Trial of Sam Bankman-Fried

Overview

United States of America v. Samuel Bankman-Fried was a 2023 federal criminal trial in the United States District Court for the Southern District of New York. Financial entrepreneur Sam Bankman-Fried, commonly known as SBF, was convicted on seven charges of fraud and conspiracy following the collapse of his cryptocurrency exchange FTX in November 2022. After the jury's verdict in November 2023, on March 28, 2024, Bankman-Fried was sentenced to 25 years in federal prison. The trial and conviction of Bankman-Fried was one of the most notorious cases of white-collar crime in the United States and raised awareness within the business community over criminal activity in the cryptocurrency market. The trial had several implications, with financer Anthony Scaramucci calling Bankman-Fried "the Bernie Madoff of crypto". The trial received significant media attention, with daily coverage from major news outlets. Prior to his company's collapse, Bankman-Fried was celebrated as "a kind of poster boy for crypto" and FTX had a global reach with more than 130 international affiliates. Some commentators said that the entire cryptocurrency industry was "on trial with him", while others argued this case was about fraud, not cryptocurrencies.

Background

Headquartered in the Bahamas, FTX was, at one time, the third-largest cryptocurrency exchange by volume in the world. One of its customers, Alameda Research, was also co-founded and majority-owned by Bankman-Fried, and the CEOs of the two companies dated on and off until April 2022. Following a spike in withdrawals and subsequent liquidity crisis, on November 11, 2022, FTX and more than 130 associated legal entities declared bankruptcy. Bankman-Fried resigned as CEO and was replaced by John J. Ray III to manage the bankruptcy proceedings. On December 12, 2022, prosecutors charged Bankman-Fried on eight counts of fraud and conspiracy, one of which was subsequently dropped. Later that day, he was arrested by the Royal Bahamas Police Force and ten days later, he consented to his extradition to the United States to face trial. He was released on a $250 million bond until August 11, 2023, at which point he was remanded into custody at the Metropolitan Detention Center, Brooklyn, following accusations of witness tampering. A second trial was scheduled for March 2024, at which Bankman-Fried would have faced a further five charges, including an alleged $40 million bribe to Chinese authorities to unlock $1 billion of Alameda Research's trading funds. Prosecutors subsequently decided not to proceed in the interest of the victims, who wanted a quicker resolution to the first trial's sentencing phase. Furthermore, a second trial would not affect how much time Bankman-Fried could face in prison under recommended federal guidelines.

Charges

In the October 2023 trial, Bankman-Fried faced seven charges brought by the U.S. Department of Justice:

Conspiracy to commit wire fraud on customers Wire fraud on customers Conspiracy to commit wire fraud on lenders Wire fraud on lenders Conspiracy to commit commodities fraud Conspiracy to commit securities fraud Conspiracy to commit money laundering The indictment claimed that the scheme began in 2019 and involved lying to Alameda Research's lenders, as well as to FTX investors and customers. Bankman-Fried faced to up to 110 years in prison. Bankman-Fried pleaded not guilty to all seven charges. According to Michael Lewis—a financial journalist who met with Bankman-Fried over a hundred times—Bankman-Fried "genuinely thinks he's innocent". Lewis also reported that "some of [the prosecution's witnesses] have said to me, 'I think Sam is innocent.'" In a private message to Vox writer Kelsey Piper, Bankman-Fried explained that "each individual decision seemed fine and I didn't realize how big their sum was until the end" and that his tweets about FTX not investing customer deposits were "factually accurate" since Alameda was the one investing them. When Piper asked, "FTX had just loaned their money to Alameda, who had gambled with their money, and lost it? and you didn't realize it was a big deal because you didn't realize how much money it was?" Bankman-Fried replied, "and also thought Alameda had enough collateral to reasonably cover it".

Opening statements

The trial began on October 3, 2023, in the Daniel Patrick Moynihan United States Courthouse in Manhattan, New York City, with district judge Lewis Kaplan presiding. The prosecution was led by Assistant U.S. Attorneys Nicolas Roos and Danielle Sassoon. Attorney Mark Cohen led the defense. The prosecution opened by portraying Bankman-Fried as a villainous, greedy con man. They claimed that he misled investors and said that in loaning FTX customer deposits to Alameda, he "stole billions from thousands of people". To support their accusations, they referenced FTX's terms of service which told customers, "Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading." The defense presented Bankman-Fried as a "math nerd who didn't drink or party" and who "reasonably believed that there were no laws or provisions in the terms of service that prohibited FTX from loaning out these deposits, whether loans went to Alameda or to other customers". Drawing attention to another part of the terms of service, the defense argued that as a customer engaged in margin trading, Alameda was allowed to borrow money from FTX. The problems, according to the defense, stemmed from the poor management of Alameda by its CEO, Caroline Ellison. The court was told that Ellison refused Bankman-Fried's advice to scale down her risky trading strategies. The prosecution, however, planned to demonstrate that with respect to Alameda's strategy, Bankman-Fried was "calling the shots". The overall picture painted by the prosecution was of an accumulation of wealth and power "built on lies", while the defense declared, "It's not a crime to be the CEO of a company that later files for bankruptcy".

Caroline Ellison

Caroline Ellison is the former CEO of Bankman-Fried's company Alameda Research. In her testimony, she described how Bankman-Fried had "directed" her to "commit crimes" during her time at Alameda, adding that "Alameda took several billion dollars from FTX customers and used it for its own investments" and to pay back its lenders. Ellison, who has pleaded guilty to seven counts of fraud and conspiracy as part of a cooperation deal with prosecutors, told the court that she had sent "dishonest" balance sheets to these lenders to conceal the taking of customer funds. She also testified that she had been concerned about "insiders" taking out a total of around $5 billion in personal loans from Alameda, saying, "Sam directed us to borrow as much money as we could at whatever terms we could". Initially, Alameda and FTX were run by the same team. Ellison told the court that early on, Bankman-Fried had "set up a system that allowed Alameda to borrow from FTX". Before FTX had its own bank account, Alameda would receive some FTX customer funds into its own bank account, and then some of those funds were spent on expenses, loan repayments, and investments. Alameda also had a $65 billion line of credit on FTX and did not have to post collateral when borrowing, she said. Alameda had been FTX's first and only liquidity provider for a time, but the growth of the exchange attracted others, and eventually Alameda was only around 2% of trades. No other customer had more than a $1 billion line of credit and as far as she knew, Alameda's essentially unlimited credit line was never disclosed to customers, auditors, or investors. Yet FTX would market itself as a "safe" and "audited" exchange. Ellison also testified to Alameda receiving 60–70% of the initial distribution of FTX's native token for free. In 2021, Ellison and Bankman-Fried discussed a "10th percentile" scenario—they thought there was a 10% chance of a situation at least this bad materializing. According to Ellison's calculations, if they made another $3 billion in venture investments but also converted their loans with Genesis Digital Assets to fixed term, their overall likelihood of finding themselves unable to repay all of their loans was 3%. Bankman-Fried reportedly then asked Ellison to try to change the Genesis loans to fixed term and said that he still wanted to proceed with the investments. Ellison only managed to convert some of the loans. "For any major decision I would always run them by Sam ... and defer to Sam," claimed Ellison. But she did take responsibility for some major decisions. During the crypto crash in June 2022 when third-party lenders started recalling their loans, Alameda was obligated to repay them immediately but its crypto assets had just lost considerable value. Ellison testified that Bankman-Fried had blamed her "loudly and strongly" for Alameda's precarious financial position and she admitted that she should have hedged its portfolio as he had suggested, although he had been the one "who chose to make all the investments". Additionally, when Bankman-Fried suggested Ellison take on a new co-CEO when her co-CEO left, she rejected the idea and remained Alameda's sole CEO. More generally, she and her co-CEO had taken over a lot of Alameda's day-to-day business in 2020 and by 2021, Ellison testified that Bankman-Fried had largely stopped coming into the Alameda office. She also criticized Binance CEO Changpeng Zhao for his role in the bankruptcy, saying that his "real aim ... was to hurt FTX and Alameda". At one point during her testimony, Ellison broke down in tears, remembering her relief when FTX collapsed because she "didn't have to lie anymore". During the cross-examination, Ellison admitted to telling prosecutors that Bankman-Fried "might not know" about some of the customer funds in Alameda bank accounts and that there were "periods of time when he wasn't paying attention to Alameda". She also conceded that Alameda had tried to hire several people to oversee their accounting, but they all left.

Gary Wang

Gary Wang, a long-time friend of Bankman-Fried's and FTX's former chief technology officer, also has a plea deal with the government and is hoping to serve no jail time. On November 7, 2022, when FTX was facing "an $8 billion shortfall in customer assets" and customer withdrawals spiked, Bankman-Fried gave the assurance on Twitter that "FTX is fine. Assets are fine" and that they had "enough to cover all client holdings." This was not accurate, Wang testified, although under cross-examination he admitted to having previously told prosecutors that it was technically true in virtue of FTX still being solvent, just not liquid. When Bankman-Fried made the decision a few days later to hand over some remaining assets to Bahamian regulators, the alleged motivation was that Bahamian authorities were more open to letting him retain control of FTX than U.S. authorities were. In 2019, Wang had altered FTX's code to allow Alameda to withdraw essentially unlimited funds without being automatically liquidated. While Bankman-Fried never wrote nor reviewed FTX's code himself, Wang testified that he made the change on Bankman-Fried's direction. Wang did, however, concede that this was a necessary part of Alameda providing the exchange with liquidity. Despite Wang claiming that he didn't know if Ellison had properly hedged, the defense was able to highlight a statement made by Bankman-Fried in a September 2022 memo about potentially shutting down Alameda: "The fact that we didn't hedge as much as we should have alone cost more in EV [expected value] than all the money Alameda had ever made or ever will make, and that's the kind of critical mistake we're likely to make if I'm not actually running the show there."

Nishad Singh

Former head of engineering Nishad Singh was the third FTX executive to enter a plea bargain with the prosecution and is also hoping to serve no jail time. He testified that he was unaware of Alameda using customer funds until Wang informed him in September 2022 that Alameda was borrowing $13 billion from FTX. Singh had then requested a meeting with Bankman-Fried in which Singh expressed that he was "really freaked out" by Alameda's net asset value (NAV). Bankman-Fried reportedly told Singh that Alameda's NAV was actually "super positive" and that while they were "a little short on deliverables", he thought Alameda could deliver $5 billion quickly and "substantially more" over weeks to months by Alameda selling assets and FTX raising from investors. Singh requested another meeting after Bankman-Fried returned from trying to raise funds in the Middle East. In this meeting, according to Singh, Bankman-Fried still maintained that they could get another $5 billion, but also said that the main way Alameda would be able to return its loans would be through FTX remaining successful. Singh recounted how Bankman-Fried had "profligately" spent "huge sums of money" on investments, campaign donations, celebrity endorsements, and real estate. Examples shared with the court included $1.5 billion for a bitcoin mining deal with a company in Kazakhstan, $205 million for the naming rights to the arena of the Miami Heat NBA basketball team, and a $30 million apartment for himself and his colleagues to live in. Singh condemned the spending as "evil" and reported how he had described one investment as "value extractive" to Bankman-Fried. On cross-examination, Singh conceded that he had taken the master bedroom in said $30 million apartment and that he had borrowed $3.7 million from FTX to buy a house after he became aware of the misuse of customer funds. And he acknowledged originally thinking of some of Alameda's privileges on FTX as "helpful for customers". Singh also testified to back-dating some transactions in December 2021 to bump FTX's revenue over the $1 billion milestone. Then in November 2022, feeling "suicidal" as the crisis intensified, Singh proposed backdating a trade to write off some of his own debt, to which Bankman-Fried replied, "I think that's probably fine". The court were shown a message exchange from around the same time in which Singh said to Bankman-Fried, "this is wildly selfish of me, but [FTX lawyers] may need to know that it wasn't a ton of people orchestrating it. I think it makes them more likely to want to be here to help save the situation and the others at least". Bankman-Fried is seen replying, "yup", followed by, "[for what it's worth] I don't think that's super selfish, I think that's probably correct".

Adam Yedidia

Under an immunity order, FTX software engineer Adam Yedidia reported learning in June 2022 that Alameda owed FTX $8 billion. In the course of fixing a bug in FTX's code that had overstated Alameda's liability by $8 billion, Yedidia noticed that Alameda's remaining liability to FTX was still $8 billion. He testified that he discussed this with Bankman-Fried, although under cross-examination he admitted that the postmortem report he had circulated to Bankman-Fried and others had not specified the size of the liability. But the amount seemed worryingly large to Yedidia, so one day after a game of paddle tennis he asked Bankman-Fried, "Are we OK?" to which Bankman-Fried allegedly replied, "We were bulletproof last year, but we're not bulletproof anymore." In November, Yedidia "heard that Alameda Research had used FTX customer profits to pay back its loans to creditors" and resigned.

Other witnesses

Other witnesses for the prosecution included FTX customer Marc-Antoine Julliard, FTX general counsel Can Sun, Alameda software engineer Christian Drappi, BlockFi CEO Zac Prince, angel investor Matt Huang, accounting professor Peter Easton, investigative analyst Shamel Medrano, FBI agent Marc Troiano, Eliora Katz, and Cory Gaddis.

Sam Bankman-Fried

There was speculation on whether Bankman-Fried would testify, since his attorneys argued that the restrictions on his prescribed medication for ADHD while in jail ostensibly hindered his ability to "meaningfully participate" in the trial. However, on October 27, he took the stand. Key themes of Bankman-Fried's testimony were that other executives had a lot of decision-making power and that there was some critical information he was not aware of at the time. Many of Alameda's problems stemmed from Ellison's refusal to follow his hedging advice, according to Bankman-Fried, and Wang and Singh were responsible for FTX giving Alameda a practically unlimited line of credit. In general, Bankman-Fried claimed to have only been vaguely familiar with how funds actually moved between FTX and Alameda until it was too late. He also expressed regret, acknowledging that "a lot of people got hurt" as a result of his mistakes. All he had wanted to do, he said, was "build the best product on the market."

Alameda's "back door" line of credit

On Bankman-Fried's understanding, the money Alameda borrowed from FTX came from "margin traders" or assets on the exchange that were earning interest. "FTX didn't have restrictions on what people could do with funds they would borrow," Bankman-Fried said. "So long as we believed that the risk was being managed, which is to say, so long as we believed its assets were greater than its liabilities, we didn't care if the user, you know, withdrew funds and used them to buy muffins, to pay business expenses, to invest or anything else." FTX would automatically liquidate positions that were at risk of going negative. However, the company's rapid growth put strain on the system and eventually a major glitch led to the exchange shutting down for an hour while the error was fixed. Their primary liquidity provider, Alameda, was also nearly liquidated in the process. After this incident, Bankman-Fried told Wang and Singh to create a mechanism—perhaps "an alert or a delay"—to prevent erroneous automatic liquidation. He did not know exactly what they chose to implement. Wang and Singh, after all, "were authorized to make decisions on behalf of the company without consulting with me." But Bankman-Fried was aware of "roughly" how much Alameda's line of credit was using, which he understood to be "millions in 2019" and "around $2 billion" by 2022.

The fiat@ account

FTX used an "omnibus" customer wallet, meaning that customers' digital assets were transferred to one central wallet for that asset. Many centralized exchanges use omnibus accounts for customer assets, Bankman-Fried told the court, because separate storage would have been "impractical". But net customer assets were kept in separate bank accounts to profit. Fiat currency was initially received via Alameda and other payment processors. But Bankman-Fried testified that he "wasn't entirely sure what was happening" there. He claimed to have thought that "either the funds were just being held in a bank account" or that they were "being sent to FTX", and that if Alameda was borrowing and using those funds, then surely they would have recorded it on the "info@" account that tracked how much credit Alameda was utilizing.