Update on Sam Bankman-Fried Case

In what the New York Times reported prosecuting attorney, Damian Williams, said was nothing more than “old-fashioned embezzlement” that caused “one of the largest financial crimes in American history,” The criminal trial of Sam Bankman-Fried (dubbed “SBF”) continues to rock the cryptocurrency exchange and investment world.

Many of our blog posts focus on issues such as Reg D 506(b) vs. Rule 506(c), or crowdfunding trends, but in this update on the SBF case, we will review what happened to propel Sam Bankman-Fried’s company, FTX, into bankruptcy and the resulting fallout of criminal and civil litigations against SBF. We will then take a look at the legal tumult surrounding SBF’s decision to testify at his criminal trial, what that testimony was, and how it all ended for SBF. 

So let’s get started. 

What Was FTX and What Happened?

At one time valued at $32 billion, FTX Exchange (“FTX”) was once the largest cryptocurrency exchange company in the world. Sam Bankman-Fried founded FTX and was the company’s CEO. That is, until he resigned after FTX’s spectacular collapse in November 2022. 

As a cryptocurrency exchange, FTX provides a platform for its customers to trade one digital currency for another or for traditional money. FTX also had a native cryptocurrency called FTT. 

In addition to being the founder and CEO (now former CEO) of FTX, SBF co-founded a crypto trading platform called “Alameda Research” (“Alameda”).

Despite the fact that FTX and Alameda Research were two independent companies, the relationship between the two was “unusually close” as illustrated in part by the fact that Alameda’s balance sheet was made up primarily of FTT— FTX’s native cryptocurrency.  

In early November 2022, CoinDesk published a post calling into question the stability of FTX. Shortly after that post appeared, Changpeng Zhao (“Zhao”), the CEO of Binance, the world’s largest crypto exchange, expressed concerns about FTX’s financial stability. Acting on his concern about the stability of FTT, Zhao liquidated approximately $530 million worth of FTT. This triggered other investors to pull out of FTT as well. In 72 hours, FTX was faced with $6 billion in withdrawals.

Matters went from bad to worse for FTX when Binance, after triggering the fallout, offered to save FTX by buying the company but then pulled out of the deal in a matter of days, citing due diligence findings that indicated that FTX was under federal investigation and had mishandled customer funds. 

By November 11, 2022, SBF had resigned as CEO of FTX, and the company had filed for bankruptcy. 

FTX’s Collapse Leads to Criminal Charges and Civil Lawsuits Against SBF

The collapse of FTX led to further investigations by the Justice Department and the Securities Exchange Commission (SEC) into the company’s operations and the issue of whether FTX improperly used customer funds to fund Alameda Research. SBF was accused of diverting billions of dollars from FTX customers to fund Alameda. 

In December 2022, SBF was arrested. After being extradited from the Bahamas, SBF was charged with seven (7) criminal counts of wire fraud, securities fraud, money laundering, and conspiracy. If convicted, he could face up to 100 years in prison. 

That’s a massive prison sentence. 

But will he be sentenced to 100 years in prison if convicted? 

Not very likely. 

Some legal authorities suggest that it is far more realistic that he would be sentenced to somewhere around 10 to 20 years in jail. But that’s still a long time.

Prosecutors allege that, along with his co-conspirators, SBF stole billions of dollars from FTX customers and used the money to make personal investments and fund his crypto-focused hedge fund, Alameda.   

While SBF’s criminal trial may be his most pressing legal concern, it is not his only one. 

In addition to the criminal charges, the  SEC brought separate charges against SBF on behalf of defrauded investors. 

In its complaint, the SEC alleges that SBF orchestrated “… a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his benefit and to help grow his crypto empire.” 

The SEC’s complaint also alleges that SBF made misleading statements to equity investors, failed to disclose Alameda’s preferential treatment, and made material misrepresentations to FTX investors regarding the risks of investing in FTX.  

The SEC’s complaint seeks monetary penalties against SBF in addition to “disgorgement” of all “ill-gotten gains” and interest. The SEC also seeks an order that would prevent SBF from ever acting again as an officer or director of any company selling securities — in addition to having him barred from participating in any way in the public offer or sale of securities, including crypto-securities.

Additional legal woes for SBF commenced when investors in Florida filed a class action lawsuit against SBF and a number of other defendants — including celebrities — who are accused of promoting and assisting in the sale of unregistered securities. 

As of the writing of this post, no less than seven (7) class actions have been filed against SBF. 

Further, the Commodity Futures Trade Commission filed a lawsuit against SBF and FTX. 

And Then SBF’s Parents Were Sued by FTX.

In a twisted quirk of fate, FTX sued Sam Bankman-Fried’s parents seeking to “claw back” millions of dollars they allegedly received from their son. The complaint alleges that SBF’s parents “siphoned off” millions of dollars from FTX customers to enrich themselves and support certain charities. 

SBF’s parents are accused of receiving $10 million in cash from their son, and a $16.4 million home in the Bahamas that was purchased by FTX. The complaint by FTX also alleges that SBF’s father helped to cover up allegations that FTX engaged in money laundering and price fixing.

SBF’s Criminal Trial Continues to Shock and Scandalize.   

SBF’s criminal trial has been chock-full of drama. 

After being extradited from the Bahamas, where FTX was located, SBF posted a $250 million bond and was put on house arrest in California, in his parent’s home. Bail was revoked after SBF was caught tampering with witnesses. Instead of awaiting trial in his parents’ luxurious home in Palo Alto, California, he was sent to the Metropolitan Detention Center in Brooklyn — a jail with the reputation for being “one of the worst jails in America.” 

The trial commenced on October 3, 2023, and reports indicate that the evidence against SBF has been damning. Three former FTX and Alameda executives — including SBF’s former girlfriend — pleaded guilty to criminal charges and have testified at the trial as prosecution witnesses.   

The executives who pleaded guilty and have been cooperating with the prosecution are:

• Nishad Singh was a co-founder of FTX and director of engineering.

• Zixiao "Gary" Wang, co-founder and CTO of FTX, and 

• Caroline Ellison, CEO of Alameda and SBF’s girlfriend.

By all accounts, the testimony of the former FTX and Alameda executives was devastating to SBF’s case.

In part, Nishad Singh testified that Alameda bank accounts were used to store FTX customer funds and that he had personally programmed systems to route FTX user deposits into Alameda bank accounts.

Gary Wang, FTX’s chief technology officer, testified that Alameda privileges, which allowed Alameda to draw on billions of FTX customer funds virtually unchecked, were written right into FTX’s software code.

Caroline Ellison testified that SBF directed her to use FTX customer funds to pay for new investments or political donations or to hide losses on Alameda’s balance sheet. She also testified that FTX customer funds were used to bribe Chinese government officials.

Then came SBF himself. 

In a move that had everyone buzzing, SBF decided to take the stand in his criminal trial. 

Criminal defendants rarely testify at trial. This is because (1) the jury may not take an improper inference against them if they do not testify (so they have nothing to lose), and (2) if they testify, they are subject to cross-examination. Cross-examination opens the door (with limitations) to bring out a number of facts that the defense would rather the jury not know about.  

Nevertheless, SBF decided to, and did, take the stand.

By all accounts, it did not go well for him. 

Over the course of his testimony, it was repeatedly reported that SBF was evasive when answering questions, frequently blaming others for FTX’s woes. 

The consensus appears that SBF contradicted himself throughout his testimony and that his constant evasions, repetitions of “I don’t recall,” and circumlocutions of questions damaged his credibility with the jury. 

After 15 days of trial, closing arguments were presented on November 1, 2023. After closing arguments, the court instructed and charged the jury. Following that, the world anxiously awaited the jury’s verdict.

The FTX Case is One of Simple Fraud, Not Crypto Volatility.

One point that keeps getting lost in the stupefaction caused by FTX’s collapse and the resultant drama and notoriety of SBF’s trial, is that the FTX case, while it did involve a cryptocurrency exchange, is not a case primarily about cryptocurrency. 

Rather, as prosecutors repeatedly argued, the case is one of corporate and individual greed, malfeasance, and the misuse of customer funds. FTX investors were defrauded when customer funds were taken without their knowledge and used to fund SBF’s personal investments and Alameda Research.

Nevertheless, it is clear that the SBF case will impact the crypto world and may very well lead to new and additional legislation and regulations.

Convicted On All Counts.

The jury was out less than five hours before returning a verdict of guilty on all seven counts of fraud and conspiracy against SBF. 

Prosecuting attorney, Damian Williams, maintained that the SBF trial was not about cryptocurrency, but simply about fraud and corruption. 

SBF potentially faces another trial in February on 5 other counts that were severed from this initial matter.

Sentencing is scheduled for March 28, 2024. While the criminal charges do carry significant time (he could be facing more than 100 years in jail), it is far more likely that SBF will be sentenced to somewhere between 10 and 20 years in jail.

After sentencing, SBF can appeal the jury verdict. Since he testified on his behalf, he had his “day in court” and got an opportunity to tell his side of the story. Further, as he claimed over 140 times on cross-examination that he did not remember his statements or details of events, the credibility of his testimony is highly questionable. As a result, it would appear that any appeal will have to be grounded in legal errors made during the trial or by the presiding judge. 

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