Inside the Courtroom: Sam Bankman-Fried's Trial and the FTX Saga
The highly anticipated criminal trial of FTX founder Sam Bankman-Fried commenced, sparking a clash between the prosecution and defense over his role in the crypto exchange's downfall. Assistant U.S. Attorney Thane Rehn portrayed Bankman-Fried as a former high-flying figure living a lavish lifestyle built on deceit.
While Mark Cohen, Sam Bankman-Fried's lawyer laid out his defense case at his fraud trial on Wednesday, portraying the 31-former billionaire as a "math nerd" who overlooked risk management in building his FTX exchange, but did not steal customer money.
The SBF Trial Highlights
Bankman-Fried, facing seven criminal counts including fraud and conspiracy charges, sat in the courtroom as the trial unfolded, with the proceedings expected to last six weeks.
“He had wealth. He had power. He had influence,” Rehn said. “But all of that—all of it—was built on lies.”
Assistant U.S. Attorney Thane Rehn alleged that Sam Bankman-Fried embezzled over $10 billion from thousands of FTX customers while engaging in fraudulent activities involving the company's sister hedge fund, Alameda Research. According to the prosecution, Bankman-Fried used the stolen funds for personal purchases, including lavish beachfront property in the Bahamas, political donations to gain influence in Washington, and to cover high-risk bets made by Alameda.
The key element of the fraud revolved around Bankman-Fried's covert transfers of money to Alameda, which customers believed was securely held at FTX. Additionally, Bankman-Fried's manipulation included false financial statements, backdated contracts, and misleading Congress about the safety of customer funds.
In response, Bankman-Fried's defense attorney, Mark Cohen, argued that the prosecution was relying on hindsight and that the business relationships between FTX and Alameda were legitimate. Cohen claimed that the Bahamas properties were used for accommodating FTX employees, and celebrity endorsements were part of a legitimate business strategy. He also asserted that the cryptocurrency market faced significant challenges in 2022, and Bankman-Fried took reasonable actions to address the crisis as customer withdrawal demands surged.
“It’s not a crime to try to get Tom Brady to go on ads for your company,” Cohen said.
Cohen painted the situation as one where Bankman-Fried was navigating a tumultuous period in the crypto industry.
Juror Selection and Witnesses
A jury comprising 12 primary members and six alternates was selected on Tuesday.
Prosecutors plan to summon three former confidants from Sam Bankman-Fried's inner circle as witnesses in his trial. These individuals include former Alameda CEO Caroline Ellison and former FTX executives Nishad Singh and Gary Wang, all of whom have already pleaded guilty and agreed to collaborate with the prosecution. In his opening statement, Assistant U.S. Attorney Thane Rehn hinted that these witnesses would provide an insider's perspective on the unfolding of the alleged crimes, although he did not mention them by name.
Additionally, Bankman-Fried's parents, Joseph Bankman and Barbara Fried, both Stanford Law School professors, were seen arriving at the federal courthouse in lower Manhattan on Wednesday morning, although they had not attended the trial's first day. While their names were included on a list of possible witnesses or individuals who might be referenced in testimony, along with Bankman-Fried's brother Gabriel Bankman-Fried and former Donald Trump staffer Anthony Scaramucci, it is important to note that this inclusion does not necessarily indicate that they will be called to testify.
Other names include: Anthony Scaramucci, Trabucco (Former Alameda CEO), Sequoia Capital, BlockFi, Genesis, Skybridge, Anchorage, Binance, Celsius, Silvergate & Signature Bank, Guarding Against Pandemic.
The Michael Lewis Debacle
On the eve of the trial, famed author Michael Lewis, credits include The Big Short and Liar’s Poker, gave an eyebrow raising interview with 60 minutes.
Here are the most jarring things said during the interview:
SBF Tried to Pay Trump $5 Billion not to Run
Lewis said the FTX founder wanted to put a stop to a 2024 Trump candidacy over fears that the former president was a threat to democracy. “Sam’s thinking, ‘We could pay Donald Trump not to run for president. Like, how much would it take?’” Sam thought it was about $5 billion. Sam was not sure that number came directly from Trump.
FTX ran a “great real business”
“This isn’t a Ponzi scheme,” Lewis said. “Like, when you think of a Ponzi scheme, I don’t know, Bernie Madoff, the problem is — there’s no real business there. The dollar coming in is being used to pay the dollar going out. And in this case, they actually had — a great real business. If no one had ever cast aspersions on the business, if there hadn’t been a run on customer deposits, they’d still be sitting there making tons of money.” 🧐🥴
The commingling of funds was due to a “rounding error”
“In the very beginning, if you were a crypto trader who wanted to trade on FTX and wanted to send dollars or yen or euros onto the exchange so you could buy crypto, FTX couldn’t get bank accounts,” Lewis said. “So Alameda Research, which could get bank accounts, created bank accounts for people to send money into so that it would go to FTX.”
$8 billion of FTX customer money piled up inside of Alameda Research. “You have to understand that when it went in there, it was a rounding error, that it felt like we had infinity dollars in there, that I wasn’t even thinking about it,” Lewis said.
Lewis’ new book, “Going Infinite” in which he tells the inside story of FTX and SBF goes on sale this week.
Some takeaways from the book according to the New York Times:
Mr. Lewis … depicts Mr. Bankman-Fried as delusional and often callous in his treatment of co-workers, a young entrepreneur who “thought grown-ups were pointless” and left messes for other people to clean up.
In a memo to Ms. Ellison, Mr. Bankman-Fried laid out the pros and cons of continuing a romantic relationship with her. The pros included that she was smart, impressive and a good person, and that he enjoyed having sex with her. Among the cons were the uncomfortable power dynamics in the relationship, as well as the possibility of negative publicity if their dating life ever became public.
“In a lot of ways I don’t really have a soul,” he wrote. “My feelings are fake, my facial reactions are fake. I don’t feel happiness. What’s the point in dating someone who you physically can’t make happy?”
When he worked at the high-frequency trading firm Jane Street Capital, some executives were “disturbed by Sam’s indifference to other people’s feelings,” Mr. Lewis writes. They cited an incident in which Mr. Bankman-Fried publicly humiliated another trader in a complex gambling game that was popular in Jane Street’s offices.
Mr. Bankman-Fried couldn’t name two of the people on FTX’s three-person board of directors. “The main job requirement is they don’t mind DocuSigning at 3 a.m.,” he said. “DocuSigning is the main job.”
What About FTX Creditors?
The expected payouts to FTX creditors have more than tripled this year, rising from just over 10 cents on the dollar at the start of 2023 to an average of 37 cents on the dollar. This surge reflects the successful efforts of FTX's estate to recover assets, totaling $7.3 billion. This recovery includes $3.4 billion in cryptocurrencies, $200 million in real estate in the Bahamas, and a valuable stake in the Amazon-backed AI startup Anthropic.
Additionally, the potential relaunch of the exchange, known as FTX 2.0, could hold promise for creditors.
Further clawbacks from entities like Binance and investment firm K5, as well as Amazon's planned investment in Anthropic, could further enhance the value of FTX creditor claims.
And while creditors have been focused on the civil side of the action, Sam Bankman-Fried began his criminal trial this Tuesday.
This Week By the Numbers 📈
This week’s earlier upward trend in the crypto markets has reversed trends due to a strengthening U.S. dollar and rising yields in the bond market.
U.S. bond yields have reached their highest levels since 2007.
The Dow Jones index has entered negative territory for the year.
Mortgage rates in the United States have surged, approaching 8%.
Federal Reserve officials concur that maintaining a restrictive monetary policy will be necessary for a considerable duration to bring inflation back to the Fed's 2% target.
The VIX volatility index has exceeded 20 for the first time in four months.
SEC Chair Gary Gensler acknowledges that Bitcoin is not classified as a security but refrains from categorizing it as a commodity.
The SEC has lost the right to appeal its XRP lawsuit defeat.
Issuers anticipate the introduction of Bitcoin ETFs in early 2024.
Former CFTC Chairman Brian Quintenz, now serving as the head of policy at a16z crypto, asserts that the SEC's recent approval of Ethereum ETFs solidifies its non-security status.
Patrick McHenry, known for his favorable stance on cryptocurrencies, assumes the role of House Speaker.
Jump Crypto, a prominent trading group, faces a $200 million loss in the wake of the FTX exchange collapse.
Top Stories 🗞️
NBC said on Monday that the Chiefs-Jets thriller attended by Taylor Swift and a star-studded crew, as the pop star’s relationship with tight end Travis Kelce blossoms in public view, averaged a staggering 27 million viewers, making it the most-watched Sunday show since the Super Bowl in February. The broadcast, which saw a surge of more than 2 million female viewers, unquestionably owes its record numbers to Swift, whose attendance yet again generated a frenzy of buzz that effectively overshadowed the game itself. At its peak, NBC said that a whopping 29.4 million viewers were watching the game across linear television and streaming platforms. The ratings were partly powered by a spike in female viewership, including a 53% surge among teenaged girls, according to Nielsen Fast National data. NBC, which leaned heavily into Swift’s appearance and cut away to her with live shots throughout the game no less than 17 times, said it was its most-streamed regular-season NFL game ever.
Embattled crypto lender Celsius Network has told a judge it plans to start paying back its customers by year’s end, amid an Oct. 2 hearing seeking approval for its reorganization plan. In his opening statements at the confirmation hearing in New York, Celsius’ legal counsel, Christopher Koenig, said the new company dubbed “NewCo” will emerge from the proceedings with $450 million in seed funding. A filing on Sept. 29 shows that Celsius plans to partially repay its creditors using $2.03 billion in Bitcoin, Ether and stock in the new company. NewCo has been backed by a group of companies in a consortium called Fahrenheit LLC, which will manage the mining and staking business.
Coinbase International Exchange has acquired regulatory approval from Bermuda's financial regulator to enable eligible non-US retail customers to trade perpetual futures, a company said in a blog on Thursday. Thanks in part to Bermuda Monetary Authority (BMA) the exchange plans to offer eligible customers access to perpetual futures contracts on Coinbase Advanced in the coming weeks. The company has been looking to expand globally and announced its international exchange in May this year and listed BTC and ETH perpetual futures contracts. Perpetual futures is a derivative market that continues to roll without expiry. "As announced in the Phase II of our “Go Broad, Go Deep” strategy, we are dedicated to partnering with high-bar global regulators to build a crypto regulatory framework that allows crypto technology to continually drive innovation," the blog said.
A class-action suit was filed against Binance.US and Binance CEO Changpeng Zhao on Oct. 2 in the District Court of Northern California, alleging various violations of federal and California law on unfair competition for attempting to monopolize the cryptocurrency market by harming its competitor FTX. The suit was brought by Nir Lahav, who is identified only as a California resident. At issue are posts made by Zhao on Twitter (now X) in early November on the eve of FTX’s collapse. The posts were made in conjunction with the decision by the defendants to liquidate their holdings in the FTX utility token, FTT (FTT), on Nov. 6. The plaintiffs estimated that Binance owned up to 5% of all FTT tokens.
UBS Asset Management, the Swiss asset manager with $3.1T of AUM, announced on Monday, the launch of a live pilot of a tokenized Variable Capital Company (VCC) fund in Singapore. The pilot project is part of a broader VCC umbrella, with the aim of tokenizing various real-world assets. The pilot relies on UBS Tokenize, UBS's in-house tokenization platform, to facilitate a controlled launch of a tokenized money market fund. Represented as a smart contract on the Ethereum public blockchain, the pilot allows UBS Asset Management to track various activities, including fund subscriptions and redemptions. UBS Asset Management's tokenization pilot is central to their global distributed ledger technology strategy, which emphasizes the use of public and private blockchain networks to enhance fund issuance and distribution.
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About the Author: Tatiana Koffman
Hi there and thanks for reading! If you stumble upon my newsletter, you will notice that I write about money, economics, and technology. I hold a JD/MBA and spent my career in Capital Markets working across Mergers & Acquisitions, Derivatives, Venture Capital, and Cryptocurrencies. I write to make financial topics more accessible and create equal opportunity for the next generation of investors. I have personally invested in 20+ companies and funds (👉 my portfolio).