The criminal trial of Sam Bankman-Fried, former cryptocurrency magnate, completed its second day on Wednesday. The prosecution and defense both gave opening statements and interviewed the first two witnesses, including a customer of FTX and Bankman-Fried’s former friend and ex-Alameda and FTX employee Adam Yedidia.
The prosecution painted Bankman-Fried as someone who knowingly committed fraud to achieve great wealth, power and influence. The defense countered that Bankman-Fried acted in good faith, never meant to commit fraud or steal, and basically got in over his head.
The prosecution: Bankman-Fried’s empire was ‘built on lies’
In his opening argument, just half past noon, prosecutor Thane Rehn began by painting a picture. “One year ago, Bankman-Fired was on top of the world.”
He arguably was.
Bankman-Fried was worth billions of dollars, living in a $35 million penthouse with friends and co-workers; he had two massive businesses, a crypto exchange (FTX) and crypto hedge fund (Alameda Research), both of which have since gone bankrupt.
“He had wealth, he had power, he had influence,” Rehn said. “But all of it was built on lies.”
Rehn alleged that Bankman-Fried “took money he didn’t have” to build an empire. Rehn repeated several times, and loudly, that Bankman-Fried stole “billions of dollars” from FTX customers so he could spend the money on “lavish houses for himself, his parents, and his friends,” gain influence in Washington, and meet celebrities.
The prosecutors showed a picture of Bankman-Fried at the FTX-hosted Crypto Bahamas conference from April 2022, seven months before it collapsed. The picture included him onstage with former U.S. president Bill Clinton and ex-prime minister Tony Blair. While both politicians were dressed formally, Bankman-Fried wore cargo shorts and a white T-shirt with unkempt frizzy hair, a stark contrast from his polished courtroom look on Wednesday.
The government went the route of explaining the alleged crimes in a simple, easy way to understand. While Rehn talked with a strong voice, he didn’t use many complex terms beyond words like “crypto” and “bitcoin.” When some jurors expressed concerns that they don’t have an understanding of the crypto world, Judge Kaplan assured them that everything they need to know will be taught to them.
“FTX collapsed, and its customers were left with billions of dollars in losses,” Rehn said. “That’s why we are here today. Because when the defendant wanted money he didn’t have, he committed fraud. He took other people’s money. He spent that money in all sorts of ways on himself, and he lied about it.”
The prosecution alleged that the funds customers put into the FTX exchange never made it there and instead were funneled directly into Bankman-Fried’s pocket. Rehn detailed how Bankman-Fried allegedly used his second company, Alameda, to take money and cryptocurrencies from FTX and use it as he saw fit — all the while assuring customers that FTX was keeping their money safe.
To make it more understandable, Rehn displayed a chart showing what should happen when customers deposit money to FTX; for example, if a customer deposited $100, or bitcoin, they would expect it to go to their FTX customer account, but instead those funds were allegedly put into an Alameda bank account and then misused.
Rehn accused Bankman-Fried of opening a secret bank account under the control of Alameda. When customers thought they were sending money to the FTX exchange, it was really going to this account, giving the defendant easy access to a large and growing wallet.
The prosecution also said Bankman-Fried set up a way for Alameda to secretly withdraw billions of dollars’ worth of crypto. By the end of summer 2022, these methods allegedly allowed Bankman-Fried to take more than $10 billion of FTX customers’ money.
Yet by early November 2022, worries about liquidity on the exchange arose, and concerns tied to Alameda’s balance sheet and competitors — voiced, in part, by the CEO of rival exchange Binance — resulted in customers beginning to try to get their money back. But they couldn’t withdraw these funds. “That money, the customers’ money, was gone,” Rehn said. “The defendant had taken it.”
Rehn also alleged that Bankman-Fried lied to investors about how the business worked in order to sell millions’ worth of FTX stock, and that he used Alameda and false documents to borrow millions from lenders.
In June 2022, when Alameda’s investments had gone south and the company didn’t have enough money to pay the bills, Bankman-Fried “doubled down,” Rehn said, by pulling out more money from FTX and creating false financial statements for Alameda. He even testified in Congress that FTX wasn’t using customer money, and he tweeted that protecting customer money was his top priority. Rehn displayed some of these tweets in his slideshow for the jury.
At the end of Rehn’s opening statement, he pointed directly at Bankman-Fried, who looked back at him. In that moment, in the back right corner of the courtroom, Barbara Fried, Bankman-Fried’s mother, was writing quickly on a yellow notepad. His father, Joseph Bankman, kept his eyes ahead watching the argument.
“This man stole billions of dollars from thousands of people,” Rehn said as he pointed at Bankman-Fried. “He defrauded sophisticated investors and lenders, and he emptied the accounts of ordinary customers, too. He bought himself wealth, power and influence.”
The defense: FTX and Alameda ‘grew too quickly’
Around 1 p.m., the defense countered Rehn’s arguments by saying that “Sam’s” companies — defense attorney Mark Cohen used Bankman-Fried’s first name throughout — “grew too quickly” and that “Sam didn’t defraud anyone,” and he “didn’t intend to defraud anyone.” Cohen added, “There was no theft. Sam reasonably believed loans were safe.” He also said, “Sam did not intend to steal.”
Cohen’s tactic was to present Bankman-Fried as a well-meaning “math nerd who didn’t drink or party” and who became overwhelmed navigating unfamiliar waters. Any mismanagement at FTX was merely the result of rapid growth and inexperience.
The defense spoke slowly, in a softer voice, as if he were a grandfather explaining to his grandchild that they can’t sneak another cookie before dinner, but instead it was a lawyer explaining to jurors why he believed his client was innocent.
“Sam and his colleagues were building the plane as they were flying it,” Cohen said. “They had to figure out how to navigate a world where they were running FTX, building out its systems, dealing with hacking threats, managing the credit risk of their customers, managing hundreds of employees, all while building up their actual exchange.”
In the startup world, companies can grow quickly, Cohen admitted. In the case of FTX and Alameda, they grew at a pace that left important business developments like building out a risk management team or appointing a chief risk officer in the dust.
Cohen said that Bankman-Fried reasonably believed that any loans FTX made to Alameda were permitted and backed by reasonable security and collateral. He also refuted the prosecution’s accusation that the relationship between Alameda and FTX was secretive.
The defense countered the idea that Alameda was a shady company, calling it a crypto hedge fund that traded in hundreds of millions of dollars and earned billions in profits. He also countered the claim that Bankman-Fried lied to investors to raise funds.
The tension in the room was high; Cohen referenced back to the prosecutors’ words a number of times, and the air was still. No one else could be heard, not even shuffling of papers or coughing transpired during his monologue.
“Alameda raised funds by borrowing from lenders who specialized in crypto and wanted to be involved because they believed in crypto and they thought Alameda was a new and exciting company,” he said. “There is nothing wrong with that.”
Cohen explained that FTX offered margin loans, which is a loan that an exchange makes to a customer where the customer puts up collateral that can be used to cover the losses of other customers who also had margin accounts. Alameda, which was a customer of FTX, was signed up for margin loans. It took big loans but also posted large amounts of security or collateral, Cohen said.
The defense wasted no time getting highly technical. For the average person who doesn’t know financial jargon, or crypto jargon for that matter, this wasn’t the best move (in our non-legal expert opinion). Even our in-house senior crypto reporter, who covers this industry day in and day out, was lost at points trying to follow Cohen’s points about margin trading and market making.
Referencing the bank account that the prosecution detailed — to which FTX customers would send their money to be put on the exchange — Cohen said this was no secret to customers, either. He called the Alameda account a “short-term fix” until FTX could get its own bank account up and running, which it later did.
“The evidence will show that Sam reasonably believed that there were no laws or provisions in the terms of service that prohibited FTX from loaning out these deposits, whether loans went to Alameda or to other customers,” said Cohen, noting that since Alameda’s use of those funds was all done in good faith, there couldn’t possibly have been a theft.
The defense explained to the jury how FTX and Alameda ended 2021 on a high as the crypto market boomed. When Bankman-Fried became concerned about a potential change in the price of Bitcoin or other cryptos, he urged Alameda’s then-CEO (and former girlfriend) Caroline Ellison to put on a hedge to protect them against a downturn. Cohen alleged that Ellison failed to do so, which became an issue “when the storm hit.” By May 2022, the price of Bitcoin had dropped 60% from all-time highs, alongside other smaller market capitalization cryptocurrencies that also tumbled in value.
As a crypto hedge fund, if the price of crypto goes down, Alameda’s value plummets with it. The downturn caused lenders to recall loans, which Alameda paid back in full and on time, according to Cohen.
“How can these lenders be victims of fraud when they were paid back this way?” he asked the jury.
At this point, Alameda owed payments to FTX, which were needed to pay FTX customers if they ever asked to withdraw funds. Rather than facing the truth of the jig being up, the defense said that Bankman-Fried still believed in the strength of his companies and just thought they were going through a liquidity crisis, which could be solved. He called on outside investors to raise capital if needed.
“[Bankman-Fried] always kept nearly all of his own assets in the companies, and now he was willing, if necessary, to give up everything he owned personally in order to make things work,“ Cohen said.
By November 2022, when Alameda’s financials were leaked, the situation changed every minute. FTX came under attack when the Binance CEO tweeted that his exchange would withdraw billions from FTX, triggering a run on the bank.
“Normally, FTX would see around $50 million flowing in and out of the company in a day normally. But now, on November 7, it saw billions of dollars of withdrawals in a single day. At the same time, the market fear caused a crash in Alameda’s assets. Its value fell dramatically over a 12-hour period.”
Alameda had to pay its investments back to FTX, but it couldn’t immediately.
As all this was going down, Cohen said that Bankman-Fried didn’t run away. He addressed the crisis in good faith and put measures in place to attempt to stabilize the company and repay customers. The defense urged the jury to consider “what Sam did and said in real time and the context that shows about his state of mind,” and that he was “the opposite of someone who intended to harm.”
“It’s not a crime to be the CEO of a company that later files for bankruptcy,” Cohen said. “It’s not a crime to run a business in good faith that winds up going through a storm . . . It’s not a crime to try to get Tom Brady to go on ads for your company.”
Cohen wrapped by urging the jury to remember the government needs to meet a heavy burden of proof beyond a reasonable doubt. He told the jury to be cautious and not let the prosecution spin what were, at the time, good-faith business decisions and claiming they were actually sinister and deceitful and that Bankman-Fried knew it all along.
Witnesses: A former customer and a former friend
On day two, the first two witnesses were former FTX customer Marc-Antoine Julliard and Adam Yedidia, who was a longtime friend of Bankman-Fried and a former employee at Alameda, then FTX. Both wore suits and entered the courtroom from the back right door, jetting straight to the front.
Julliard shared how he deposited a “significant amount” of his savings, about £100,000, or roughly $120,000, to his FTX account. After the exchange collapsed, he was unable to withdraw his remaining balance.
Jurors looked at Julliard with narrowed eyes; some seemed engaged while others looked confused as terms related to trading crypto, using an exchange and other technicalities, were tossed into the first witness examination.
The jurors seemed equally perplexed during Yedidia’s examination, which focused on his past “close friendship” with Bankman-Fried, his role at Alameda and FTX and how the two — along with eight other FTX employees — lived in a $35 million penthouse apartment in The Albany, a private community in the Bahamas. Yedidia initially claimed that Bankman-Fried bought the apartment but later corrected himself to say that “Alameda did [acquire it] at Sam’s direction.”
Yedidia’s examination was cut short by the prosecutors around 4:30 p.m. and will be continued on Thursday.
During conversations between the judge and prosecutors, one person from the government team mentioned that the next witnesses will be Matt Huang, co-founder and managing partner at Paradigm, and Gary Wang, co-founder of FTX. They anticipate that it will bring the trial to the end of the week.
Wang is one of the three major executives from FTX and Alameda — alongside Ellison and Nishad Singh, an FTX co-founder and former director of engineering — who pleaded guilty and plan to cooperate as a witness during Bankman-Fried’s trial in return for lighter sentencing.
During his opening statement, Rehn also teased Ellison as a future witness. Ellison was formerly the CEO of Alameda, part of Bankman-Fried’s inner circle, and his ex-girlfriend. The two previously worked together at Jane Street.
“She will tell you about how she and the defendant stole the money that customers entrusted to FTX and used it to make investments through Alameda,” Rehn said. “She will testify that she and the defendant took customer money again and again to spend it and invest it through Alameda.”
TechCrunch+ takeaway
Jacquelyn’s takeaway: After sitting in the courtroom for roughly nine hours, two days in a row, it’s hard to keep everyone captivated, yet these 20- to 30-minute opening statements did. An opening statement isn’t the be-all and end-all for this trial, but it sets a tone from both parties of what is yet to come. As the days unravel and evidence proceeds, it’ll be interesting to see if either the prosecutors or defense change tone, direction or tactics. I’d guess, based on how precise both sides have been, it seems unlikely for their angles to change.
Rebecca’s takeaway: The level of detail from both sides about how money was used and moved and how Bankman-Fried talked publicly about FTX makes me wonder how this case will become a benchmark for crypto regulation in the future. Regulators might be asking themselves what kinds of information crypto platforms will be required to communicate to customers, what kinds of advertisements are too risky? On the back end, regulators might create rules on what crypto companies can legally do with customers’ money and how to enforce those rules. We’ll be watching this space.