Is Sam Bankman-Fried’s defense even trying to win?

I had never seen Sam Bankman-Fried as still as he was during the prosecution’s opening statement. His characteristic leg movement was absent. He barely moved as the prosecutor listed the evidence against him: internal company files, what they told clients, the testimony of his accomplices, and his own words.

His hair was cut, the result of a fellow prisoner’s haircuthe Wall Street Journal reported. She was wearing a suit purchased at a discount at Macy’s, according to the Diary; She hung on him. She seemed to have lost some weight.

Bankman-Fried, this time last year, was living a lavish lifestyle as CEO of cryptocurrency exchange FTX, Assistant U.S. Attorney Thane Rehn said, with the cadence of a high school student uttering his lines in a student play. Bankman-Fried dated Tom Brady. He appeared on magazine covers, lived in a $30 million penthouse and spent time with world politicians. “That was all based on lies,” Rehn said.

In his opening speech, Rehn avoided explaining cryptocurrencies to the jury. Instead, he severely beat Bankman-Fried for lying and stealing.

Bankman-Fried remained almost motionless, occasionally glancing at Rehn, as the prosecutor told the jury that Bankman-Fried sold FTX stock and borrowed millions from lenders by lying.

The story Rehn told is familiar to anyone who follows the news. In May and June 2022, Alameda Research, the cryptocurrency trading company apparently run by Caroline Ellison, did not have enough to pay its bills, so it withdrew money from clients to pay off loans. By September, the hole in FTX’s balance sheet was so big that it could never pay customers.

When CoinDesk published its article in November 2022, people realized that FTX was a house of cards, Rehn said. Meanwhile, Bankman-Fried tweeted. “FTX is fine. Assets are fine” and “We do not invest client assets even in Treasury bonds.”

Pointing to Bankman-Fried, Rehn said, “This man stole billions of dollars from thousands of people.”

So how was the defense going to continue? I was very curious, as I learned yesterday that Bankman-Fried had never been offered a plea deal since he and his attorneys had told the government they would not negotiate. Surely there would be some kind of evidence, something that would have given him so much confidence.

Instead, there was a metaphor.

Defense attorney Mark Cohen, with the energy of a patient father telling his obnoxious children a bedtime story, assured us that working at a startup was like building a plane while flying it, and that FTX the plane had flown straight towards the perfect storm: the Crypto crash. Except he also said this: FTX “didn’t have a chief risk officer, which became a problem when the storm hit.”

The problem with this metaphor is that if FTX was a plane, it was a flying plane that was missing a key component: namely, the risk officer, an executive whose job is to, well, manage risk. This is important, since the risks can range from reputational to regulatory and financial.

FTX got its name because it was a futures exchange, which, to borrow a phrase from Bloomberg’s Matt Levine, “is situated between the winners and losers of bets.” That means FTX can’t pay what it owes to winners unless losers pay up. Risk management is a crucial part of business; risk officers exist to identify potential business risks, monitor and mitigate them. This is not to mention the regulatory risks around cryptocurrencies.

As Cohen talked about planes, he couldn’t stop thinking about the missing risk officer. I thought bringing it up was a huge mistake. The prosecution had not mentioned it. Either Bankman-Fried is stupid (unlikely) or he deliberately did not hire a risk manager. Was he worried about what one might find?

Of course, as Cohen said, Bankman-Fried was a math nerd who didn’t party. That paints a picture of someone who is quite deliberate, particularly since he immediately left MIT and went to work on Wall Street. If he had It’s been a holiday-resistant train wreck, I could see bypassing a risk officer for another line, or a supermodel, or something more important. Why was he defending bringing this up?

But while Cohen tried to tell me that FTX and Alameda’s business relationships were “reasonable under the circumstances,” the risk-off officer kept elbowing me in the ribs. “Sam acted in good faith and took commercially reasonable actions” is a pretty tough pill to swallow considering this.

Man, it doesn’t help that your defense attorney made you look worse than the prosecution already did. And while Cohen tried to make the common white-collar defense argument that Bankman-Fried, as CEO, was simply too busy to supervise what everyone did every day, he only made me more suspicious. That’s why you hire a risk manager and delegate! That’s the whole point! I could barely hear Cohen blaming Caroline Ellison and Changpeng “CZ” Zhao for the “safe officer” debacle ringing in my ears.

After the defense’s opening statements, things got even worse for Bankman-Fried. The prosecution called its first witness, Marc-Antoine Julliard, whose money was stuck in FTX. Juilliard, who was born in Paris and lives in London, testified that he trusted FTX because Bankman-Fried seemed like a leading figure in the industry. When he was evaluating the exchange, he thought that the sheer volume of users was also important; At the time, FTX was among the three largest exchanges. Additionally, major venture capital firms had invested and “don’t commit hundreds of millions without doing due diligence, checking the firm’s books, accounting, and going through various compliance processes,” so it was a vote of confidence. for me,” Juilliard said. (Evidently he had not been paying attention to the trial of Elizabeth Holmes.)

He also pointed out that FTX’s glossy ads, featuring Gisele Bündchen, for example, suggested a very high budget. It wouldn’t make sense to spend that much money unless FTX had very strong finances, Juilliard thought. She opened an account, transferred both regular money and cryptocurrency, and used the exchange to execute her plan: buy Bitcoin to sell it within five to ten years at higher prices.

In November 2022, things went wrong for Julliard. He followed Bankman-Fried on Twitter and read aloud “FTX is fine. Assets are fine,” they tweet, along with “FTX has enough to cover all client holdings. We do not invest client assets” and some others, which gave Julliard the impression that his money was there; the problem could have been technical (anti-spam measures) or regulatory. When he tried to withdraw the money from him on November 8, it was too late. We saw screenshots of his withdrawal attempts: $20,000 and about 4 Bitcoin, which were worth about $20,000 at the time: about $100,000 of money, inaccessible.

It’s a thankless task to question a client whose money is gone, but Cohen tried it anyway. He noted that Julliard was a licensed commodities broker, who traded cryptocurrencies because he did not have to disclose it; that Julliard knew that cryptocurrencies were new and risky, and that Julliard did not review the terms of the service agreement he had agreed to when creating his FTX account.

Well, sure, but so what?

The next witness called was Bankman-Fried’s former college (and FTX) roommate, Adam Yedidia, about whom I hope to have a lot more to say tomorrow.

When the jury was dismissed, Bankman-Fried’s attorneys told the judge that she was not receiving her full doses of Adderall in prison. The defense appeared to be laying the groundwork for an appeal; It was previously argued that Adderall’s prison retention made it difficult for Bankman-Fried to prepare his defense. Given what I saw today, it seems prudent to file an appeal. It is, at a minimum, risk management.