Can Sam Bankman-Fried argue his way out of trouble?

Early last summer, Adam Yedidia took Sam Bankman-Fried to one side after a game of paddle tennis. In the shadow of a hut in the grounds of the Bahamian penthouse they and others shared, he asked the crypto tycoon: “Are we OK?”

Yedidia told a New York court this month that he was worried FTX, the crypto exchange that Bankman-Fried had co-founded and at that time led, was in financial trouble. He recounted his old friend’s reply: “We were bulletproof last year, but we’re not bulletproof this year.”

FTX collapsed a few months later, sending shockwaves through the cryptocurrency industry. US prosecutors hope this chat, which they have taken to calling the “bulletproof conversation”, will help to show Bankman-Fried knew about, and concealed, an $8bn cash shortfall for months at least before it was exposed.

Until November last year, FTX appeared to be one of the most successful fintech companies in history. The crypto exchange, where customers could trade various cryptocurrencies, was valued at $40bn after just three years in existence, making its 30-year-old co-founder and chief executive a billionaire.

Bankman-Fried oversaw both the exchange and Alameda Research, a private trading firm, with a tiny group of close associates in their late 20s and early 30s. Most of them lived together in the $30mn Bahamas penthouse, with an orchid-shaped pool on its terrace and sweeping ocean views.

This penthouse clique has had a strange reunion in court over the past three weeks. Most of them have not been in the same room since the chaotic events of last autumn, when a leak of financial data caused a stampede to withdraw money from FTX. But there was insufficient money to meet the requests — only an $8bn hole where customer deposits should have been.

US prosecutors allege the shortfall arose because FTX had transferred or lent billions of dollars of its customers’ money to Alameda, which spent it on crypto investments, venture capital, political donations, celebrity marketing and real estate. They claim Bankman-Fried defrauded his lenders, investors and customers.

Bankman-Fried acknowledges that money flowed from FTX to Alameda, but has pleaded not guilty to fraud, claiming the disaster was a result of poor bookkeeping and risk management that left FTX dangerously exposed to a crypto market crash. 

The former crypto kingpin, his trademark curly hair shorn by a fellow inmate at a New York jail, has spent the first 12 days of the trial sitting hunched and impassive at the defence table as his longtime friends took the stand against him. 

Caroline Ellison, Bankman-Fried’s former girlfriend and Alameda’s former chief executive officer, along with FTX co-founder Gary Wang and director of engineering Nishad Singh have all pleaded guilty to fraud and other offences.

Bankman-Fried faces life in prison if he is convicted. But the trial has wider significance for the largely unregulated world of cryptoasset trading. It represents a crucial test for efforts by US law enforcement to exert their authority over trading businesses domiciled offshore. Damian Williams, the US attorney for New York’s Southern District, has sat in court several times to watch his deputies carry out the high-stakes prosecution.

Hilary Allen, a professor of law at the American University, says that while the industry has often “weaponised technobabble” to claim it falls outside national regulation, this case is intended to show that there “actually is someone you can hold accountable”.

The trial will resume on October 26 after a week-long intermission. His legal team have confirmed that Bankman-Fried will take the stand, raising the question of whether crypto’s most captivating advocate can possibly explain away the documentary evidence and the damning testimony of his former lieutenants.

Old friends turn

The 12-person jury and its six back-up jurors includes two conductors on New York’s Metro North commuter railway and a former Salomon Brothers investment banker. They have sat through presentations of internal spreadsheets, chat messages and tweets along with hours of testimony as the prosecution set out the bulk of its case. 

All 12 will have to agree to convict or acquit. If one or more dissents, the ultimate result is a mistrial, forcing the government to decide whether to bring the whole case again. 

The key issue is whether Bankman-Fried had criminal intent. Prosecutors have focused on conversations and documents that they hope will convince the jury that the FTX founder was aware of, orchestrated and lied about the diversion of funds to Alameda for years.

Yedidia, one of the lower-profile roommates at the Bahamas penthouse, was a surprise choice as the first prosecution witness. One of Bankman-Fried’s best friends at MIT and a senior coder at FTX, he testified under an immunity order that precludes him from being charged based on his evidence, providing it is truthful. That affords defence attorneys less scope to attack his credibility than for Ellison, Wang and Singh — all of whom are co-operating with prosecutors in the hope of lighter sentences. 

He said he knew that customer deposits went to Alameda but assumed the trading firm just held the money for safekeeping because it had an easier time getting bank accounts than FTX. Through technical work on the exchange’s settlement system, in June 2022, he learned that Alameda owed about $8bn in FTX customers’ hard-currency deposits to the exchange.

“It seemed like a lot of money,” Yedidia said, his concern leading to the “bulletproof conversation”. He also asked how long it would be “until we’re bulletproof again?” Bankman-Fried said it could be six months to three years. In the event, the company didn’t even last four months.

Since FTX’s demise, Yedidia said he has become a high school maths teacher. The return to normal life will not be so easy for the other three key witnesses.

Co-founder Gary Wang, infamous at FTX for barely speaking to his colleagues, was highly talkative on the witness stand, testifying that secret, unique privileges for Alameda were baked into FTX’s code as far back as its launch in 2019. Ultimately, the trading firm was exempt from FTX’s normal automatic liquidation system and able “to withdraw unlimited amounts of money”.

Initially, he recalled Bankman-Fried saying Alameda could borrow from FTX as long as it was “less than what FTX’s total trading revenue was at the time”. If Alameda borrowed more, Wang said, the only source of further funds at that time was to dip into customers’ money. But by late 2019 or early 2020, Wang said he noticed Alameda had done just that.

Wang said Bankman-Fried then told him to incorporate the value of Alameda’s holdings of FTT, a cryptocurrency that FTX had itself created, into his calculation. If Alameda had enough crypto assets to pay back its borrowing from FTX, Bankman-Fried reasoned that was OK. “I trusted his judgment,” Wang told the court.

Tweet by Sam Bankman-Fried

As the crypto boom picked up in 2020 and 2021, and FTT’s price rose from about $3 to more than $70, Alameda’s FTT stash gave it enormous headroom for borrowing from FTX while still being theoretically solvent and able to pay back its loans on demand.

But critics say the use of volatile crypto tokens meant Alameda’s financial strength was illusory. Allen, of the American University, describes the token as “the fulcrum” that allowed the alleged fraud to be perpetrated. One of the government’s expert witnesses called up a picture of a $100 bill to illustrate the difference between fiat currency and crypto tokens

Ellison, who testified after Wang, explained how using FTT as collateral also gave Alameda access to billions in borrowing of cash and crypto assets from external lenders, up to a peak equivalent to $15bn by late 2021. She told the court it was “somewhat misleading” to include FTT on the firm’s balance sheet since it could not be sold in large amounts without undermining its price.

The reversal of crypto markets in the spring of 2022 threatened to expose what prosecutors claim was Bankman-Fried’s magical thinking about FTT. By mid-June, Ellison feared that falling prices had left Alameda technically insolvent. Bankman-Fried thought the numbers must be wrong. He called Wang, his trusted fixer.

Wang recalculated and spotted an error that made Alameda’s situation look worse than it was. He recorded its true net balance on FTX in a spreadsheet, labelling it “Gary’s number”. Including the roughly $8bn in customers’ cash and its other positions, Alameda owed FTX $11bn.

The inner circle then sat down to a meeting. Yedidia recalled watching Wang, Bankman-Fried, Ellison and Singh filing into a conference room in the Bahamas office, where Wang said Bankman-Fried reviewed the spreadsheet showing the $11bn debt. That sum was more than all the revenue FTX had ever made and all the equity it had raised from outside investors combined.

The group had to consider what to do next. Alameda’s outside lenders wanted billions in loans repaid, but that money was either locked up in illiquid investments or had been spent. Wang described how Bankman-Fried told Ellison she could pay back the external creditors. “He turned to Caroline and said: Alameda can go ahead and return the borrows.”

For prosecutors, this is perhaps the most crucial moment. Knowing that Alameda must be dipping into FTX customer funds in order to repay external creditors, Bankman-Fried ordered it to carry on. Ellison said she and Bankman-Fried then worked together on seven different balance sheets in order to conceal the outsized borrowing from FTX.

The defence response

Bankman-Fried was arrested in the Bahamas penthouse in January and later appeared, handcuffed, on the tarmac of Nassau airport before being extradited to the US. But before he was detained, he gave a flurry of media interviews that provided prosecutors with a sketch of his likely defence.

He blamed “huge management failures” and “massive oversights” in bookkeeping and risk management for the leakage of funds to Alameda, which left FTX itself unable to pay back customers. He has said he had only “fully realised” the exchange’s position in late autumn of 2022 and never knowingly lied. 

Bankman-Fried appeared to allude to this meeting in a Financial Times interview in December. “I do remember that there were some discussions around Alameda’s positions,” he said at the time. “I don’t remember numbers from those. I don’t remember numbers being said, I’m not sure they weren’t. I think Alameda did some recounting then, or some checking in on the health of its position.” 

If he does take the stand, prosecutors will try to demonstrate that the gaps in Bankman-Fried’s memory are both selective and deceptive. The trial may yet hinge on what was said inside that conference room — and the fact that the three other people present will contradict him makes his testimony a difficult task.

However, not all elements of the prosecution narrative line up neatly. Singh said he left the crucial June meeting still thinking things were OK and did not realise customer funds were being raided until September. Under cross-examination, he said that after the June meeting he “suspected there was wrongdoing . . . [but] took cues from people around me and didn’t pursue it further”.

In Singh’s telling, the penny dropped in September 2022 amid a debate about whether Alameda should be shut down. Ellison said it would be impossible because the trading firm couldn’t repay its debts to FTX. The same evening Singh said he confronted Bankman-Fried, pacing back and forth on the penthouse balcony. Pressed on Alameda’s inability to pay back what it owed, in effect, to FTX’s customers, Bankman-Fried said: “Right. That. We are a little short on deliverables.”

He told Singh he hoped the exchange could grow its way out of trouble, earning enough to re-fill the gap, or raise money from new equity investors. Between September and November he tried to tap investors, including Saudi wealth funds, without apparently telling them why he needed the money.

Bankman-Fried’s public image and personality have also featured heavily in the case. Prosecutors have already made full use of his prolific tweets and interviews, from FTX’s earliest days to its final week, and called on witnesses to explain how they are false.

A photo of Bankman-Fried at the 2022 Super Bowl with Katy Perry, Orlando Bloom and Kate Hudson, among others

They have also sought to cast doubt over the loveable oddball image he liked to project. Witnesses said Bankman-Fried rarely slept on a beanbag, despite making much of it in media profiles, and that he chose to keep driving a modest Toyota Corolla car because he knew it was “better for his image”.

For the prosecution, assistant US attorney Thane Rehn said Bankman-Fried’s persona and business empire was “built on lies” and that “in reality, he was taking [the] money and spending it on himself”. But Mark Cohen, the lead defence lawyer, argued the government portrayal of his client as a greedy criminal mastermind verged on caricature. “He was a math nerd who didn’t drink or party,” Cohen said in his opening arguments.

Cohen also tried, in his opening argument, to prime the jury to doubt the penthouse witnesses. “Ask yourselves [ . . .] are they pointing to out-of-context or ambiguous statements that now they are saying led to black-and-white conclusions?”

Far from being a “cartoon villain” in his Bahamas lair, Bankman-Fried was a hard-working entrepreneur who eschewed personal luxuries but made mistakes in his rush to grow the company. Cohen said Alameda’s privileges “were done for reasonable purposes at the time” and far from secret. “Taking something out of context and in hindsight calling it improper is not proof beyond reasonable doubt,” he added.

Images from the case against Sam Bankman-Fried, showing the penthouse where he and key witnesses lived

However, Cohen’s often halting cross-examination of the key prosecution witnesses has so far failed to significantly dent their credibility.

“When the co-operating witnesses multiply, the points just don’t land as well,” says Sarah Paul, a former prosecutor and partner at Evershed Sutherland, adding that it was hard to cross-examine Ellison because she may have come across to jurors as a sympathetic witness.

With the government case largely intact at the end of the trial’s first act, it appears Bankman-Fried has accepted that he is the only person who can offer a counter-narrative to the prosecution’s portrayal of greed, secrets and lies. 

Paul, speaking before Bankman-Fried’s decision to take the stand, said doing so could be a counsel of desperation, given how overwhelming the prosecution’s case appears to be. “It may be his last hope,” she said. “Maybe he is able to persuade at least one juror that he did not have criminal intent.”

Photographs by Bloomberg, Reuters, AFP/Getty Images and AP

This item has been modified since publication in light of the news that Sam Bankman-Fried intends to testify

Video: FTX: the legend of Sam Bankman-Fried | FT Film