Sam Bankman-Fried’s Trial to Examine Conflicting Explanations for the Collapse of a Crypto Exchange

By Luc Cohen

NEW YORK – According to U.S. prosecutors, Sam Bankman-Fried misappropriated funds from depositors of his cryptocurrency exchange, FTX, since its inception in 2019, a practice that directly contributed to the collapse of the platform as cryptocurrency values plummeted last year.

In contrast, Bankman-Fried and his legal team argue that he believed FTX functioned like a bank, making investments with customer funds as long as customers could still withdraw money. He claims he was unaware that actions by his closest associates were putting the availability of those funds at risk.

Over a six-week period beginning on October 3, a federal jury in Manhattan will examine these conflicting narratives during Bankman-Fried’s criminal trial on fraud charges. They will decide whether the former billionaire, now 31, is guilty of seven counts of fraud and conspiracy.

Bankman-Fried left his quantitative trading position at Wall Street firm Jane Street to start the cryptocurrency hedge fund Alameda Research in 2017 and has pleaded not guilty to the charges against him.

A conviction would mark a dramatic fall for Bankman-Fried. During the rise of cryptocurrencies in 2020 and 2021, he became emblematic of integrity in a turbulent industry. He notably branded FTX’s identity on a Miami basketball arena and on MLB umpires’ uniforms, hired prominent athletes and actors for endorsements, and pledged to donate much of his $26 billion fortune to philanthropic initiatives, including pandemic preparedness.

While FTX initially weathered the downturn that impacted other major cryptocurrency platforms in early 2022—with Bankman-Fried even providing bailouts to some—everything changed in November when a report revealed Alameda’s balance sheet, highlighting the fund’s significant exposure to FTT, a token issued by FTX. This revelation caused a flood of customer withdrawals that FTX could not withstand.

Prosecutors allege that Bankman-Fried’s operation was a facade; he is accused of misappropriating billions in deposits to cover losses at Alameda, purchase luxury properties, and fund political donations aimed at promoting pro-cryptocurrency legislation.

"This is one of the biggest financial frauds in American history," stated Damian Williams, the U.S. Attorney in Manhattan, upon announcing Bankman-Fried’s arrest in December 2022.

While Bankman-Fried admits to poor risk management practices, he denies any theft, claiming he intended to explain to Congress that he was unaware of the extent of FTX’s loans to Alameda due to a glitch in internal controls. He was arrested before he could present his testimony.

His defense team maintains that he believed he was acting in good faith and that his handling of customer funds aligned with FTX’s terms of service and legal guidelines. For a conviction, prosecutors must establish that he intended to commit a crime.

"It’s always been Bankman-Fried’s best strategy to demonstrate that he is not a criminal mastermind; he was just over his head," remarked Mark Kasten, a defense attorney not tied to the case.

To support their case, prosecutors plan to call three former associates of Bankman-Fried: former Alameda CEO Caroline Ellison, former FTX tech chief Gary Wang, and former engineering chief Nishad Singh, all of whom have pleaded guilty and agreed to cooperate with authorities.

Prosecutors allege that Bankman-Fried instructed Wang to alter FTX’s computer code to permit Alameda to borrow unlimited funds, a privilege not afforded to regular exchange users. Singh has admitted that he was aware by June 2022 that Alameda had borrowed billions from FTX without customers’ consent. Ellison, who previously had a personal relationship with Bankman-Fried, claimed that they conspired to conceal loans made to FTX executives from the fund’s lenders.

Behind bars since mid-August, after his bail was revoked due to alleged intimidation of Ellison, Bankman-Fried has been preparing for trial. In personal writings that have surfaced, he attempted to shift blame for Alameda’s failure onto Ellison.

Bankman-Fried’s defense lawyers are expected to challenge the credibility of all three witnesses.

Given that prosecutors are attempting to prove that FTX customers’ inability to withdraw funds last November stemmed from Bankman-Fried’s mismanagement rather than a deliberate fraud scheme, they are likely to fiercely oppose any testimonies that suggest he was acutely aware of his companies’ financial troubles prior to the collapse.

"The critical question is, when did Bankman-Fried know there wouldn’t be enough money?" queried Paul Tuchmann, a former federal prosecutor. "Clearly, there wasn’t enough money to satisfy all deposits. But when did he realize that? When did he have cause to believe that?"