The news that Sam Bankman-Fried, founder and former CEO of the now bankrupt cryptocurrency exchange FTX, plans to testify in a Manhattan courtroom after his trial resumes on Thursday has surprised many observers, given the likelihood that government lawyers will seize the opportunity to grill him over his alleged fraud.
But this highly dangerous ploy may be Bankman-Fried’s only hope of countering weeks of damaging testimony and evading a prison sentence of more than 100 years, legal experts told The Epoch Times.
The decision comes after highly unflattering testimony since the trial began on Oct. 3, largely about Bankman-Fried’s role as CEO of the exchange that imploded in November 2022. Prosecutors have interviewed members of the crypto mogul’s inner circle, namely Caroline Ellison, CEO of FTX’s hedge fund affiliate, Alameda Research; Nishad Singh, FTX’s former head of engineering; and Gary Wang, its former chief technology officer—all of whom have criticized their former boss.
Mr. Wang’s testimony during the trial’s opening week, in particular, has been devastating. He described an operation where Bankman-Fried had oversight of all the moving pieces and knew full well, at every stage, what his employees were doing with customer deposits. He said that Bankman-Fried knew that Alameda had drained $8 billion from FTX’s coffers despite assurances from the exchange’s CEO that customers need not worry about the disposition of their funds.
Notwithstanding these promises, as much as $10 billion of customers’ money went to finance a lavish lifestyle, the purchase of a Bahamas home, trips abroad, political bribes in both the United States and China, and other excesses not within the scope of the exchange’s ostensible role and purview.
Exactly how much blame falls on Mr. Bankman-Fried? Agency, or the lack of it, is the critical bone of contention for both the prosecution and defense cases.
That’s the view of Thomas Plunkett, a professor at Harrisburg University in Pennsylvania who specializes in cryptocurrency regulation. Prosecution lawyers have zeroed in on Mr. Bankman-Fried’s perceived dishonesty, he told The Epoch Times.
“They’re trying to get at the fact that customer funds were used inappropriately, and the fact that there was a whole pattern of fraud here, that [FTX executives] were fraudulently trying to get loans and make lots of false statements. And they’re trying to show that Sam Bankman-Fried was the ringleader of all that,“ Mr. Plunkett said. ”He was the one in charge.”
How has the defense responded to the scandalous allegations?
“You can see in the cross-examination that defense lawyers were trying to imply that other people had motives to do these things. But that doesn’t exonerate Bankman-Fried, it just implies that the witnesses were also guilty. So, I think it will be very hard to defend against,” he said.
Given these realities and the considerable evidence of false representations on Mr. Bankman-Fried’s part, the defense team is pushed into something of a corner, Plunkett suggested. One where they and their client must fight hard to drive home to jurors the difference between insufficient oversight, or a managerial approach that merely had unintended consequences, and the presence of scienter, or the knowledge and will to commit fraud.
“I think they will try to make the argument that though Bankman-Fried was the high-level executive, he wasn’t paying a lot of attention to his underlings. At the end of the day, that’s the only way they can defend,” Mr. Plunkett said.
Part of the legal case may rest on an argument that FTX’s terms of service did not preclude the use of customer funds at its executives’ discretion, he predicted. Such claims have already been the subject of motions and witness testimony since Oct. 3, noted Mr. Plunkett, with more likely to follow.
“To a certain extent, I’m sympathetic to that argument, but that still doesn’t excuse lying, and the prosecution evidence, I think, is fairly convincing that there were some lies told by FTX,” Mr. Plunkett continued.
“That being said, they were certainly not the only crypto company telling lies in 2021 and 2022.”
Mr. Bankman-Fried and his lawyers are also likely to make the rather familiar case that a lack of clarity in crypto regulations helped foster an environment where executives committed violations simply because they didn’t grasp what the rules of the road were.
“They will make the case that it was an immature business, a brand new startup, they didn’t know they were doing wrong,” said Mr. Plunkett.
The defense team’s hope, and that of Mr. Bankman-Fried himself, will be to evoke sympathy on the part of jurors who do not want to send someone away for life for what were, at bottom, innocent mistakes.
A Question of Presence of Mind?
The question of whether FTX’s CEO was fully compos mentis when the serious offenses occurred may loom large during the trial’s remaining weeks, said Jeffrey Hooke, a senior lecturer at the John Hopkins Carey Business School and a former investment banker at Lehman Brothers and Schroder Wertheim.“The defense might argue that Bankman-Fried didn’t have any malicious intent, he just got a little carried away and did these things,” Hooke told The Epoch Times.
“He’s a bit of a prodigy, he’s a little erratic, he was talking on YouTube before he was even charged,” Hooke said.
Besides the questions about presence of mind, Mr. Hooke concurred with Mr. Plunkett that Mr. Bankman-Fried does have some room for legal maneuvering with regard to the technical legal status of FTX.
Mr. Bankman-Fried may well use part of his time on the stand to argue that he was running a private exchange not subject to the same rules regarding commingling or campaign donations as a registered public exchange, Mr. Hooke suggested. Hence, his activities fell outside the purview of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
“He wasn’t running an exchange regulated by the government. The SEC never cracked down, the CFTC never cracked down, it was sort of in a gray area,” Mr. Hooke observed.
While Alameda may well have siphoned off funds from FTX, the rules on segregation of funds may simply not apply given the funds’ status as, in essence, unsecured loans from FTX customers, said Mr. Hooke. From this point of view, FTX was wholly different from, say, the New York Stock Exchange, which must follow highly specific and detailed rules about the use of customer funds, he continued.
“Lying on bank forms and making foreign campaign contributions and foreign bribes are a lot more clear-cut for the prosecution. It will be harder for him to make excuses about that,” Mr. Hooke stated.
The Right Move?
Given the preponderance of evidence against Mr. Bankman-Fried and the defense’s need to try to disprove scienter, Mr. Bankman-Fried’s decision to take the stand is not quite so surprising.“I think a lot of people—and he may do the same—would just plead ignorance and say that underlings were handling this or that. I don’t see who else could make that argument except him,” said Mr. Hooke.
But, in electing to take this course, Mr. Bankman-Fried may walk right into the government’s trap.
Having testified during trials involving allegations of fiscal fraud, Mr. Hooke knows well the psychological pressures that aggressive prosecutors hell-bent on breaking a witness tend to apply.
“I’ve been in trials as an expert witness where they’re cross-examining you for six or seven hours. That’s pretty wearing. They’re trying to wear you down, make you slip up,” Mr. Hooke said.
“Often, the lawyers on the other side are going to try to repeat a question six different ways. You might just give the wrong answer one time out of six, because you’re so worn out.”
Given the pitfalls, it is relatively rare for the top executive of a bank or exchange at the center of a high-profile lawsuit to testify, and when they do so, things often do not go as they hoped, Mr. Hooke said.
The Likely Outcome
While Mr. Hooke is under no illusions about the dangers of Mr. Bankman-Fried’s chosen course, he conceded that the worst possible outcome evoked by some commentators might not materialize. Even if convicted, Mr. Bankman-Fried might yet avoid a century-long prison sentence.“He’s a first offender. I can’t see that kind of sentence. I’d say he’ll probably get 20 years, which is still a long time. I think it would have to be a minimum- or medium-security prison,” Mr Hooke said.
“You can’t put him in with convicted murderers; he’d get killed.”
If there is a silver lining, it is that crypto exchanges and firms may derive lessons with respect to governance and transparency, and avoid the catastrophe that befell FTX and its founder.
“Crypto companies should implement strong corporate governance structures so that there are appropriate checks and controls on how business activities are undertaken and how funds and assets belonging to their customers are managed,” Christopher Odinet, a professor at the University of Iowa College of Law, told The Epoch Times.
But the industry may not yet be at a mature enough stage to draft, implement, and codify rules that can avoid shenanigans in the future.
“Admittedly, some regulatory regime that requires them to do this would be ideal because I am not confident that one can consistently rely on crypto firms to do it in all cases, or to do it in a robust way across the industry,” Mr. Odinet said.
Meanwhile, the restructuring of FTX under its current CEO, John Ray III, who oversaw Enron’s remaking after its December 2001 insolvency, will proceed regardless of the fate of Mr. Bankman-Fried.
“I think the outcome of the trial is unlikely to impact the bankruptcy very much. Whether he incurs criminal liability doesn’t really have a bearing on how the defrauded customers of FTX get paid ... and how much. These are separate matters,” said Mr. Odinet.
The Epoch Times has reached out to Sam Bankman-Fried’s legal team for comment.
