By Luc Cohen
NEW YORK (Reuters) – In U.S. prosecutors’ telling, Sam Bankman-Fried embezzled money from depositors in his FTX cryptocurrency exchange ever since he launched it in 2019, and the resulting shortfall led directly to its collapse as crypto prices swooned last year.
But in his own version and in explanations put forth by his lawyers, Bankman-Fried thought FTX, like a bank, could make investments with customers’ money as long as they were able to withdraw it – and he did not know that actions taken by his closest colleagues had jeopardized the availability of funds.
Over the course of six weeks starting on Oct. 3, a federal jury in Manhattan is due to weigh these dueling narratives during Bankman-Fried’s criminal trial on fraud charges, before determining whether the 31-year-old former billionaire is guilty on seven counts of fraud and conspiracy.
Bankman-Fried, who quit his job as a quantitative trader at Wall Street firm Jane Street to found crypto hedge fund Alameda Research in 2017, has pleaded not guilty.
A conviction would seal his spectacular fall from grace. During his meteoric rise as the values of bitcoin and other digital assets soared during 2020 and 2021, he became something of a poster child for responsibility in the often rough-and-tumble cryptocurrency sector.
He plastered FTX’s logo on a basketball arena in Miami and on MLB baseball umpires’ uniforms. He hired star athletes and actors to endorse the platform as safe. And as his net worth surged to $26 billion, he pledged to give most of his wealth away to philanthropic causes such as pandemic preparedness.
FTX survived a downturn in crypto prices that saw other major digital currency platforms fail earlier in 2022, with Bankman-Fried even bailing some of them out.
But in November, crypto news outlet CoinDesk published an Alameda balance sheet showing the fund was heavily exposed to FTT, a token issued by FTX itself. That spurred a wave of customer withdrawals from which the exchange could not recover.
Prosecutors say it was a facade all along. Bankman-Fried is charged with stealing billions of dollars in FTX deposits to plug losses at Alameda as well as to buy luxury real estate and donate to U.S. political campaigns to promote crypto-friendly legislation.
“This is one of the biggest financial frauds in American history,” Damian Williams, the U.S. Attorney in Manhattan, said in December 2022 upon announcing Bankman-Fried’s arrest in the Bahamas, where FTX was based.
Bankman-Fried has acknowledged inadequate risk management, but denied stealing funds. He intended to tell Congress in a December hearing over FTX’s collapse that he made a mistake and did not know how much FTX had lent Alameda due to a “quirk” in the company’s internal controls, according to a written draft of his planned testimony published by Forbes and confirmed by Bankman-Fried as authentic. Bankman-Fried was arrested before he could testify.
His lawyers have said Bankman-Fried should be allowed to introduce evidence that he had a “good faith” belief that his treatment of customer funds was in line with FTX’s terms of service and the law. To convict Bankman-Fried, prosecutors must show he intended to commit a crime.
“It’s always been Bankman-Fried’s best strategy to show that he’s not a criminal mastermind – he was just out of his depth,” said Mark Kasten, a defense lawyer at Buchanan Ingersoll & Rooney who is not involved in the case.
EX-COLLEAGUES TO TESTIFY
To prove their case, prosecutors have said they plan to call three former members of Bankman-Fried’s inner circle: former Alameda chief executive Caroline Ellison, former FTX technology chief Gary Wang, and former engineering chief Nishad Singh, who once shared a $30 million Bahamas penthouse with their onetime boss.
All three have pleaded guilty and agreed to cooperate with the government.
Prosecutors say Bankman-Fried directed Wang to change FTX’s computer code to allow Alameda to borrow unlimited sums of money, a privilege other exchange users lacked. Singh, in pleading guilty, said he was aware by June 2022 that Alameda had borrowed billions from FTX without customers’ consent.
Ellison, Bankman-Fried’s former romantic partner, said in her plea hearing that she and Bankman-Fried agreed to hide the fact Alameda had lent billions of dollars to FTX executives for their personal use from the fund’s own lenders.
Bankman-Fried has been preparing for trial from behind bars since mid-August, when U.S. District Judge Lewis Kaplan revoked his $250 million bail after finding he likely tried to intimidate Ellison by sharing her personal writings, in which she described struggling with her job at Alameda, with a New York Times reporter.
In personal writings by Bankman-Fried that were also published by the New York Times, on Sept. 14, he sought to push the blame for Alameda’s failure onto Ellison.
“She continually avoided talking about risk management – dodging my suggestions – until it was too late,” he wrote.
Bankman-Fried’s defense lawyers have indicated in court papers that they plan to challenge the credibility of all three witnesses.
Because their case rests on showing FTX customers’ inability to withdraw funds last November was the result of Bankman-Fried’s mistakes running his business, not a deliberate fraud scheme, they are likely to push back hard on any testimony that their client knew well ahead of the collapse about his companies’ dire financial straits, experts said.
“The question is, when did Bankman-Fried know that there wouldn’t be enough money?” said Paul Tuchmann, a former federal prosecutor and current partner at Wiggin and Dana. “Obviously there wasn’t enough money to cover all the deposits. But when did he know that? When did he have reason to believe that?”
(Reporting by Luc Cohen in New York; Editing by Amy Stevens and Daniel Wallis)
