FTX Closing Arguments Deliberate or Poor Management? Both sides argue fiercely over SBF’s four crimes

FTX Closing Arguments Intentional Scheme or Incompetence? Debate Over SBF's Four Offenses Heats Up

Author: Song Xue, Lian Guai

The criminal trial of Sam Bankman-Fried (hereinafter referred to as SBF) reached the closing arguments phase on Wednesday local time. Both the prosecution and SBF’s defense attorneys appeared in the Manhattan courtroom, but they have different assessments of SBF:

The federal prosecutor described the FTX founder to the jury as follows: “SBF told a story, but he lied to you.”

SBF’s attorney Mark Cohen, on the other hand, stated: “The government has concocted a Hollywood story about FTX, deviating from reality. Every good movie needs a villain, and a high school math nerd like SBF is not a good villain, so the prosecutor created one.”

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Lian Guai has compiled the main points of the closing arguments in the FTX case as follows:

Click here to view Lian Guai’s special topic: “A Downfall Prisoner with Presidential Ambitions: A Summary of SBF’s Trial”

On Wednesday, attorneys reviewed a month’s worth of testimony and hundreds of pieces of evidence. SBF is facing charges of wire fraud and conspiracy related to the operation and collapse of the cryptocurrency exchanges FTX and Alameda Research. The jury could start deliberations on Thursday and decide SBF’s fate.

In the courtroom, Prosecutor Nicholas Roos summed up SBF’s actions as four crimes: fraud against FTX customers, fraud against FTX investors, fraud against Alameda lenders, and conspiracy to commit money laundering.

Assistant US Attorney Roos conveyed the conclusion of the US Department of Justice for the first time: “There is no doubt that FTX customer funds worth billions of dollars have disappeared,” and “this is a fraudulent scheme built on lies and false promises.”

SBF’s defense attorney objected to this: “The government’s portrayal of SBF as a movie villain is based on ‘erroneous assumptions,’ that is, fraudulent behavior existed in the FTX empire ‘from the very beginning.'” “FTX certainly should have had a more robust risk management system, but its actions were well-intentioned, and this is a complete defense against ‘all charges in this case.'” It was “miscommunication,” “mistakes,” and “delays” that led to the collapse of SBF’s cryptocurrency empire, FTX.

I. Assistant US Attorney Nicholas Roos’ Closing Arguments: Where did the money go, what happened, and who is responsible

1. Where did the money go?

Prosecutor Roos urged the jury to keep three questions in mind when reviewing the evidence: where did the money go, what happened, and who is responsible?

Ruth said, “These funds are used for investments, loan repayments, expenses, property purchases, and political donations. This is a deceitful pyramid built on lies and false promises, all for the purpose of deceiving people and ultimately it collapsed, leaving countless victims.” Ellison once pointed out, “As part of the FTX legal deposit system, we directly deposit FTX customer funds into our bank account.” Long before she became CEO of Alameda, SBF established a system to deposit FTX customer deposits into Alameda’s bank account.

Ruth listed some simple facts:

• FTX Exchange claimed to have held billions of dollars in customer deposits at the time of closure.

• Customers believed that the deposits were their own and for their own use. There is no significant dispute about this issue. The defendants’ public statements, FTX advertisements, FTX policy documents, and their terms of service can all confirm this issue. FTX states in its terms of service that the assets are the property of their customers and not FTX. FTX also states in its policy that customer assets (whether fiat or cryptocurrency) are held in segregation and that customer funds do not represent FTX’s assets and are held in trust. Employees and investors testify that they believe customer deposits belong to the customers.

• There is no significant dispute about the approximately $10 billion that went missing.

• Fourth, there is no significant dispute about the whereabouts of the missing funds. The missing billions were used for investments, stock repurchases, real estate purchases, donations, transaction fees, and loan repayments.

This is about deception, this is about lies, this is about theft, this is about greed.

2. The central dispute in this case?

One of the disputes is whether the defendants were knowledgeable. The central dispute in this case is whether the defendants knew that taking the funds was wrong. That is the core issue.

The answer is clear. He took the money, and he knew it was wrong.

Ruth believes SBF fabricated a story. During cross-examination, SBF couldn’t remember details and used the phrase “I don’t remember” over 140 times. But during direct questioning, he often described details of his life very well.

Pointing out that FTX’s “privilege” allowed Alameda to take FTX customer funds, Ruth presented to the jury six moments when SBF “doubled down” and “got himself in deeper” during these moments.

According to the analysis of data expert testimonies, SBF used over $1 billion of FTX user funds to repurchase shares from former investors and competitors like Binance.

SBF previously stated that he didn’t know Alameda was on the verge of bankruptcy, but Ruth pointed out specific loopholes in SBF’s testimony: first, SBF instructed Alameda to repay third-party loans after the market crash in June 2022; second, SBF participated in producing a “false” Alameda balance sheet.

In Google’s metadata, SBF created a spreadsheet showing that Alameda owes a large sum of money to FTX, and then had a meeting with several executives to discuss the matter.

Russ noted: On November 7, 2022, SBF wrote in a private memo, “We have enough funds to handle the remaining customer funds,” and the next day, he tweeted publicly saying, “There’s no problem with the assets.”

3. SBF should take full responsibility

Russ believes that SBF should take full responsibility: “He is the only person involved in and controlling FTX and Alameda, and therefore the only person with the authority to access both companies.”

Alameda CEO Caroline Ellison has never worked at FTX, and Gary Wang and Nishad Singh are only employees of FTX and have never worked at Alameda. “So it’s not possible for them to have caused this on their own.”

Russ pointed out: Evidence shows that SBF took this money from FTX customers who were told that their assets would be safely isolated. That is fraud. It’s theft, plain and simple. Before FTX, there was Alameda, another company being sued. When SBF founded FTX and started acquiring customer funds, he believed he had found a new source of funding for Alameda. SBF told Ellison, “FTX will be a good source of funding,” and then he created a system that allowed Alameda to borrow from FTX.

Gary Wang previously stated: SBF is the one who created the system that allows Alameda to take this money, and he is the one who instructed us to take customer funds to repay the loans.

Russ noted: SBF provided Alameda with a different way to borrow customer funds, a system that is only applicable to Alameda. These secret rules allowed Alameda to borrow billions of dollars on the exchange without 7 collateral types, accumulating millions and billions of dollars in negative account balances without any risk of being closed.

In Gary Wang’s testimony, under SBF’s instructions, a feature was added to the code that allows accounts to go negative, the “allow negatives” feature. SBF used it to let Alameda borrow more money than before. To ensure that Alameda could draw essentially unlimited funds, SBF also had Wang provide Alameda with a huge line of credit. There is a $65 billion credit limit on Alameda’s account, and the reason the credit limit was set so high was for unlimited borrowing.

Gary Wang was directly asked: Where does the money come from to repay those loans? His answer was: either from Alameda’s FTX account or from Alameda’s accounts elsewhere, but either way the money comes from FTX customers. Caroline Ellison said the same thing. They know where the money comes from.

Wang testified that it was these special features that allowed and led to such a large loophole for Alameda on FTX, and Singh said the same thing.

Alameda’s main account, doesn’t even have spot margin enabled, because it did not participate in the typical customer programs where they had to opt in and post collateral.

Roos believes that SBF knows: (1) Alameda’s financial condition is poor; (2) the situation will worsen as all creditors want to repay these loans.

To cover up the problem of borrowing huge sums of money from clients, Ellison created seven alternative balance sheets. Trying to hide the problem of Alameda borrowing funds from FTX clients and providing large loans to executives.

4. SBF has repurchased Binance equity

In 2021, SBF wanted to repurchase Binance equity, but the cost of repurchasing Binance equity and the cost of repurchasing FTX assets held by Binance was high.

SBF did not have enough money to do this, and he told Ellison, “We have to do it.” However, repurchasing the assets requires $2 billion, but SBF only has $1 billion, so they misappropriated $1 billion of client funds.

5. Four crimes of SBF

Roos summarized SBF’s criminal facts as four major items: fraud against FTX clients; fraud against FTX investors; fraud against Alameda lenders; and money laundering conspiracy.

The essence of defrauding clients and investors is having a plan to deceive FTX clients by falsifying false information. The declaration encourages them to save money and then intentionally participates in this fraud by misappropriating, embezzling, or stealing funds entrusted to SBF and its company. The conspiracy to commit money laundering means committing crimes involving email, interstate financial transactions, phone calls, etc. The essence of defrauding and conspiring to launder money from Alameda lenders is that SBF schemed and conspired to make significant false statements to Alameda lenders, and he knew and intentionally participated in it.

In terms of conspiring to commit commodity fraud, Roos mentioned that there are two ways of money laundering. The first method is essentially conducting financial transactions aimed at concealing the source, nature, or ownership of funds related to wire fraud in which the defendants engaged. The other way is that the financial transactions involve wire fraud for amounts over $10,000. SBF meets both of these criminal methods.

Roos also pointed out that SBF has committed securities fraud against FTX investors. It has three elements: the existence of a conspiracy to commit securities fraud; the defendant’s participation in the conspiracy; and a member of the conspiracy carrying out overt acts.

6. Roos’ response to three arguments

Roos discussed three arguments that appeared in this case. They are: SBF’s actions were in good faith; SBF believed that everything would eventually be resolved; and some argue that the loans mentioned in this case were margin loans to some extent.

Roos rejected each argument one by one:

• Good faith refers to someone honestly believing in the truth of what they say or honestly believing that the victim’s property has not been deprived. SBF knew that what he was doing was wrong and knew why it was wrong. He knew that one day the regulatory authorities would see something they wouldn’t like, so he asked for the messages to be set to auto-delete.

• SBF repeatedly claimed that he was just unlucky. When he testified in court, he blamed everyone and everything. He claimed that the problem was not about – they didn’t hedge correctly, they were just unlucky, FTT prices fell, investments just lacked liquidity. The defendant claimed that as long as they had a little more time, everything could be successful, and they could have handled more withdrawals. Even if it is an honest belief that everything will be fine in the end or that the victims will not ultimately lose money, it does not mean that SBF’s actions were in good faith. The crime here is that SBF took the money and made false statements to obtain that money. What happened later does not make him innocent.

• SBF claims that any act of withdrawing funds from the exchange, repaying any third-party debts or expenses, or purchasing FTT is a margin transaction. But there is no factual support for this. Because FTX clients do not automatically include funds in the spot margin loan program. Furthermore, even if clients choose spot margin trading, their money is still not in that program. Alameda has not enabled spot margin loans for accounts that are set to “allow negatives.” This means that accounts matching the withdrawals did not engage in spot margin trading.

2. SBF Lawyer Cohen’s Statement

1. The Case is Based on a False Premise

Cohen believes that the SBF case itself is based on a false premise: from the beginning, FTX was set up by Sam and Gary, Caroline and Nishad as a fraudulent enterprise with the intention to intentionally steal client funds.

The appearance of SBF, FTX’s operations, or Alameda’s trading or asset value are unrelated to his appearance or his romantic relationships and have no bearing on the specific charges alleged in the indictment. Sam was, for a time, the worst-dressed, worst-haired CEO in the world. Sam would talk to almost anyone – any TV journalist, any reporter, any blogger, anyone you can think of. It made his life a mess, and it made things a mess, but it’s not a crime. The reason why the US court focuses so much on Sam’s appearance is that every movie needs a villain.

There are roughly two periods: the first period from 2019 to 2021, where the events of this case and the evidence in this case did not show that Sam had criminal intent. The witnesses in this case made millions of dollars and did not resign, did not notify authorities, or call lawyers to report any wrongdoing by Sam. Until June 2022, everyone thought they were operating the most successful cryptocurrency exchange in the world. The prosecution in its evidence has stated that all the growth of a company of this scale and complexity is due to Sam sending out fraudulent tweets and enticing customers to deposit funds into the exchange. Is the evidence really like that? On the contrary, the growth of the business is due to their hard work together, the growth of the business is due to their excellent product. This is an outstanding company that has grown and expanded, employing hundreds of employees, licensed in many countries/regions around the world, generating millions of dollars in revenue every day. We ask why these things happened during this period and why the government doesn’t want to focus on that.

The second period of the case is from June to November 2022. In May-June of that year, the “crypto winter” began and the crypto industry was under pressure and crisis. It was then that it became apparent for the first time that Alameda may have borrowed not only from the SBF account info@ observed and inspected by SBF but also from customer deposits through the fiat@ account. It was not until the fall of 2022 that the government confirmed that SBF knew about these issues.

Other witnesses have different views on the implications and impact of this statutory liability, their perspectives, and whether Alameda could meet its obligations. SBF considers the situation in the fall of 2022 as a liquidity issue, not a solvency issue. He may have hesitated, he may have been too slow. But he always believed that Alameda had enough assets both within and outside the exchange to meet all its liabilities.

SBF said during the testimony that FTX should indeed have a better risk management department, and he is absolutely right. However, a poorly managed system is not a crime. It should be emphasized again that making incorrect business judgments is not a crime.

2. Determination of Legal Standards

One basic element of the accused crime is the intent to defraud, so the defendant’s good faith is a complete defense against allegations of wire fraud. Good faith means that the defendant honestly believed that his actions were not motivated by wrongdoing. Furthermore, the defendant is not obligated to present a good faith defense; it is still the government’s responsibility to prove fraudulent intent and lack of sincerity within a reasonable doubt. As I mentioned before, good faith is a complete defense against all charges in this case. What does this mean? If the defendant made mistakes; if he made incorrect business decisions; if there was no risk management department or a fully established one; if he delayed or hesitated; if coding and accounting errors exist; if he genuinely believed statements to be true; or if he did not know what other executives were not sharing with him, or if other witnesses’ statements were inconsistent. We believe that none of these indicate a lack of sincerity.

To convict SBF, 7 reasonable doubts must be eliminated, including SBF not acting in good faith, and his actions being knowing and intentional, and the judgment must be unanimous. The standard of legal scrutiny is whether the government has assumed the burden of proving beyond a reasonable doubt that Sam’s actions were motivated by criminal intent rather than good faith, but the government has not done so.

3. SBF’s Testimony

According to the U.S. Constitution, SBF has the right not to testify, but he came forward to testify because he wanted to tell you what happened.

The government’s characterization of SBF’s testimony is unfair. If SBF gives a long answer to a question, they say it’s too long. If he gives a brief answer to a question, they say it’s too short and shouldn’t be relied upon. If he answers and attempts to explain, they say he’s evading. No matter how Sam answers these questions, we are now being told it’s not credible. The government has spent a lot of time handling this case, and today they are portraying SBF as a villain, a criminal mastermind.

4. FTX’s Innovativeness

Building FTX is a challenging task. Other exchanges require customers to have separate accounts for each cryptocurrency.FTX introduced a new approach that allows customers to keep all their digital assets in one account and seamlessly trade them. FTX brought in the cross-margin, which essentially means that customers can trade different currencies simultaneously. If you own Bitcoin and Ethereum, you can trade them at the same time. This is another significant innovation.

FTX allows customers to engage in futures trading, called a futures exchange, and to purchase and borrow cryptocurrencies on margin. This means that the way margin trading works on FTX is that customers borrow other assets and send them to the exchange, and each customer engaging in margin trading relies on and uses assets sent to the exchange by other customers.

As FTX developed, Alameda did indeed play some legitimate business roles. Alameda established three legitimate business relationships with FTX – exchange customers, market makers, and payment agents. The role Alameda played in the early stages was crucial to FTX’s launch and operations.

5. Expenditures of FTX and Alameda

For FTX and Alameda, the business expenses and various expenditure costs generated are completely normal considering the scale, complexity, and business models they have.

The government and FTX will pay fees to a sports stadium in Miami over a 19-year period, paying approximately $19 million or $14 million in the first year for naming rights. This may seem like a astronomical figure now, but it was a normal thing for FTX at the time. FTX allocates around 10% to 20% of its revenues for marketing, which is less than what SBF believes competitors spend. The real estate purchased by SBF in the Bahamas is used for employee housing. As for the $30 million apartment, SBF and others wanted to live and work together, and they are senior leadership of the company, so it is a valid business expense. Regarding the private jet, considering the company’s size and the need to travel to places like Washington D.C., SBF believes it is a reasonable business expenditure because there are not as many flights available on the same day.

6. Wild Moments of Collapse – FTX and Binance

From November 1 to November 11, 2022, many crazy things happened. Starting from November 2, CoinDesk appeared to have leaked Alameda’s balance sheet, causing some FTX customers to start withdrawing assets from the exchange, and this led to what SBF called a run on the exchange over the weekend. On November 6, CZ, the well-known CEO of Binance, tweeted his plan to sell a large amount of FTT he held because the leaked balance sheet showed that Alameda owned a significant amount of FTT. The combination of these events would have more dramatic effects. Before November 6, FTX had withdrawal volumes ranging from $5 million to $10 million per hour, but starting from November 6, FTX began to receive withdrawal requests exceeding $100 million per hour.

Ellison previously stated in his testimony: “SBF said to liquidate Alameda’s positions and transfer the funds to FTX.” For the CEO, this was a wise move during this period. SBF continued to work on raising funds because he believed it was a liquidity issue and that Alameda’s net asset value was positive.

Even through the weekend, SBF still believed that the core issue was a liquidity problem. So he even reached out to Binance – the fiercest competitor. SBF signed a letter of intent with Binance, which meant that SBF would sell the shares he owned in FTX to Binance in order to obtain funds to pay the lenders, investors, and customers. SBF was willing to give up everything he owned as always to occupy the capital and save the situation if possible.

Just after CZ proposed to buy or sell his FTT at $22, Ellison pointed out: CZ, if you want to minimize the market impact of FTT sales, Alameda is happy to buy all of them from you at a price of $22 per token. $22 is a fair market price. This is the lowest point in six months.

Cohen noted that now I believe SBF and Ellison are worried that CZ may not actually be selling, he is just doing it to hurt FTT\FTX.

As of November 7th, in terms of liquidity, SBF believes that Alameda has assets both within and outside the exchange that can solve the liquidity problem, and FTX also has assets that can solve this problem. By the next day, November 8th, the price of FTT – please remember, this is what caused the crash – plummeted. The price of FTT has dropped to near zero – $5 per token. What does this mean? It means the assets are not good. So what did he do? He deleted a tweet.

7. Response to the charges

• There is no factual basis for wire fraud against clients, and the government’s action of calling two clients does not validate their testimonies.

• The conspiracy to commit wire fraud claim against the lender, securities fraud, and money laundering do not hold up.

III. Others

On Wednesday evening, as SBF’s defense lawyer made the closing statement, SBF seemed close to tears. This was his last and best chance of getting an acquittal.

Cohen spent several hours pointing out the loopholes in the government’s description of SBF and expressing doubt about the credibility of other witnesses – they had signed cooperation agreements with the government to reduce their penalties.

Cohen also reminded the jury that SBF had considered shutting down Alameda. But SBF wrote in a memo, “It’s hard to dissolve the company,” and Ruth believed it was because “the company borrowed too much money from FTX users and couldn’t repay it.”

But Cohen pointed out: “If SBF was a criminal mastermind, and Alameda was the key to the fraud used to steal client funds, why would he propose closing it first?” “SBF worked hard to create and operate two billion-dollar enterprises in the new market,”

At the end of the trial, which lasted until after 6 p.m. local time, he urged the jury to consider SBF as “acting in good faith” throughout his management of FTX and Alameda, and therefore not guilty of fraud. In Cohen’s statement, it was “communication breakdowns” and “mistakes” that harmed FTX and SBF’s crypto empire, not intentional fraud.

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