How does SBF defend himself and what other variables are there in the follow-up?

Examining SBF's Defense Strategies and Additional Factors in the Follow-Up Process

Author: David Z. Morris

Translation: Ehan Wu on blockchain

The criminal fraud trial of SBF is about to come to a close. The prosecution and defense conducted a marathon court debate on Wednesday, and the jury will begin deliberations before the end of the day.

These closing arguments are the final statements from each legal team to the jury. From a legal standpoint, the prosecution has the responsibility to prove the charges against SBF without any reasonable doubts. Assistant U.S. Attorney Nicolas Roos passionately and precisely delivered the prosecution’s closing argument, demonstrating through the examination of numerous documents and testimonies that SBF orchestrated a group of conspirators to transfer FTX client funds to Alameda Research, with most of the profits going to SBF.

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The courtroom atmosphere was solemn, with almost all members of the jury and alternates attentively listening. It is worth noting that SBF’s parents were absent during the prosecution’s closing argument, possibly sequestered in a private room throughout the trial process. However, they later appeared to watch the defense team make their final plea for their son’s freedom.

From a legal perspective, the defense has a relatively easier task compared to the prosecution: they only need to plant reasonable doubt in the minds of the jury regarding SBF’s guilt. But considering the evidence the jury has seen over the past few weeks, this may be more challenging than it appears. This includes testimonies from former subordinates of SBF, stating that he explicitly instructed them to deceive investors. There is also a substantial amount of evidence indicating that SBF himself intentionally made false statements regarding the safety of client funds on FTX and the privileges of Alameda on the exchange.

The defense focuses on discrediting these witnesses or casting doubt on the prosecution’s strategy in other ways. In their closing argument, they include reiterating the plea agreements reached by Caroline Ellison and others with the government, implying that they are trying to “escape” the FTX disaster and abandon SBF. Cohen also claims that the prosecution unfairly portrays SBF as a “monster, villain,” emphasizing his spending and lifestyle.

However, it is harder to find a coherent alternative explanation for the events that have taken place in the defense arguments. The fact that $8 billion went missing is almost undisputed—so how is it possible that no crime was committed?

“Good faith is a complete defense”

In fact, the real focus on the narrative and reasonableness of the defense emerges in SBF’s recent testimony and Wednesday’s closing arguments. The core claim is that every step SBF took, from the founding of FTX to the catastrophic failure, was done in “good faith.” As Cohen articulated the legal theory on Wednesday, if SBF genuinely believed his statements to be true when making them and genuinely believed that all his actions were lawful and in the best interests of the clients, then there was no criminal behavior.

Cohen presented these elements of the defense in a relatively low-key manner, unlike Roos, who expressed the prosecution’s closing argument in a conversational and improvisational tone. Cohen stood steadfastly behind the podium, mostly reading from the script, with a tone that can be described as somewhat weary and discouraged.

In order to demonstrate “good faith,” Cohen partially argued that SBF’s expenses and risks are reasonable business decisions, even if his judgment is proven wrong afterwards. Some of these details may seem insignificant, such as claiming that the proportion of FTX Arena naming rights and other marketing expenses to FTX revenue is reasonable.

More substantial is Cohen’s belief that some decisions the government has characterized as evidence of criminal motives are actually strategic business choices. For example, in the autumn of 2021, SBF knew that Alameda Research’s trading account owed FTX customers about $3 billion in debt, yet they still insisted that Alameda should borrow billions of dollars for further investment. Caroline Ellison believed this was a very bad idea, but SBF rejected her idea. Cohen did not dispute the facts of this crucial moment but described it as a “commercial judgment” difference between SBF and Ellison.

However, the good faith defense relies on some more far-fetched claims. These include SBF’s sincere misunderstanding of the fundamental elements of their company’s policies and being unaware of FTX’s financial situation at critical moments.

Perhaps the most challenging point for the good faith defense is that SBF genuinely believes the other party has the right to borrow all of FTX’s customer deposits or custody funds, including fiat currency and cryptocurrencies. SBF further claims that he believes the funds borrowed through FTX’s margin loan program can be withdrawn from the exchange and used for any purpose chosen by the borrower.

However, as a good example of the vulnerability of the defense of good faith, the prosecution presented to the jury in their closing arguments the margin loan agreement explicitly prohibiting the withdrawal of funds from FTX or their use for any purpose other than trading.

SBF’s Lawyer Claims FTX Customers are Aware of the Risks

In perhaps the most strained argument in the defense, Cohen argues that FTX’s terms of service include “no restrictions” on the exchange’s use of fiat currency. In other words, Cohen argues that all FTX customers consented to their fiat currency deposits being effectively unlimited loans to FTX, rather than their property with control retained.

SBF’s claimed ignorance of FTX’s financial details is another crucial support for the defense. These claims especially require complex theorizing about the events that occurred. For example, Cohen discusses a notorious spreadsheet where Caroline Ellison prepared seven alternative versions of the other party’s balance sheet for the purpose of obtaining a loan.

Google metadata clearly shows that SBF viewed this document. So, in order to claim that SBF was not deceiving the lenders, Cohen must defend Ellison by stating that his client only looked at one of the tabs and approved its use without careful review. “SBF’s reliance on the balance sheet prepared by Ellison seems reasonable,” Cohen told the jury.

This is just some of the evidence that SBF may have remained unaware of FTX’s finances until November 7, 2022. Specifically, Cohen referred to a tweet made by SBF on November 7, claiming “FTX is fine. Assets are fine.”

In order to claim this was not deceptive, the defense once again fell back on the “good-faith” misunderstanding of SBF’s other borrowing privileges on FTX. As Cohen stated, SBF believed that “assets are fine” meant that the loans Alameda borrowed against FTX customer assets were collateralized by a significant amount of assets, including FTT and Serum tokens, as well as Robinhood stocks.

However, the jury has seen some contradictions here: similar to the fund usage restrictions, various FTX policies explicitly state that all collateral must be held on the exchange. In fact, SBF himself outlined this policy in his congressional testimony. The collateral within the exchange is crucial for the highly regarded automated “risk engine” and provides protection for many client compensations. SBF and his team attempted to argue that Alameda was not the only entity allowed to borrow against collateral outside of the exchange, but these efforts were brief and lacked strong supporting evidence.

In addition, the “good-faith” defense for Alameda’s borrowing must claim that assets, including a significant amount of Robinhood stocks, were valid collateral for Alameda, even though they technically are no longer Alameda’s property: these stocks had been transferred to a holding company controlled by SBF by November 2022. SBF’s loose interpretation of corporate property structure is just one of the many complexities and contradictions the defense case theory faces.

After some procedural formalities, the jury will begin deliberations on November 2. How long it takes for them to reach a verdict may heavily depend on whether they take SBF’s arguments seriously or if the prosecution has thoroughly countered his claims of ignorance.

Verdict

On Thursday, the jury reached a verdict on all seven charges in less than five hours, surprisingly swift and decisive. SBF will be sentenced on March 28, 2024, facing a maximum of 110 years in prison. The final sentence is more likely to be 25-50 years, but his deceptive testimony did him no favors. The government must decide by February 1 whether to pursue further charges, including campaign finance fraud and bribery.

On Thursday evening, November 2, a Manhattan jury found Sam Bankman-Fried guilty on seven charges of wire fraud, conspiracy, and money laundering. The verdict marks the culmination of one of the largest financial fraud cases in American history. Bankman-Fried’s name now joins the likes of Bernie Madoff, Elizabeth Holmes, Jho Low, and Charles Ponzi, individuals who have been involved or accused of large-scale fraud in the financial realm and now have infamous reputations.

The deliberation of the jury and the entire trial process was faster than expected. Under Judge Lewis Kaplan’s ruling, the trial ended almost two weeks ahead of schedule. Kaplan seemed eager to bring the matter to a close this week, adding extra time on Wednesday and Thursday court days.

On Thursday, Kaplan proposed keeping the jury waiting for nearly four extra hours past the normal time, as they may have needed to struggle through lengthy deliberations on the seven complex charges. But at 7:45 that evening, just before the final deadline at 8 o’clock, the jury announced that they had reached a verdict.

The parents of Bankman-Fried, Barbara Fried and Joseph Bankman, both attended the trial almost every day – including the announcement of the verdict. When the jury forewoman began reading the verdict, Bankman slumped forward in his seat. As the trial progressed, Fried’s uncontrollable twitches and tremors became increasingly apparent, briefly covering her ears with her fingers, as if not wanting to hear.

SBF himself showed his usual behavior. He was instructed to stand and face the jury when the verdict was read, but after it was delivered, he showed no obvious reaction. Then he sat back in his chair, only to change his mind, stood up, and glanced around as if hoping someone would tell him what to do. His legal team offered no advice.

There are many reasons to feel indignation towards SBF and his parents, as they benefitted from it and allegedly were involved in shaping his fraudulent behavior. But in the moment of truth, one cannot help but feel sympathy for their pain and confusion. Even for those of us who have helped uncover and prosecute FTX fraud, it is difficult to find solace, as we witnessed a life on the brink of ending.

After the verdict was read, the jury was dismissed, and court personnel gratefully left for the day. However, SBF and his legal team remained in the courtroom, speaking softly to each other, as chief defense attorney Mark Cohen soothingly put his hand on SBF’s shoulder, while a group of reporters watched. His parents supported each other as they walked behind the defense table, ready to bid farewell to their son. But they were not allowed a final embrace or a prolonged goodbye. SBF barely looked at his parents before being escorted to face his fate.

After the trial concluded, SBF was taken back to federal custody, but his sentence will not be determined until March 28, 2024. He may face up to 110 years in prison, but the actual number will depend on the number of victims affected and Judge Kaplan’s assessment of SBF’s remorse. Considering SBF’s apparent dishonesty in court, Kaplan is unlikely to show leniency. It is widely estimated that SBF will receive an actual sentence of around 25 years, with his release not until his fifties.

SBF may need to undergo another trial. Due to procedural reasons from SBF’s extradition from the Bahamas, the second set of charges, specifically related to alleged campaign finance irregularities, has been separated from this case and is currently scheduled for trial on March 11, next year. However, the government will only notify Judge Kaplan on February 1 whether they intend to proceed with the trial.

Sometimes, in situations like this, once a conviction is obtained, further charges are not pursued. But in this case, dropping the campaign finance charges may come with political risks: SBF’s criminal act of concealing donations is part of a plan to shape the image of a major Democratic donor, which is ironically significant. This has led to right-wing conspiracy theories and could spark outrage if he escapes punishment for allegations such as funnelling money to his mother’s political action committee through straw donors.

A series of post-trial litigation procedures will continue until the end of November. SBF’s defense team is likely to file an appeal, although Mark Cohen did not explicitly state this in a brief statement last night. Instead, he vaguely promised to “keep fighting.”

Lastly, the significant cleanup work caused by a few extremely reckless fraudsters will still take months or even years. This includes a series of recovery lawsuits filed by FTX estate in recent months, including the lawsuit against FTX’s legal counsel, Dan Friedberg, as well as lawsuits against SBF’s parents, Joe Bankman and Barbara Fried. Another long-standing but crucial question is whether SBF’s parents, given their apparent involvement in guiding and benefiting from fraudulent actions, will also face criminal charges.

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