Bankman-Fried’s FTX fraud trial isn’t favoring him.
A Simple Tale of Theft and Deceit
The trial of Sam Bankman-Fried has captivated audiences with its gripping narrative of fraud and deception. From the start, former colleagues Gary Wang and Caroline Ellison have pointed the finger at Bankman-Fried as the mastermind behind one of the largest financial frauds in U.S. history. The prosecution has presented compelling evidence, leaving the defense struggling to make its case. As the trial unfolds, it becomes clear that the prosecution’s case is strong.
Since its start on Oct. 3, the trial has featured compelling testimony from former colleagues FTX co-founder Gary Wang and Alameda CEO Caroline Ellison, both of whom pointed the finger at Mr. Bankman-Fried—also known by his initials, SBF—as the ringmaster of one of the largest financial frauds in U.S. history. The defense has struggled to make its case, although Mr. Bankman-Fried’s attorneys may still have cards to play.
“As of now, it’s not going well for the defense,” Braden Perry, a former federal enforcement attorney who’s currently a partner at Kennyhertz Perry, told The Epoch Times. “Both Ellison and Wang have testified that SBF directed them to commit the crimes.”
The prosecution has been methodically building its case, Mr. Perry said. Assistant U.S. Attorneys Nicolas Roos and Danielle Sassoon presented consistent testimony that Mr. Bankman-Fried knowingly and intentionally defrauded investors, and they also made efforts to humanize the losses suffered by FTX customers.
“The evidence that has come out over the first two weeks of trial is all to the point that SBF was involved, either directly or indirectly, in a conspiracy with people who themselves have pled guilty to committing fraud,” Daniel Silva, a former federal prosecutor who’s currently a shareholder at business law firm Buchalter, told The Epoch Times.
The prosecution’s case thus far “is very strong,” he said.
And while cryptocurrencies are arcane financial instruments, the case itself is straightforward.
A Simple Tale of Theft and Deceit
“It’s a typical corporate fraud case,” Mr. Silva said. “The product may have been complex, but the fraud itself is not unique. Basically, the allegations are that [the defendants] improperly and deceptively took money from customers and investors for FTX owners’ personal use.”
The prosecution has largely avoided delving into the intricacies of cryptocurrencies, focusing instead on the simpler narrative of theft and deceit.
“What this trial boils down to is FTX’s use and Alameda’s use of customer funds,” Mr. Perry said. “The prosecution will need to prove SBF used those funds knowingly and fraudulently.”
According to the allegations, “SBF was the front of the entire enterprise, including Alameda,” he said. “Further, SBF used a massive [line of credit,] which was not disclosed to Alameda customers or investors.”
While approximately $9 billion of customers’ and investors’ money has gone missing in the 2022 collapse of crypto exchange FTX and its affiliated hedge fund Alameda Research, the trial on Oct. 4 featured testimony from an individual investor who had lost $100,000 on the FTX crypto exchange to show jurors how retail investors were personally harmed.
This was an “interesting start.” according to Mr. Perry.
“It shows how a typical investor was duped by the ‘safeness’ of FTX,” he said.
The prosecution then laid the foundation of its case with testimony from Mr. Wang, FTX’s former chief technology officer, who said he coded the accounts of Alameda Research to allow it to run negative balances on the FTX exchange. This gave Alameda the ability to borrow money from the exchange and ultimately to take clients’ funds—without their knowledge or consent—to pay off billions of dollars in loans and trading losses and to lend money to FTX executives for their personal use.
Mr. Wang said Alameda accounts were set up this way at the direction of Mr. Bankman-Fried but that this special arrangement between the two companies was kept secret from FTX customers. Mr. Wang pled guilty to charges of securities fraud and accepted a plea deal with prosecutors to testify against Mr. Bankman-Fried.
The prosecution’s case then shifted to how customers’ money was taken by Alameda Research.
Ms. Ellison took the stand next and accused Mr. Bankman-Fried of directing her to use Alameda’s credit line with FTX to repay approximately $10 billion in loans, which she could only do by taking money from FTX customers. She said he also instructed her to deceive Alameda creditors regarding the extent of its indebtedness.
Her testimony became emotional when during cross-examination, she broke down in tears and said she lived in “dread” that her actions to deceive investors would come to light and that when Alameda and FTX finally collapsed, it brought her an “overwhelming feeling of relief.”
Defense Fights Uphill Battle
In sum, this evidence has put the defense in a particularly challenging position, analysts say.
“You can attack testimony and witnesses and their credibility and recollection, which it sounds like they’re trying to do,” Mr. Silva said. “But at the end of the day, when you have multiple people saying the same thing—basically that SBF committed fraud and directed us to commit fraud—it’s really tough to undermine those witnesses or the impact of that.
“Strategically, there’s only so much you can do.
“Even if you’re the greatest [attorney] in the world, you can’t make evidence disappear.”
The defense, indeed, appears to be floundering.
Lead defense attorney Mark Cohen had argued in his opening statement that Mr. Bankman-Fried’s associates were the actual perpetrators and that his client was either unaware of or not directly involved in their crimes. Mr. Bankman-Fried stepped down as CEO of Alameda Research in October 2021, handing the reins to Ms. Ellison.
Mr. Cohen succeeded in getting Ms. Ellison to admit to instances in which Mr. Bankman-Fried wasn’t directly involved in the workings of Alameda, but he largely failed to discredit her overall testimony that Mr. Bankman-Fried was the ultimate decision-maker, legal analysts say.
Mr. Cohen’s line of questioning appeared to ramble at times, repeatedly changing topics and dates and, at one point, referencing a wrong document. Another time, he paused to say he’d lost his place.
Defense Fights Uphill Battle
“The judge has been very skeptical of the [defense’s] cross-examinations and has sustained multiple objections,” Mr. Perry said.
Several times, the judge stopped the proceedings to ask Mr. Cohen where he was going with his questions or what he was talking about, finally declaring after an hour of cross-examination that “maybe this is a good time for a break.”
Mr. Bankman-Fried also earned U.S. District Judge Lewis Kaplan’s ire by allegedly attempting to communicate with witnesses via the Signal app before the trial. In February, Mr. Bankman-Fried was ordered by the judge to refrain from communicating with former employees.
In August, Mr. Bankman-Fried allegedly shared personal writings from Ms. Ellison with a reporter, which Judge Kaplan deemed to be witness tampering. This led the judge to revoke his bail, whereupon Mr. Bankman-Fried was moved from his parents’ home in California, where he was under house arrest, to a jail cell.
Despite the stumbles, Mr. Bankman-Fried may not be beaten just yet.
One element that the defense may have in its favor is the fact that both Mr. Wang and Ms. Ellison admitted that, for the most part, they were the ones who acted—coding accounts, transferring money from FTX, or manipulating financial records. While they both said they did so at the direction of Mr. Bankman-Fried, there has so far been limited physical evidence of that, leaving jurors to rely on the word of those who are testifying in order to receive a lighter sentence.
There are few records of the conversations among the parties in this case because of the fact that FTX and Alameda executives communicated with each other via Signal, a messaging app that uses encryption to keep communications secure and was configured to delete messages automatically. On the other hand, jurors may well question the motives of Mr. Bankman-Fried in avoiding a paper trail of company correspondence, and it doesn’t help the defense’s case that the chat group that executives used with this app was reportedly called ”Wirefraud.” Mr. Bankman-Fried has denied that a chat group existed under that name or that he was part of it if it did.
The defense may also be attempting to build a counter-argument that Mr. Bankman-Fried believed that he was acting lawfully, based on advice that he had received from FTX lawyers.
“A key ruling will be the use of the advice-of-counsel defense by SBF,” Mr. Perry said, referring to decisions by Judge Kaplan about what evidence he’ll allow along these lines.
“The prosecution will need to prove SBF used those funds knowingly and fraudulently. The SBF defense has asked the judge to allow SBF to argue that his acts were reviewed and approved by his FTX’s lawyers and that SBF believed that his acts were within the law based on this advice.
“This would mitigate the intent element of his crimes.”
In a letter to Judge Kaplan in August 2022, Mr. Cohen wrote that FTX’s counsel, Fenwick & West LLP (Fenwick), provided legal advice to Mr. Bankman-Fried regarding the use of auto-delete apps, the banking relationships between Alameda and FTX, loans given to FTX executives, FTX customer agreements, and “intercompany agreements between FTX and Alameda, including the Payment Agent Agreement.” Mr. Cohen’s request to subpoena these documents was opposed by prosecutors, and Judge Kaplan appears to have agreed with prosecutors in denying Mr. Cohen’s request.
Mr. Cohen argued that the legal advice given to Mr. Bankman-Fried by Fenwick, as well as by internal FTX lawyers, “gave him assurance that he was acting in good faith” and that “the fact that the Government now asks the Court to preclude evidence on reliance of counsel is yet another attempt by the Government … to deprive the defense of a defense.”
Fenwick has denied that it advised Mr. Bankman-Fried that the alleged fraudulent actions were legal or that it was aware of him engaging in activity that might have violated laws.
Campaign Finance Charges Set Aside
The remaining wild card in this trial is the more than $100 million of FTX money that Mr. Bankman-Fried donated to politicians prior to FTX’s collapse. He was the second-largest donor to President Joe Biden’s election campaign in 2020, giving more than $5 million, and the second-largest donor to Democrat politicians and political action committees (PACs) in the 2022 midterms.
Among the largest recipients of FTX donations were Sens. Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.), who led the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission, one of the regulatory agencies for cryptocurrencies. Other top recipients included Sens. Kirsten Gillibrand (D-N.Y.), Maggie Hassan (D-N.H.), Cory Booker (D-N.J.), Lisa Murkowski (R-Alaska), and Susan Collins (R-Maine).
On Oct. 16, Nishad Singh, FTX’s former director of engineering, testified that the political donations made by senior executives were made from customer funds. Mr. Singh, who has also pleaded guilty to securities fraud and accepted a plea deal to testify for the prosecution, said he co-signed on bank orders to make the payments at the request of former FTX executive Ryan Salame, who has pleaded guilty to campaign finance violations.
Mr. Bankman-Fried reportedly also held a private meeting with Securities and Exchange Commission (SEC) Chair Gary Gensler in March 2022. The SEC has thus far refused to release documentation regarding the approval of this meeting by its internal ethics committee, although an SEC spokesperson maintained that the meeting did receive approval.
In addition to the seven counts of securities fraud, wire fraud, and money laundering with which Mr. Bankman-Fried was charged, there was initially an eighth charge of campaign finance violations. Prosecutors dropped these charges in July, however, reportedly at the objection of authorities in the Bahamas on the grounds that campaign finance violations weren’t included in the extradition agreement.
Prosecutors may bring these charges at a later date, which could be sometime in 2024, according to legal analysts.
Mr. Bankman-Fried’s arrest came just one day before he was scheduled to testify before Congress, which led a number of lawmakers to protest that he was being silenced. Between the timing of his arrest and the rescinding of campaign finance charges, prosecutors have effectively dropped the issue of Mr. Bankman-Fried’s political donations from this case for the time being.
How does the strength of the prosecution’s case impact the defense’s chances?
Ying to do,” Mr. Silva said. “But at the end of the day, if you cannot put forth another explanation for the evidence presented, then you’re on a really uphill battle.”
Experts say the defense will likely focus on discrediting the testimony of the prosecution’s witnesses, highlighting any inconsistencies, personal biases, or ulterior motives that could undermine their credibility.
They may also attempt to shift blame onto other individuals or entities, arguing that Bankman-Fried was not solely responsible for the fraud and that others within FTX and Alameda were equally involved.
Furthermore, the defense may argue that Bankman-Fried was unaware of the illegal activities or that he was coerced or manipulated by others into participating in them.
However, given the strength of the prosecution’s case and the weight of the evidence against Bankman-Fried, legal experts believe that the defense faces an uphill battle.
“The evidence so far has been very damning,” Mr. Perry said. “The defense will need to present a convincing alternative narrative that can explain the evidence and cast doubt on the prosecution’s case. It will be a challenging task.”
As the trial continues, the world awaits the final verdict, which will determine the fate of Sam Bankman-Fried and potentially set a precedent for future cases involving financial fraud in the cryptocurrency industry.
The Implications for the Cryptocurrency Industry
Regardless of the outcome of this trial, the case against Sam Bankman-Fried and the ongoing publicity surrounding it will undoubtedly have repercussions for the cryptocurrency industry as a whole.
The trial has brought much-needed attention to the risks and vulnerabilities of cryptocurrency exchanges and the need for stronger regulation and oversight in the industry.
“This case highlights the potential dangers of unregulated crypto exchanges and the lack of safeguards for investors,” Mr. Silva said. “It underscores the urgent need for comprehensive regulation to protect consumers and ensure the integrity of the financial system.”
As cryptocurrency continues to gain traction and attract more mainstream investors, it is crucial for regulators to address the inherent risks and establish clear guidelines and accountability for market participants.
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