Original article by Daniel Kuhn, CoinDesk
Original translation: Felix, PANews
The general market consensus seems to indicate that the first few days of SBF's (Sam Bankman-Fried) trial have not gone well for him.
U.S. Department of Justice (DOJ) prosecutors are proving that SBF was deeply involved in a long-term scheme to defraud customers and investors, which makes SBF's legal defense more difficult. Although SBF was nominally the head of the company, he was unaware of the corruption that was taking place at his exchange FTX and hedge fund Alameda Research.
SBF has been facing an uphill battle throughout this highly-watched trial. FTX’s current CEO is John Jay Ray III, the man who headed Enron’s bankruptcy. Under Ray’s guidance, FTX released documents and made accusations against SBF, which led to SBF, once a favorite among crypto people, embarking on an “apology tour” and completely changing the public’s view of him.
The defense of SBF by lawyers from the Cohen Gresser law firm did not seem to have much effect in court. District Judge Lewis Kaplan was clearly annoyed with SBF's defense lawyers. Some onlookers said that in some inquiries, "80%" of the questions asked by defense lawyer Chris Everdell were rejected. In fact, it has become common for prosecutors to reject misleading questions.
But it’s still early days for the trial, which could last six weeks. It’s unclear whether SBF, who has a new haircut, will testify. Renato Mariotti, a partner at Bryan Cave Leighton Paisner LLP who is following the case, and seemingly most lawyers, say it’s a gamble at best and could be disastrous. Gary Wang, a co-founder of FTX and a longtime friend of SBF’s, has pleaded guilty to fraud and mentioned the “privilege” FTX offered Alameda, which allowed Alameda to withdraw funds without limits. While former FTX developer Adam Yedidia said he resigned in November 2022 after learning of FTX’s scheme to “defraud” customers, that point was previously redacted from the record.
Here are the main highlights and details from the trial so far, as well as events outside the courtroom, such as revelations about SBF by The Big Short author Michael Lewis in his new book, Going Infinite.
FTX co-founder Gary Wang testified on October 6 (Beijing time) that he was the fourth witness of the US Department of Justice. He admitted that FTX gave SBF's hedge fund Alameda Research "privileges". Alameda has a large credit line, can execute orders faster on the FTX platform, and can withdraw funds unlimitedly. Gary Wang said that Alameda Research was allowed to maintain a negative balance. When FTX collapsed, Alameda had withdrawn $8 billion from the platform and $65 billion from its credit line. Gary Wang also testified that executives of FTX and Alameda, including Caroline Ellison and Nishad Singh, deliberately committed wire fraud, securities fraud, and commodities fraud.
Matt Huang, co-founder of venture capital firm Paradigm, said during the SBF trial that it had "marked" its $278 million investment in FTX to "zero." Matt Huang described how Paradigm invested a total of about $278 million in FTX twice. Matt Huang said he was excited by FTX's rapid early market share growth, but he was concerned about FTX's lack of a formal governance structure or even a board of directors. SBF had told him that Alameda Research did not have preferential treatment at FTX.
According to the testimony of Adam Yedidia, a former senior engineer of FTX, Adam Yedidia met with SBF in June 2022 and asked SBF about the situation of FTX. SBF said, "We were bulletproof last year, but we are not this year. It may take six months to three years to correct this problem." Later, SBF also told Adam Yedidia that SBF had tried to raise funds from the UAE to enhance the cash reserves of the trading platform, but failed.
As U.S. prosecutors continue to recover assets, two luxury jets worth millions of dollars owned by SBF (but reportedly never used) may be confiscated. In documents filed late on October 4, the forfeiture bill issued by the U.S. Department of Justice listed two aircraft (Bombardier Global and Embraer Legacy) as SBF assets it intends to confiscate.
According to Michael Lewis’ new book, Going Infinite, SBF changed the lockup period for SRM tokens after the token surged in 2021, hitting an all-time high of $13.72, because SBF was worried that employees would become too rich to focus on their work. In the fine print of the Serum contract, SBF reserved for itself the right to extend the lockup period for Serum, locking up all employees’ Serum tokens for seven years.
The 12 jurors for SBF's trial have been confirmed, with an additional 6 alternates. They will ultimately decide whether SBF is guilty of fraud. Throughout the week, reporters and onlookers said the jury seemed bored with the trial at times, and at least one juror reportedly dozed off. (The 12 jurors are as follows: ① 39-year-old female physician assistant, 10 weeks pregnant, with a medical background, and her husband is a web developer; ② 33-year-old female nurse, living alone in Westchester, New York; ③ 40-year-old female social worker, currently unemployed; ④ 53-year-old female, Duke University graduate, divorced, full-time home mother of two children, previously managed fundraising activities for non-profit organizations; ⑤ 59-year-old male, married, with 3 children, one of whom works in a bank; ⑥ 50-year-old Metro North, a female ticket seller, a mother of five children, three of whom live at home and two of whom are in college; ⑦, a 47-year-old female high school librarian, single, lives with her cat, sister and sick mother; ⑧, a 65-year-old female retired prison guard, a mother of three children; ⑨, a 61-year-old male employee of the United States Postal Service, no wife and no children; ⑩, a 43-year-old Ukrainian woman, who works in IT at Bloomberg, has been in the United States for 15 years, is divorced and has two children; ⑪, a 55-year-old female special education teacher, originally from a Bermuda bank, studied undergraduate at the University of Waterloo, and received master's degrees from New York University and Seton Hall University; ⑫, a 69-year-old male, a retired investment banker from Hong Kong, studied at Rice University and Stanford University, has a wife and no children, and was diagnosed with non-Hodgkin's lymphoma)
In opening statements, U.S. prosecutors called SBF’s crypto empire a “house of cards” “built on lies.” Lying became a recurring theme during the trial, with FTX co-founder Gary Wang also saying SBF “lied” about Alameda’s ability to increase debt and leverage, putting FTX customer funds at risk.
SBF's defense attorneys argued during the trial that SBF acted in "good faith" and worked to prove that business mistakes -- even huge ones like misappropriating $8 billion -- are not necessarily crimes. It wasn't SBF's fault that the business grew too fast and collapsed so dramatically. The attorneys put some of the blame on Caroline Ellison, saying she failed to take safeguards. Ellison has pleaded guilty and is expected to testify in SBF's trial next Tuesday.
U.S. prosecutors reiterated on October 4 that the existing legal framework is sufficient to charge SBF with fraud-related violations and rejected SBF's previous argument that "there is a clear lack of relevant laws or guidance directly related to whether the alleged use of customer deposits constitutes misappropriation rather than permitted business practices."
According to Michael Lewis’ new book Going Infinite, Alameda Research lost almost all of the $170 million it raised in its first round of funding, which was primarily supported by the “effective altruism community.” In addition to its arbitrage strategy of buying cheap Bitcoin in the U.S. and selling it in Japan for a profit, its high-frequency trading strategy was problematic, losing millions of dollars in the first few months, with more than $500,000 a day in one month, while some trading funds “just disappeared” due to poor fund management.
SBF is suing his insurance company, CNA, for failing to pay legal fees associated with defending against allegations of fraud. SBF’s legal action references more than a dozen civil and regulatory lawsuits related to FTX, suggesting that legal costs are mounting.
Former FTX spokesperson Kevin OLeary (a well-known Canadian businessman) said that the era of "crypto cowboys" is over as the crypto industry moves towards regulation. According to the book "Going Infinite", FTX paid the famous Canadian businessman $15.7 million for "20 hours of service, 20 social posts, a virtual lunch and 50 signatures." But not all FTX executives agree on the value of the deal. SBF said that fans will listen to financial advice. Because investing is a social thing, it makes no sense, but that's the fact. According to the book, SBF also tried to hire CNBC host Jim Cramer.