BY JOEL KHALILI
BUSINESS
OCT 2, 2023 11:29 AM
The Trial of Sam Bankman-Fried, Explained
White-collar defendants use three main defenses: “It wasn’t me, I didn’t mean it, and the people that say I did
are lying.” FTX's Sam Bankman-Fried is likely to go for “I didn’t mean it,” experts say.
PHOTO-ILLUSTRATION: CHARIS MORGAN; GETTY IMAGES
The Trial of Sam Bankman-Fried
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Fraud
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How SBF Sealed His
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The FTX Void
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ON OCTOBER 3, Sam Bankman-Fried, founder of bankrupt crypto exchange FTX, is due to go on trial for fraud and
conspiracy in a court in the Southern District of New York.
Last fall, a report published by news outlet CoinDesk cast doubt over the health of FTX’s sibling company, Alameda
Research, with which it had unusually close ties. When customers rushed to pull money out of the exchange, FTX couldn’t
meet withdrawals. After a rescue deal from rival exchange Binance fell through, FTX filed for bankruptcy on November 11. A
month later, Bankman-Fried was arrested in the Bahamas, where FTX was headquartered, and extradited to the US.
The Department of Justice has filed a total of 13 criminal charges against Bankman-Fried, seven of which will be heard at
the initial trial. (A second will follow in March 2024.) Meanwhile, court filings in the criminal case against Bankman-Fried,
civil cases filed by US financial regulators, and the FTX bankruptcy proceeding have shone a light on the events and
conditions that led to the evaporation of billions of dollars’ worth of customer funds.
FTX couldn’t meet withdrawals, the DOJ alleges, because Bankman-Fried had mismanaged and misappropriated funds that
were used to bankroll risky trading activity; make loans to himself and others; engage in investments, acquisitions, real
estate purchases, marketing campaigns, and political donations; and service debt.
A court filing from September 30 shows the prosecution is likely to call upon a number of customers of the exchange as
witnesses—ranging from professional investors to regular people. The objective, according to legal experts, will be to
appeal to the sympathies of the jury by demonstrating the toll the alleged fraud has taken on those whose money was lost.
In January, Bankman-Fried pleaded not guilty to each of the seven charges. He has spent most of the intervening period
under house arrest but was taken into custody in August after the prosecution alleged he was tampering with witnesses. If
convicted at the end of the trial, which is expected to last around a month, the one-time crypto wunderkind could face
decades in prison.
Who Are the Players Involved?
BANKMAN-FRIED IS ACCUSED of orchestrating the alleged fraud at FTX. But the exchange and Alameda Research were
run by a small inner circle of lieutenants, some of whom have pleaded guilty to related offenses and are expected to testify
at his trial. The exchange’s rise and fall also drew in other major players in the crypto world.
Sam Bankman-Fried: The founder and CEO of FTX and the founder of Alameda Research, a trading firm whose close
relationship with the exchange is central to the alleged fraud. He faces 13 criminal charges, seven of which will be heard at
the initial trial.
Caroline Ellison: The CEO of Alameda Research and on-and-off romantic partner of Bankman-Fried. The pair met at Jane
Street, a quantitative trading firm where they both worked after college. She has pleaded guilty to seven criminal charges,
including wire fraud, securities and commodities fraud, and money laundering.
Sam Trabucco: The co-CEO of Alameda Research alongside Ellison, Trabucco left the post three months before the
collapse of FTX. The DOJ has not accused Trabucco of any wrongdoing, and it is unclear whether he’s cooperating with
prosecutors. His whereabouts are unknown.
Gary Wang: The cofounder of FTX and Alameda Research and CTO for both firms. Wang met Bankman-Fried in high
school, and the pair were later roommates at MIT. He has pleaded guilty to four criminal charges, including wire fraud and
conspiracy.
Nishad Singh: The director of engineering at FTX. Singh worked as an engineer at Meta before being headhunted by
Bankman-Fried. He has pleaded guilty to six criminal charges, including wire fraud, securities and commodities fraud, and
money laundering.
Changpeng Zhao (or CZ): The CEO of Binance, the world’s largest crypto exchange, whose relationship with BankmanFried had become increasingly fraught in the lead-up to the fall of FTX. Bankman-Fried blamed tweets Zhao made for
having precipitated the run on deposits that caused FTX to crumble. The prosecution may refer to these tweets as it frames
events for the jury. Zhao is dealing with his own legal issues: US regulators charged Binance earlier this year with a litany of
violations, and the DOJ is reportedly investigating too.
John J. Ray III: The attorney now tasked with steering FTX and its subsidiaries through bankruptcy. Ray established a
reputation as a restructuring savant after overseeing the liquidation of Enron, a company that engaged in extensive
accounting and corporate fraud. The prosecution may cite materials Ray compiled as part of the FTX bankruptcy
investigation to support its case against Bankman-Fried.
Barbara Fried and Joseph Bankman: Longtime professors at Stanford Law School and parents to Bankman-Fried. Their
expertise, reputation, and connections are suspected of having helped legitimize FTX. Under Ray’s instruction, a lawsuit
was filed against Bankman and Fried on September 18 seeking the return of millions of dollars allegedly gifted to them
through FTX and accusing them of a level of complicity in the FTX fraud, which they deny.
FTX Customers: According to court filings, the prosecution will call a range of FTX customers to the stand to describe the
ways in which they were misled by FTX. Customers entrusted their funds with FTX in the expectation the exchange would
act as a responsible custodian, the prosecution will claim, but were betrayed under the direction of SBF.
What Allegedly Happened?
THE ALLEGED FRAUD centers on the ties between FTX and Alameda Research, a trading firm also founded by BankmanFried. The specifics of the financial relationship between the two companies had long been unclear. In public, BankmanFried insisted that Alameda was an entirely distinct entity that focused on arbitrage trading and market-making, while FTX
stuck to exchange work helping customers trade cryptocurrencies and derivatives.
But on November 2, 2022, an article published by CoinDesk implied that the opposite was true. The report alleged that
large portions of Alameda’s balance sheet consisted of a highly illiquid crypto token, FTT. The token was invented and
issued by FTX; holding it would give customers of the exchange discounts on trading fees and other rewards—and FTX
another avenue through which to raise money without giving up equity. Alameda valued its FTT holdings in the billions of
dollars, based on the going market price, but FTX and Alameda owned almost all of the FTT in existence, and only a small
number of the tokens were in circulation. This meant that Alameda’s business and FTX’s were deeply entwined and that the
value of Alameda’s holdings—indeed, its very solvency—was incredibly vulnerable to a sell-off in FTT.
Spooked by the revelation and perhaps sensing an opportunity to deal a blow to his rival, Zhao announced that Binance
would sell off its own sizable pot of FTT, nominally worth more than $500 million at that point, which it had acquired as
part of an earlier deal to offload an equity stake in FTX. Other traders leapt to get rid of their own FTT, causing the price to
tumble by 75 percent and massively reducing the value of Alameda’s assets. Concerned about the financial condition of
FTX, users rushed to pull their money off the exchange.
Unlike banks, crypto exchanges are expected to store customer funds in a one-to-one ratio: For every dollar’s worth of
assets deposited, the exchange is supposed to keep a dollar’s worth on hand for withdrawal. Most, including FTX, have a
clause in their terms of service to this effect. But FTX couldn’t meet the influx of withdrawals, the criminal indictment
asserts, because it had used customer deposits to fund billions of dollars in loans to its sibling company. The collateral
Alameda had posted as security against the loans: the now-worthless FTT token.
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Investigations by the DOJ, Securities and Exchange Commission, Commodities and Futures Trading Commission, and FTX
liquidators have since charted the extent of the ties between Alameda and FTX.
From its inception, FTX funneled customer deposits into bank accounts owned or managed by Alameda, the DOJ alleges,
where they were muddled together with the trading firm’s assets. Separately, Alameda was extended a virtually unlimited
line of credit by FTX, funded by customer deposits, through a specially coded mechanism devised by Wang and Singh that
allowed it to maintain a negative balance on the exchange—in short, to spend money that wasn’t its own. This money was
used by Alameda to conduct high-risk crypto trading, make venture investments, donate to political campaigns, and for
other purposes. Later, Bankman-Fried authorized the use of billions more to repay substantial debts to external lenders
too, the DOJ alleges.
In practice, there was no discernible division between the two organizations, the CFTC asserts. Not only did FTX and
Alameda share an office, but also “key personnel, technology and hardware, intellectual property, and other resources,”
and senior executives had “widespread access to each other’s systems and accounts.” Nominally, Bankman-Fried ceded
control of Alameda to Ellison and Trabucco in October 2021, but in practice he “maintained direct decision-making
authority.” It was later reported by CoinDesk that Bankman-Fried and Ellison, who lived with eight other FTX executives in
a luxury penthouse, had been romantically involved.
According to the DOJ and SEC, Bankman-Fried also personally borrowed more than $1 billion from Alameda, again funded
by FTX customers, and approved similar loans to his parents and FTX executives. The loans—used to make political
donations and private investments and to purchase luxury jets and real estate—were “poorly documented,” the SEC claims,
“and at times not documented at all.”
“Never in my career have I seen such an utter failure of corporate controls at every level of an organization,” Ray told
Congress on December 13. In the hands of a small cabal of “grossly inexperienced and unsophisticated individuals,” with
Bankman-Fried at its helm, he said, FTX “failed to implement virtually any of the systems or controls necessary for a
company entrusted with other people’s money.” This amounted to a criminal act, says the DOJ, because Bankman-Fried
deliberately lied to clients and investors about asset segregation and other protections, exposing them to “massive,
undisclosed risk.” Through a “pattern of fraudulent schemes,” the indictment claims, Bankman-Fried “exploited the trust
that FTX customers placed in him” to prop up his businesses, enhance his public image, and enrich himself.
ILLUSTRATION: CHARIS MORGAN; GETTY IMAGES
What Are the Charges?
OF THE CHARGES to be tried in October, most relate to the ways FTX and Alameda allegedly misled their various
counterparties, from customers to lenders to investors. Six of the seven are conspiracy charges, meaning the prosecution
need only demonstrate Bankman-Fried was aware of the underlying crime to secure a conviction:
Conspiracy to commit wire fraud on customers of FTX
Wire fraud on customers of FTX
Conspiracy to commit wire fraud on lenders to Alameda Research
Wire fraud on lenders to Alameda Research
Conspiracy to commit fraud on customers of FTX in connection with purchase and sale of derivatives
Conspiracy to commit securities fraud on investors in FTX
Conspiracy to commit money laundering
In building its indictment against Bankman-Fried, says Daniel Richman, professor of law at Columbia University and
former federal prosecutor, the government has adopted a “thin to win” approach—including only the minimum amount of
information necessary to secure a conviction. The goal, he explains, is to tell a “rich and textured story” that conveys the
extent of the fraud, but without overwhelming the jury with tales of “bit players and side schemes,” even if that means
leaving out technical details that crypto-heads might find the most egregious. “If you can’t explain in a couple of sentences
why all this basically amounts to ripping people off, you’re not going to have an easy trial,” he says.
Meanwhile, in highlighting the impact of the fraud on a variety of parties—not just FTX customers, but lenders and
investors too—the prosecution has attempted to “tease out different kinds of victims,” Richman says. Although the alleged
fraud might have felt to insiders like the culmination of a single series of decisions, the government is attempting to
separate out the individual schemes to help illustrate the range of parties injured by the actions of Bankman-Fried.
That said, not all charges will be given equal treatment at trial; experts say the prosecution will focus on those that offer the
most bang for the buck, from a sentencing and jury management perspective. In this context, that might mean spending
more time on charges that relate to losses incurred by regular people, a cohort likely to appear more sympathetic to the
jury, than by institutions that lent money to FTX or took an equity stake.
In aggregate, the charges could theoretically carry a maximum jail time of 110 years. But Richman says it’s a mistake to
guess at a likely jail sentence because judges frequently make unexpected decisions. If found guilty, he says, based on
previous sentencing in SDNY courts, the likelihood is that Bankman-Fried would receive a far shorter sentence than the
guidelines dictate.
ILLUSTRATION: CHARIS MORGAN; GETTY IMAGES
Does Bankman-Fried Have a Defense Here?
IN WHITE-COLLAR CASES, there are only a limited number of possible defenses: “It wasn’t me, I didn’t mean it, and the
people that say I did are lying,” says Richman.
It would appear, based on the parade of interviews prior to his arrest and legal motions ahead of the trial, that BankmanFried’s defense will fall under the “I didn’t mean it” category. Specifically, he is teeing up a so-called “advice of counsel
defense.” He’ll say he was led astray by his legal advisors, who gave him cause to believe everything at FTX was kosher.
In theory, says Richman, an advice of counsel defense can be a “get out of jail free card.” But it’s often a difficult defense to
mount because it requires the defendant to demonstrate that their lawyers were given all of the information necessary to
provide fully informed advice—warts and all. In this context, Bankman-Fried would have to show that his legal team knew
everything about the FTX operation, from the reliance on Alameda bank accounts to the undisclosed intercompany loans
funded by customer deposits. “That’s where a lot of advice of counsel defenses crumble,” says Richman. Staging such a
defense would also give prosecutors the right to scrutinize Bankman-Fried’s communications with legal advisors, usually
subject to attorney-client privilege, which he may prefer to avoid if he ever made remarks in the privacy of his lawyer’s
office that might incriminate him.
The silver lining for Bankman-Fried is that there is no burden of proof on the defense; his counsel need only plant doubt in
the minds of the jury, which can be achieved via a number of routes. The advice of counsel defense might be the
centerpiece, but Bankman-Fried could also attempt to undermine the credibility of the insiders who testify against him, for
example, or deflect blame for fraudulent acts onto his deputies. There are options at his disposal.
It’s also possible that the case won’t make it to trial; until October 2, Bankman-Fried still has the opportunity to submit a
guilty plea, which the overwhelming majority of white-collar defendants do. “Many pleas happen well before the trial date,
but some on the eve,” says Richman. “The immediate prospect of conviction and a long jail sentence often focuses the mind
intensely.”
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Joel Khalili is a reporter for WIRED, covering crypto, Web3, and fintech. He was previously an editor at TechRadar, where he wrote about the business of
technology, among other things. Before turning his hand to journalism, he studied English literature at University College London.
TOPICS
CRYPTOCURRENCY
CRIME
COURTS
SAM BANKMAN-FRIED
FTX TRIAL
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