LESSONS FROM THE TRIAL OF SAM BANKMAN-FRIED Authored by: Nicola McKinney, Partner, Quillon Law
Only a year after the dramatic collapse of FTX, the federal trial of its co-founder Sam BankmanFried (“SBF”) commenced in New York at the end of September 2023. After a month-long trial in which most of the FTX management team gave evidence against SBF (having entered guilty pleas),a jury found SBF guilty at the start of November 2023, on all 8 counts on the indictment. SBF awaits sentencing in March 2024, a potential further trial (on separate charges) to take place prior to sentencing has now been ruled out. But as the dust settles and the testimony of the key witness is examined, what are the key lessons for fraud practitioners or regulators? Does a postmortem of FTX offer any useful information for the crypto industry? Arguably the most significant overall ‘takeaway’, particularly from the perspective of fraud lawyers, is how little of the testimony feels new or unfamiliar in the context of director frauds. The new asset class of digital assets and the flamboyant character of SBF drew a lot of interest in the collapse and the trial. However, notwithstanding the backdrop of the charges being FTX (which was in reality a large group of associated companies) and Alameda Research (an affiliated entity), the evidence was of behaviour at FTX management levels which is alltoo-familiar in cases of corporate fraud or breaches of fiduciary duty by directors. As well as the familiarity, the relative lack of sophistication of the fraudulent activity is also striking.
The implication of the speed at which Ray was able to reach that conclusion (which was contained in a sworn declaration to the Delaware bankruptcy court), was that the wrongdoing was not difficult to see with a small degreeof scrutiny of internal documents, systems and communications. On the basis ofthat comment, the natural inference was that this would probably not be a case where the central fraud involved the careful and discreet pilferingof assets away from the companies and into a complex trust structure (for example). And so the prosecution case and testimony have proved. The charges on the indictment against SBF principally related to the misappropriation and misuse of customer deposits (using these to pay expenses and debts, and loan obligations of Alameda), providing false and misleading information to investors, and conspiracy charges on the same underlying facts. The open and blatant ways in which that misappropriation, misuse and misrepresentation was carried out might well seem to investors and customers who lost money in the collapse to show a huge missed opportunity for even light-touch regulation to prevent flagrant risk-taking by the FTX management team. (1)
Early impressions ‘behind the scenes’ Almost immediately after the FTX collapse John Ray III took over as the new CEO of FTX. It is worth recalling the early comments made by Ray – who, having “worked around the clock with teams of professionals…” for just a week – observed, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, the situation is unprecedented”.
The Alameda Relationship The relationship between SBF, FTX and Alameda were at the heart of the wrongdoing. SBF held ultimate decision-making power, seemingly unchecked in any real sense, across the whole business. Gary Wang, cofounder and CTO of FTX, gave evidence that “[w]e gave special privileges to Alameda Research on FTX which allowed it to withdraw unlimited amounts of funds from the platform, and we lied about this to the public.” (1) Subject to what the Ray investigations and recovery process recovers, which may in the event be a significant proportion of the losses initially feared.
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