The trial of Sam Bankman-Fried is likely to have more consequences than simply determining whether the man himself is found guilty. Depending on the evidence presented during the trial, it could be difficult for the entire crypto industry.
“How much damage can this lawsuit do to the industry’s already weakened reputation at this point?” asks Yesha Yadav, a law professor at Vanderbilt University. “This trial is going to be an excruciating time for the industry because no one knows what kind of evidence might emerge.”
Bankman-Fried, founder of FTX and Alameda Research, faces seven criminal charges: two counts of wire fraud and five counts of conspiracy. FTX was a failed cryptocurrency exchange founded in 2019. According to a now-deleted profile of FTX investors, Sequoia Capital, FTX was founded out of Bankman-Fried’s frustration with other exchanges when he was running Alameda Research, his cryptocurrency trading company. According to the SEC, FTX was a fraud “from the beginning” diverting client funds to Alameda.
“In reality, it’s just old-fashioned embezzlement.”
What remains of FTX is now run by John J. Ray III; You may remember him as the guy who cleaned up Enron and also said FTX is worse than Enron. Just before the trial began, FTX lawyers filed a lawsuit against Bankman-Fried’s parents, saying they should repay the millions of dollars they received from their son. Ray has also referred to Bankman-Fried’s conduct as “really old-fashioned malfeasance.”
We have an idea of what the government will argue thanks to the presentations prosecutors are making in this case. They argue that Bankman-Fried lied about consumer protection and that Bankman-Fried’s statements that FTX was “avoiding or managing conflicts of interest” and that “as a general principle, FTX separates client assets from its own assets in our platforms” were lies, in a superseding indictment filed on August 14.
The indictment also says there were special features in FTX’s code that “allowed Alameda to spend and withdraw unlimited amounts of money from FTX,” which were created under Bankman-Fried’s direction. that actually exempted Alameda from the types of risk management that other clients faced. At the same time, the government alleges, “Bankman-Fried publicly and repeatedly asserted that Alameda did not have privileged access to FTX.”
Bankman-Fried is accused of using “billions of dollars in embezzled FTX customer deposits” to help purchase more than $200 million in real estate for himself, make billions of dollars in investments for his own interest and pay Alameda lenders, according to the indictment. Additionally, Bankman-Fried allegedly used more than $100 million of client funds to make political contributions; prosecutors can prove evidence of those contributions in this essayalthough are not part of the charges filed. A second trial is scheduled for March 2024, with additional charges.
Before his downfall, Bankman-Fried presented himself as the good guy of cryptocurrencies: the trustworthy face of a sometimes murky industry. He was also very interested in publicity and gave many interviews before and after the fall of FTX. FTX’s rapid rise as an industrial force was due, at least in part, to Bankman-Fried’s appetite for attention. Here are the successes:
- FTX bought the naming rights to a stadium in Miami, FTX Arena, now Kaseya Center
- FTX ran ads featuring Tom Brady and Gisele Bündchen, as well as a Super Bowl ad with Larry David.
- Company left Crypto Bahamasa conference attended by former US President Bill Clinton and former British Prime Minister Tony Blair.
- Bankman-Fried testified before Congress, in the Senate Committee on Agriculture, Nutrition and Forestryhe House Financial Services Committeeand the House Agriculture Committee
- fried banker emerges as a political mega-donor who backs Democrats
- Bankman-Fried offered to bail out Failed Crypto Companies Voyager Digital and BlockFimajor some compare it to JP Morgan
Bankman-Fried gave interviews freely and quickly rose to public prominence in the industry. Although FTX had not been in business as long as competing exchanges like Coinbase, Kraken or Gemini, Bankman-Fried positioned itself as an important, youthful face for cryptocurrencies. (At a point, Bankman-Fried told an FTX colleague that “Honestly, I think it’s a negative EV (this can mean “expected value,” like in poker) for me to cut my hair. I think it’s important that people think I look crazy.
Because he was so successful at this type of public relations, his fall from grace was another mark against an industry already rocked by bankruptcies and scandals. Some additional problems for the crypto industry are likely to arise from a crucial element of the fraud trial: the part where the government must prove its intent.
The first part of proving the government’s case is fairly simple and a little boring: Prosecutors must prove that certain transactions took place. Any records the Southern District of New York has for the transactions will be displayed.
“What conversations took place between him and his accomplices who are now cooperating against him?”
The second part is where all the drama will likely come, says Christopher LaVigne, litigation partner and co-chair of the cryptocurrency practice at the Withers law firm. Prosecutors have to connect those transactions to Bankman-Fried, show that he knew what he was doing was wrong and prove that he lied about it anyway.
“What were you telling your parents and your other advisors about this?” says LaVigne. “What conversations took place between him and his accomplices who are now cooperating against him?”
To better establish intent, the government can use Bankman-Fried’s own words. The indictment calls Bankman-Fried’s tweets from November 2022 “false and misleading.”
“We made it go directly to the Internet,” LaVigne says. If he wrote things on Twitter or said things in interviews that weren’t true, that’s more material to the government’s case. “They can point to that and say, ‘This is what he said, this is what really happened.’”
Other evidence may include Signal messages and testimony from co-conspirators pleading guilty to their own charges. Alameda Research CEO Caroline Ellison, who was also Bankman-Fried’s sometimes girlfriend, may play an important role: Bankman-Fried leaked his diaries to He New York Times and it was accordingly jailed for witness tampering. The government has indicated that FTX co-founder Gary Wang and engineering chief Nishad Singh will also be among the witnesses called to testify about Bankman-Fried.
Bankman-Fried’s defense may also present risks to people who dealt with him
There may be testimonials from lenders, venture capitalists, and clients to establish the basis for some charges. In the indictment, prosecutors allege that Bankman-Fried lied to FTX investors. Some of those investors may be called to testify, which isn’t the kind of thing venture capital bigwigs typically enjoy and could create collateral damage for the industry.
If, for example, Capital of the redwoods did due diligence around his investment in FTX, everything Bankman-Fried told his partners could be important. Was FTX already sending funds from Alameda clients at that time? Did Bankman-Fried know? And did you tell the venture capitalists at the time? (If I told them it wasn’t happening, that would set the intention.) Binance was also an early investor in FTX, and former executives may also be called to testify, says Hermine Wong, former head of policy at Coinbase and former SEC regulator.
Bankman-Fried’s defense may also present risks to people who dealt with him. Defense lawyers have several simultaneous objectives. First, they try to prove that their client is not guilty. But in case they don’t get the result they want, they are also laying the groundwork for appeals and sentencing arguments. Any evidence they want to present for those two purposes has to come into play at trial.
Bankman-Fried’s lawyers are already making arguments that her constitutional rights are being violated by her pretrial incarceration because, among other things, her Internet connection was not good enough to plan her defense, LaVigne notes. That could be grounds for appeal.
“Is it going to ruin the entire industry?”
Bankman-Fried’s behavior after the FTX crash suggests he is something of a wild card. It may suggest that you acted on the advice of his attorneys. But you can also present other evidence that could be problematic, implying, for example, that he engaged in industry-standard behavior or that everything that happened was Binance’s fault. It may be risky, but we already know that Bankman-Fried loves risk.
“Is it going to ruin the entire industry?” asks Wong. “A thought like, ‘Everyone was doing this, isn’t it fair that I’m the only one accused?'” That may not fly in a court of law, but it could absolutely damage the public perception of cryptocurrencies in general.
For example, just before he was arrested, Bankman-Fried presented messages from a crypto group chat in testimony. planned to deliver before Congress. In that testimony, he primarily blames Binance and its lawyers at the firm Sullivan & Cromwell.
Other messages from group chats may be introduced into evidence during the trial. This could potentially be embarrassing for the entire industry, says Wong.
“You can imagine that some of these founders, CEOs and people at that level talk to each other somewhat informally about what’s going on,” he says. If it appears that his peer group supported him, or worse, fawned over him, that is a real problem for the reputation of the industry.”
After FTX filed for bankruptcy, Bankman-Fried went on an extensive media tour and conducted interviews. with The New York Times’ Andrew Ross Sorkin and Good morning america. Even under house arrest, he gave interviews, even with The New Yorker. Bankman-Fried seemed to think that if he simply explained things, everyone would understand that what he did was a mistake, not a crime.
Big legal cases like this often unearth embarrassing correspondence: think of Elon Musk’s text messages in the Twitter case revealing VC Steve Jurvetson asking Musk to get his son a job or the messages of Elizabeth Holmes’ embarrassing texts with her ex. fried banker He has already leaked his ex’s diary to The New York Times. Who else can he humiliate?
There is no doubt that the Bankman-Fried trial will be embarrassing for the crypto industry. The salacious details: his ex-girlfriend and a friend he met at a children’s math camp testifying against him, possible recreational drug useand complicated love lives – means the public will likely be paying attention to the trial. The real question is as It’s embarrassing and, given Bankman-Fried’s risk appetite, the sky may well be the limit.