Ever since his arrest, Sam Bankman-Fried has bucked advice from lawyers to keep quiet. But through press interviews, blog posts, leaks and social media, he has challenged the allegation that he is solely responsible for the world’s biggest crypto meltdown.
Now, as the trial against Bankman-Fried starts on charges that he swindled billions of dollars from his crypto platform FTX, the 31-year-old will have one last chance to tell his side of the story.
The case against the former chief executive will begin with jury selection in federal court in lower Manhattan on Tuesday, less than a year after Bankman-Fried’s empire imploded and filed for bankruptcy.
The case, which the government labeled one of the biggest financial crimes in the country’s history, will explore how an awkward 20-something from California came to run and allegedly ruin one of the largest crypto exchanges in the world. The MIT graduate faces a maximum prison term of 20 years for each of the five most serious charges.
During his trial, Bankman-Fried, who has been inside a Brooklyn jail for nearly two months for allegedly trying to influence two government witnesses, will attempt to explain away the $8 billion in liabilities Alameda Research — FTX’s hedge fund affiliate — had on its balance sheet when both filed for bankruptcy last November.
White-collar defendants rarely testify at their own trials, instead spending hundreds of thousands, sometimes millions of dollars, on top defense attorneys to do the talking. But Bankman-Fried has shown he isn’t like most white-collar defendants.
“One of the narratives he will want to present is he was the Warren Buffett of crypto,” said former federal prosecutor Joshua Naftalis, who previously worked in the unit prosecuting Bankman-Fried. “He was the name in the game and while mistakes were made, they weren’t intentional.”
A spokesman for Bankman-Fried declined to comment. He has pleaded not guilty to all seven charges, including fraud and conspiracy to commit money laundering.
Bankman-Fried founded FTX in 2019 in Hong Kong, relocating to a more friendly regulatory environment, The Bahamas, two years later. At his peak, Bankman-Fried was worth $26 billion and ran FTX from a palatial penthouse overlooking the ocean with his friends. He was a frequent visitor to Washington, donated millions to charity and rubbed shoulders with celebrities. He was widely viewed as a beacon of responsibility in an industry that many treated with skepticism.
Cracks in the crypto industry began to show in 2022, starting with the May implosion of the multibillion-dollar Terra stablecoin ecosystem. That, in turn, triggered contagion that engulfed firms from Three Arrows Capital to Celsius Network. The crisis in confidence saw crypto prices plunge. FTX, however,appeared to weather the downturn better than most, with Bankman-Fried celebrated as the “J.P. Morgan of crypto” who could help rescue ailing firms.
That would change by November, when concerns around FTX’s solvency and its ties to Alameda sparked a run on the exchange. Still, on Sunday, Nov. 6, Bankman-Fried’s net worth was a healthy $15.6 billion, according to the Bloomberg Billionaires Index. By the end of the week, it would be gone. On Friday, Nov. 11, FTX, FTX.US and Alameda all filed for bankruptcy.
Federal prosecutors will argue that Bankman-Fried used FTX as a vehicle to steal billions in customer funds and spend lavishly on speculative trading at Alameda Research, real estate in The Bahamas and gave money away in line with the effective altruism movement that supposedly underpinned the business.
The Government’s Case
After FTX and Alameda, the trading firm he started in 2017, filed for bankruptcy, Bankman-Fried went on a press tour in an early attempt to explain everything away. US prosecutors investigating the cause of FTX’s demise watched from afar, eventually asking authorities in The Bahamas to arrest Bankman-Fried on December 12.
Prosecutors plan to argue that Bankman-Fried allegedly lied to investors about the nature of the relationship between Alameda and FTX. In contrast to Bankman-Fried’s public declarations that the two entities were separate, Alameda had special privileges on FTX that gave it an unlimited line of credit. It used customer funds to make illiquid investments, prosecutors will argue. When the crypto market spiraled last year and Alameda couldn’t repay its loans, it called in more customer funds to meet the shortfall.
Bankman-Fried allegedly directed his top lieutenants to falsify information to auditors and financial statements to disguise the relationship, allowing him to continue fund raising despite the liquidity crunch.
Key to the government’s case are three cooperating witnesses; former FTX engineering director Nishad Singh, former FTX chief technology officer Gary Wang and former Alameda Research CEO Caroline Ellison.
The former executives were part of Bankman-Fried’s inner circle. They all have pleaded guilty to fraud and agreed to testify against Bankman-Fried in the hope of receiving lighter sentences.
Former FTX Digital Markets co-CEO Ryan Salame also pleaded guilty to criminal offenses but did not sign a cooperation agreement.
Based on court filings and submissions in the lead up to trial, the government has detailed what these witnesses may testify to. Singh and Wang will likely tell the jury about FTX’s code and how it was altered at Bankman-Fried’s behest. Ellison may tell the jury this allowed Alameda to borrow funds without posting collateral or be subject to margin calls.
Singh was also used as a straw donor, making millions in campaign donations in the lead-up to the 2022 election. While prosecutors dropped a campaign finance violation charge against Bankman-Fried before trial, the government will still weave his donation activity through its case, alleging this is how he spent the proceeds of his fraud.
Ellison’s testimony could be much broader and damaging for Bankman-Fried.
Prosecutors have her personal diary, notes she made of meetings with executives, lists, including one titled “Things Sam is Freaking Out About,” and allegations about how and when she knew Alameda was secretly using customer funds.
Ellison once dated Bankman-Fried, adding another layer of complexity to her role as a cooperating witness. Prosecutors allege Bankman-Fried “retained authority” over Ellison’s trading decisions at Alameda.
The “retained authority” extended to Bankman-Fried telling Ellison, who joined Alameda as a trader in 2018, to engage in secret trading to inflate the value of FTT, FTX’s cryptocurrency, to better Alameda’s borrowing power.
The government indicated it has 50 potential witnesses including former employees, investor victims, FBI agents and forensic accountants to explain the flow of money between FTX and Alameda. The jury will also hear from FTX customers, including a man in Ukraine who lost a significant portion of his life savings, to explain what their expectations were around how their funds would be used. Prosecutors, who have produced 1,300 exhibits ahead of trial, will want to portray the case as a simple fraud and steer clear of crypto minutiae, Naftalis said.
The Defense
Despite warnings from his lawyers to keep his head down, Bankman-Fried has been unusually vocal in the face of the criminal investigation. His bail was revoked in August after he showed Ellison’s personal writings to a New York Times reporter, which a judge decided was a possible attempt to scare her. Even before that he’d had a constant dialogue with journalists, recording about 1,000 phone calls with reporters while on bail, prosecutors previously revealed.
But his testimony may be one of the few options his lawyers have left. Bankman-Fried’s case suffered a setback weeks before trial when Judge Lewis A. Kaplan ruled he couldn’t call seven expert witnesses to testify.
While defense teams closely guard trial strategies, Bankman-Fried may argue that FTX’s lawyers were involved in key business decisions and he acted in good faith.
Judge Kaplan ruled last week, however, that Bankman-Fried’s lawyers couldn’t mention in their opening statement that FTX lawyers were present when key business decisions were made. It could confuse the jury and prejudice the government, Kaplan said. If Bankman-Fried wants to make that argument or present evidence on the issue later in the trial, his lawyers need to notify the judge first.
Bankman-Fried may try to rely on technical issues, rather than technicalities. He could try to put himself at arm’s length from Alameda and FTX’s engineers, arguing he didn’t have the expertise to understand the platform’s coding and wasn’t involved with Alameda’s operations.
That ties in with Bankman-Fried’s earlier public statements, and material leaked to the press, attempting to shape Ellison as someone who wasn’t up to the job of running a hedge fund with billions of dollars of assets under management. But a blame-your-ex-girlfriend strategy is “risky,” Naftalis said.
“You’re taking a set of facts and turning it into a soap opera,” he said. “You don’t want to be perceived as lashing out and making it all about them when the trial is about you. The jury might not like making this about gender or an ex treating an ex poorly.”
The trial before Judge Kaplan is expected to last up to six weeks with jury selection scheduled for Tuesday.
The case is US v. Bankman-Fried, 22-cr-673, US District Court, Southern District of New York (Manhattan).
© Bloomberg