching at Stanford.

On campus, colleagues said, they would lend behind-the-scenes support in intradepartmental squabbles. Students, some of whom have gone on to become federal judges, Silicon Valley bosses and billionaire investors, repeatedly voted them their favorite teachers.

Fried co-founded a super PAC known as Mind the Gap, which aims to use statistical analysis to help determine which Democratic candidates to support financially. She has resigned as chairwoman, her spokeswoman said.

Bankman has pushed for a system where the government would perform the role of tax preparer for American workers. Tax preparers lobbied against it. He poured $35,000 of his own money into counter-lobbying in California.

“He said, ‘Look, Jay, I could remodel my kitchen, or I can do this on behalf of taxpayers,’” said Jay Soled, a professor at Rutgers Business School who has known Bankman for about 20 years.

Friends and colleagues said Bankman, who is also a clinical psychologist by training, abhors conflict. When discussions at the Bankman-Frieds’ Sunday dinner parties turned contentious, Bankman on occasion would step out of the room, friends said.

 “Joe likes people and wants people to be comfortable,” Kramer said.

Fried and Bankman raised their two sons on the Stanford campus, near a student house known for its vegan food and nude parties.

Fried and Bankman often spoke to their young sons as if they were adults and encouraged others to do the same, friends and colleagues said. While many of the other children would leave the table at the Sunday dinner parties to watch TV in another room, Sam and his younger brother, Gabe, usually stayed with the adults.

“As a kid I would talk, I think, as much with adults as I would with kids,” Bankman-Fried said in a recent interview with the Journal. “It was somewhat academic of an upbringing, but also somewhat relaxed.”

Matt Nass, whose father was also a Stanford professor, was a childhood friend of Sam’s. When Nass’s father died suddenly in 2013, Fried and Bankman offered him a place to stay. He lived with them for several years.

“From then forward,” Nass said, “I thought of them as parents.”

Several of Fried and Bankman’s friends said they rarely drew attention to their sons’ achievements.

“I literally had no idea about anything until [I saw] a big profile on Sam calling him the king of crypto,” said John Donohue, another Stanford Law professor.

FTX’s troubles, and Bankman-Fried’s central role, have reverberated through faculty lounges across the country. Last month, Stanford colleagues bristled when Bill Maher took aim at Bankman and Fried during a segment on his HBO show.

Maher noted essays by Fried that seem to categorise personal responsibility and blame as outdated. “You were raised wrong,” the comedian said, punctuating with a profanity.

In early November, as FTX’s problems spilled into the open, clients raced to pull their money from the struggling firm. Bankman-Fried told his parents that his businesses were in trouble.

Bankman phoned an old friend, David Mills, another Stanford Law professor who specialises in criminal defense: There was a run on his son’s firm, Bankman told him.

A few days later, Mills could see the writing on the wall for FTX and Bankman-Fried’s future. He called Bankman. “Sam needs lawyers, and desperately,” Mills told him, according to people familiar with the conversation.

Mills agreed to serve as a consultant to Bankman-Fried’s legal team, the people said.

As FTX’s future hung in the balance, Bankman tried to remain upbeat with his son and others at the firm, people familiar with the matter said.

When an FTX executive spoke to Bankman on 9 November about whether Binance, FTX’s big rival, would proceed with its plan to bail out his son’s exchange, Bankman remained hopeful.

Later that day, Binance said it wouldn’t acquire FTX after all, citing issues “beyond our control or ability to help.”

That week, other members of the legal team asked Bankman to try to persuade his son to step down as CEO. Bankman-Fried resigned on Friday 11 November, and FTX filed for bankruptcy.

Many FTX employees have since left the Bahamas. Bankman and Fried remain.

Bankman’s law class that was supposed to start in January has been postponed until the spring. Fried, who retired in September, hadn’t planned to teach this year. Their spokeswoman said she looks forward to teaching again in the future.

Write to Justin Baer at justin.baer@wsj.com

Miriam Gottfried and Alexander Osipovich contributed to this article

This article was first published in the Wall Street Journal, part of Dow Jones

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