The Case Against Sam Bankman-Fried

Is Sam Bankman-Fried going to prison? Five weeks into his criminal trial, 12 randomly selected New Yorkers are preparing to discuss among themselves whether they believe he violated federal law or not.

Bankman-Fried is charged with wire fraud and conspiracy to commit wire fraud against FTX’s customers, wire fraud and conspiracy to commit wire fraud against Alameda Research’s lenders, conspiracy to commit securities fraud against FTX’s investors, conspiracy to commit commodities fraud against FTX customers and conspiracy to commit money laundering.

In laying out the U.S. Department of Justice’s case, a very animated Nicholas Roos walked a rapt jury through an hours-long version of what the court had heard over the past month. Though getting to this point took over a dozen witnesses and more than a hundred exhibits, the DOJ’s case is pretty straightforward.

Billions of dollars of FTX customer and investor funds, and some Alameda lender funds, are gone. There’s really no disputing that. In the DOJ’s telling, Bankman-Fried found FTX – a company he founded and mostly owned – to be a perfect cash cow for Alameda – another company he founded and mostly owned.

The defense, in contrast, argued that everything that happened with FTX was the result of poor risk management and a slow-building series of issues. The DOJ never managed to prove that Bankman-Fried himself was involved in some of the decisions and actions that led to its multibllion-dollar hole, and none of the witnesses ever testified that FTX was set up specifically to divert customer funds from the beginning, defense attorney Mark Cohen said.

We’ve reported the witness testimony and evidence across the last month, so I won’t go into detail here. But it is worth taking a quick look at some of the main arguments we heard on Wednesday.

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The charges

Wire fraud/conspiracy to commit wire fraud against FTX customers (counts 1 and 2)

The loss of customer funds is obviously FTX’s biggest issue. Per the DOJ, Bankman-Fried defrauded (and conspired to defraud) his customers by letting Alameda tap those funds. FTX customers deposited the money they intended to trade (or buy crypto with) into bank accounts that actually belonged to Alameda, letting Alameda misuse the funds, Assistant U.S. Attorney Roos said.

Cohen, Bankman-Fried’s attorney, argued that the FTX founder – a heavily overworked, stretched CEO – genuinely believed that FTX was a safe company. He didn’t know the extent to which there were issues until shortly before it all collapsed.

The DOJ brought two witnesses to the stand to testify that they thought FTX was a safe company to use to invest in cryptocurrencies, pointing to Bankman-Fried’s tweets and ads produced by the company.

“Here is what one customer said: He was relieved after seeing the defendant’s tweets. He found it reassuring. Another customer told you that after seeing the defendant’s tweets, he felt comfortable to just sit and wait,” Roos said about Bankman-Fried’s public statements immediately before FTX filed for bankruptcy.

Wire fraud/conspiracy to commit wire fraud against Alameda’s lenders (counts 3 and 4)

The main idea here is that Alameda’s balance sheets were doctored, and then sent out to companies it was trying to borrow millions of dollars from. Bankman-Fried reviewed and OKed the balance sheets that were sent to companies like Genesis (a subsidiary of Digital Currency Group, CoinDesk’s parent firm) and BlockFi, Roos said. He pointed to Google-produced metadata showing that Bankman-Fried’s email account definitely viewed the document that contained the balance sheets.

But, Cohen said, “he only remembered reviewing one of the spreadsheets” on that multi-tabbed document – and Caroline Ellison, Alameda’s CEO, said she discussed “some” of the tabs with Bankman-Fried.

BlockFi’s Zac Prince told the court that he would never have lent out funds if his company had seen the real balance sheets and knew that Alameda had borrowed billions of dollars worth of customer funds – though Cohen contended that this was a gotcha question, and BlockFi had previously conducted due diligence on more of Alameda’s financials prior to any initial loans.

Roos’ argument is: “You cannot come up with an alternative version of your finances and give them out.”

Conspiracy to commit securities fraud against FTX’s investors (count 5)

Companies like Paradigm and Third Point invested in FTX, and Bankman-Fried lied to these companies about what it was doing with the funds and how much revenue it was generating, Roos said, pointing to the EcoSerum staking revenue that former FTX executive Nishad Singh testified was only added by backdating revenue across 2021. Paradigm invested in FTX’s Series C funding round in 2022 – after the 2021 revenue figures were out, in other words.

FTX also did not disclose it was shifting losses to Alameda or that its insurance fund was detailed by a “random number generator,” Roos said.

But Alameda – a company mostly owned by Bankman-Fried – assuming some of these losses isn’t necessarily a crime, Cohen suggested. The company was a market-maker and payment agent on FTX and its role was to ensure smooth operations and liquidity.

Interestingly, Cohen did say that investors who invested in FTX prior to May 2022 weren’t defrauded because this was before any of the financial issues really happened, despite the fact the EcoSerum figures were shared prior to that month.

Conspiracy to commit commodities fraud against FTX customers (count 6)

This is basically just kind of more of the above: Bitcoin and ether are commodities, customer funds were stolen, therefore there’s conspiracy to commit commodities fraud, is the basic argument. The defense also goes back to whether or not Bankman-Fried knowingly and willingly engaged in fraud, which is the same argument as above.

Conspiracy to commit money laundering (count 7)

In short, the DOJ is alleging that FTX customer funds moved to Alameda’s bank accounts, where they were then moved into investments or political donations.

Cohen’s defense is that Bankman-Fried wasn’t trying to conceal the movement of these funds, citing political donations – a “heavily regulated” form of giving – as an example.

Details

Roos and Cohen presented stark contrasts across their different closing arguments. The AUSA was extremely animated, constantly stepping around and gesticulating. At one point, when arguing against some of the defense arguments brought up over the past month, his voice rose in pitch, emphasizing his point.

Cohen did none of that. He leaned over the lectern (and it is a lectern, not a podium – I asked) and gestured a bit, but mostly maintained a sober demeanor. He was a bit more animated after the first half hour, arguing that Bankman-Fried was not a criminal mastermind or a “movie villain,” despite what the DOJ would have the jury believe.

The defendant – that’s what Roos called him each and every time, “the defendant” – worked on his computer during most of the DOJ presentation. But when Cohen took over, Sam – how Cohen referred to him – just sat in his chair, looking over in the general direction of the jury box and his lawyer.

Listening to the competing attorneys, it’s not hard to see where the defense’s key issues might be. Though the burden of proof is on the prosecution, the DOJ does have a very simple narrative: Bankman-Fried knowingly and willingly misappropriated customer funds, lied about it, spent the funds on all sorts of things and then tried to mislead people when things fell apart. Roos spent the first few hours of his argument repeating the phrase, “where did the money go, what happened and who’s responsible” – the three questions he wants jurors to ask themselves when they deliberate. He used quotes from the witnesses and court exhibits to illustrate the point, and kept mentioning the missing billions.

Cohen’s argument, on the other hand, is by necessity far more complicated: There was a lack of risk management, efforts to hedge risk were unsuccessful or didn’t happen, margin trading issues worsened FTX and Alameda’s financial positions. FTX’s real estate purchases and sports sponsorships were reasonable and justified expenses, and the prosecution’s key witnesses testified either under cooperation or non-prosecution agreements.

“None of the cooperating witnesses … acted like they thought they were doing anything wrong,” he said. “None of them resigned.”

Customers indeed had no major withdrawal issues until it all fell apart.

And these points are true. The entire inner circle continued working at FTX or Alameda into November 2022, which is also when withdrawal requests outpaced available assets. The expenses may well have been reasonable for a company seeking to draw talent to its global headquarters and attract customers via sponsorships.

But, as Roos pointed out, this is all kind of beside the point. The question is were the funds misappropriated and/or did Bankman-Fried lie about that?

Cohen said FTX’s terms of service allowed FTX to take customer funds (which, look, you know my suspicions about that) and that the government didn’t really make its argument in terms of the timeline of events.

But he almost struggled to push back against the DOJ’s specific allegations. Bankman-Fried’s infamous “FTX is fine. Assets are fine” tweet was up until he learned the truth, at which point he took it down, Cohen said. He saw so many emails and documents that he just signed off on things like the balance sheet. And Cohen sort of addressed the multibillion-dollar hole, but mostly he just tried to talk about the broader issues outlined above.

Bankman-Fried’s own testimony did indeed turn out to be an issue that came up during the closing arguments. Roos commented that he seemed like two different people when testifying before his own attorney compared with the cross-examination.

Cohen seemed to be trying to rehabilitate Bankman-Fried as a witness, saying the DOJ would dismiss his efforts to defend himself in court regardless of how he responded to the questions. Cohen tried interpreting Bankman-Fried’s discussions and comments with other witnesses – the ones he later tried to cast as being unreliable narrators.

Roos painted a picture of Bankman-Fried as someone who repeatedly chose to hide what he knew and when he knew it, in an effort to misappropriate funds. Bankman-Fried made “criminal choices” over and over again.

But Roos never explained “why” Bankman-Fried may have done any of that, Cohen said.

Courtroom scenes

• Where is everybody? Barely 30 people were at the courthouse by 9 a.m. Wednesday.

• Cohen repeatedly referred to the DOJ case as prosecutors creating a movie, with “Sam the villain” as its lead character. Reporters covering the case have, over the past two days, begun suggesting who may be suitable for the cast of this movie: Robert De Niro (who we did not see in the cafeteria again Wednesday) as Judge Lewis Kaplan, Harry Melling as Bankman-Fried and Jamie Lee Curtis as Barbara Fried.

• Reporters who watched the sun come up from the courthouse steps also watched the sun go down from the overflow room. It was nice. (Editor’s note: Also sounds exhausting!) And a reminder that winter is headed full-speed toward us.

What we’re expecting

So … there’s a chance that Judge Lewis Kaplan is going to hold the jury in the courthouse to deliberate late on Thursday. How late? He was talking about how the jurors would get free pizza for dinner. The press pool probably won’t be invited to that particular party.

There’s also a chance the court may sit on Friday for deliberations. TBD on a final decision there.

Before we get to that: The DOJ has a final chance at a rebuttal argument, which sounds like it won’t take more than an hour on Thursday. This will just be the prosecution saying (I assume) some version of “Sam knew dang well what he did.”

Then, the judge reads the final jury charge out to the men and women who are going to decide on a verdict. It’s more than 60 pages and will likely take a few hours. The jury will probably begin deliberations after lunch. And that means there is a very real chance that we’ll get a verdict on the one-year anniversary of the article by my friend and colleague Ian Allison that kicked this whole thing off.