Sam Bankman-Fried’s Fraud Trial: Unveiling His Defense Strategy

Sam Bankman-Fried to Argue Lack of Criminal Intent in Fraud Trial

New York, October 2, 2023 – Sam Bankman-Fried, the founder of FTX cryptocurrency exchange, is expected to defend himself in his upcoming fraud trial by claiming he did not believe the use of customer funds was improper. Bankman-Fried will also challenge the credibility of individuals who claim otherwise. These arguments, suggested by defense lawyers in court filings, aim to help Bankman-Fried prove he lacked criminal intent despite the mistakes that led to FTX’s collapse in November 2022. However, testifying against Bankman-Fried may be individuals who allege he knowingly used customer funds, thus undermining his good faith argument, experts say.

A spokesperson for Bankman-Fried declined to comment. He is currently detained in Brooklyn. Bankman-Fried has pleaded not guilty to seven counts of fraud and conspiracy. While he admits to mismanaging risk at FTX, he denies the prosecution’s accusation that he stole billions in customer deposits.

“We underestimated the risks and were negligent,” Bankman-Fried wrote on X (formerly Twitter) on November 16, five days after FTX filed for bankruptcy. “There were problems brewing, bigger than I realized.”

In a later interview with the New York Times, Bankman-Fried acknowledged that Alameda had borrowed money from FTX but claimed he was unaware of the extent of the debt.

In court filings in September, Bankman-Fried’s lawyers asserted that he believed in good faith that FTX’s handling of customer funds was permissible according to the platform’s terms of service, which did not prohibit the use of customer deposits as long as withdrawal requests were honored.

Prosecutors from the U.S. Attorney’s Office in Manhattan have highlighted a section of FTX’s terms of service stating that users retain control of their digital assets at all times. They also argue that Bankman-Fried made false public statements, including in FTX commercials, claiming that the exchange properly safeguarded customer assets.

U.S. District Judge Lewis Kaplan has barred Bankman-Fried from presenting an expert witness to interpret the terms of service. However, he has not ruled out allowing the defendant to cross-examine witnesses on the subject.

Testimony from former colleagues who were close to Bankman-Fried may challenge his claim of good faith. Three former members of his inner circle—former Alameda CEO Caroline Ellison and former FTX executives Gary Wang and Nishad Singh—have pleaded guilty and are expected to testify against him. “Cooperating witnesses like Caroline Ellison and Gary Wang… are able to provide an insider’s perspective on what was happening behind closed doors, which can be very powerful to show intent,” says Tim Howard, a former federal prosecutor.

Prosecutors also plan to play a recording of an Alameda meeting in which Ellison supposedly approved the use of customer funds, and they allege that Bankman-Fried instructed Wang to alter FTX’s code to allow Alameda to accrue a negative balance, a privilege other users did not have.

Bankman-Fried will likely argue that his former colleagues are motivated to implicate him falsely to receive more lenient sentences, a common tactic among cooperating witnesses in criminal cases, experts say. His lawyers have also claimed in court documents that other companies in the cryptocurrency sector used customer assets in a similar manner, which contributed to Bankman-Fried’s belief that FTX’s treatment of customer deposits was acceptable.

Judge Kaplan, in a hearing on September 28, stated that despite the case involving some “arcane” subjects related to cryptocurrency, the central issues of the case were straightforward: “Was there fraud or wasn’t there?”

Reporting by Luc Cohen in New York; Editing by Amy Stevens and Daniel Wallis

Our Standards: The Thomson Reuters Trust Principles.

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