Molly White's Citation Needed - The FTX trial, day thirteen: Sam Bankman-Fried gets a dress rehearsal

Episode Date: November 30, 2023

After a few other brief witnesses, it was time for the main event — or, at least, a preview of it. Originally published on October 29, 2023.

I'm Molly White, and you're listening to the audio feed of the citation-needed newsletter. You can see the text version of the newsletter online at newsletter.mollywhite.net. The FTX trial, Day 13. Sam Bankman-Fried gets a dress rehearsal. After a few other brief witnesses, it was time for the main event, or at least a preview of it. This issue was originally published on October 29, 2023. On Thursday, October 26, the government rested after 12 days and 16 witnesses. Seven former FTX or Alameda Research employees, one FTX customer, one CEO of an Alameda research lender and institutional FTX customer, and one director of a company that invested in

FTCS were called to the witness stand, as were six investigators or subject matter experts. The last of these prosecution witnesses, was Mark Troiano, an FBI special agent who was brought in to authenticated document that had been created to summarize the vast number of Sam Bankman-Fraid's signal chats, 325, to be precise. These chats had names like hashtag organization and money-moving notes and vertex. Conspicuously missing from this list was the infamous wire fraud chat. This actually came up in court, albeit in a sidebar. because Bankman Freed's defense attorney, Mark Cohen, wouldn't quit questioning the FBI agent during cross-examination

about whether the prosecutors asked him to exclude any signal groups. During the sidebar, the prosecution had to remind Cohen that they had excluded two signal groups, but that it had been at the defense's request. One was called wire fraud, and another was called fake fraud site. The defense seemed to believe that a chat called wire fraud might prejudice the jury in a way. liar fraud case for some reason. Ultimately, the question was stricken entirely from the record. After Troiano, the prosecution rested their case. The defense case begins. The defense team brought two witnesses before putting Bankman Fried on the stand. One was a Bahamian attorney named Crystal

Roll, who Bankman Fried had retained personally post-collapse. She accompanied him to a meeting with the Bahamas Securities Commission on November 12, 2022. The defense primarily seemed to be using her to establish that Bankman Freed had complied with instructions from the BSC and later the Bahamian Supreme Court because he faced the possibility of a contempt charge and imprisonment had he not done so. This was likely motivated by Gary Wong's testimony earlier in the case, where he had suggested that Bankman Freed might have been so cooperative with Bahamian regulators simply because they might let him retain control over FTX.

The second witness was Joseph Pimbley, a financial consultant brought on by the defense team to analyze a snapshot of the FTX database. He produced charts for them that captured Alameda researchers in-use line of credit over time, as well as the portion of customers on FTCS who had enabled spot margin or spot margin lending or had traded futures.

While I think these were intended to suggest that perhaps the money borrowed by Alameda research had all come from customers who acknowledged their funds could be loaned out, the defense failed to paint a very clear picture for the jury of the meaning they were supposed to infer. Further weakening this portion of the defense's case was what felt to me like quite effective cross-examination, where the prosecution pointed out that Pimbley had been instructed only to incorporate data on Alameda Research's researches. line of credit that was associated with accounts under Alameda's name. The now infamous Fiat at liability and the debt that had been tucked away under the name of, quote, our Korean

friend, were omitted, and previous witnesses for the prosecution's case had acknowledged that you get a much rosier picture of Alameda's financial positions if you failed to include some of its obfuscated liabilities. They also established that dollar amounts for cryptocurrencies had been calculated from the fair market value column within FTX's own database, numbers that were not validated against external data sources to confirm their accuracy, and which did not account for token illiquidity. Advice of counsel. Finally, it was time for what some had lined up a full eight hours early to see. Sam Bankman-Fried would take the stand to testify in his own defense. However, there was a hiccup. The prosecution

and the defense couldn't come to an agreement on whether Bankman-Fried should be allowed to testify on several matters in which he had solicited advice from his attorneys, and so the defense had asked the judge to make a ruling. The judge found that because of, quote, insufficient detail in the defense team's filing, he could only rule on the admissibility of the testimony after hearing it, meaning he would need to take the rare step of having Bankman-Fraid testify on those specific topics first out of the presence of the jury. For that reason, the judge opted to send home the jury at 2 p.m. I was sitting in one of the several overflow rooms, which was filled with the usual hodgepodge of journalists, crypto enthusiasts, lawyers, and others who for some

reason or another were sufficiently interested in the case to come watch it from the courthouse. After an audible groan of disappointment, about a third of the room emptied, Bankman-Bread had stepped down from the witness stand, and they believed the afternoon would be little more than boring, procedural back and forth between counsel and the judge. They couldn't have been more wrong. Sam Bankman Fried takes the stand. The defense and then the prosecution peppered Bankman Freed with questions pertaining to subjects on which he'd solicited legal advice from various lawyers, which included his company's document retention policies, the loans made to various individuals, and a payment agent agreement between FTX and Alameda Research,

and those of us watching got our first taste of how Bankman Freed would hold up on the stand, including in front of a capable cross-examiner. It did not go well. Bankman Freed's characteristic, meandering, long-winded replies had not been noticeably reined in by any coaching his defense team might have offered. If they had instructed him, as defense attorneys typically do, to answer just the questions without volunteering additional detail, there was no evidence of it. In fact, it was the prosecutors who occasionally objected to how far he was straying a field of some questions,

but for the most part, they just let him keep talking. At some points, he sidestepped questions entirely, only to prattle on about something else for a minute or more, though this did not go unchallenged by the cross-examiner. Judge Kaplan himself expressed frustration several times at Bankman Freed's rambling, at one point scolding him, speaking slowly, listen to the question and answer the question directly. While Bankman Fried seemed relatively comfortable and in some cases transparently coached when answering questions by his own defense attorney, he at several times was clearly rattled by questions posed by the prosecution.

If you recall his sudden change in demeanor when George Stephanopoulos pushed back on a question during a post-collapse pre-arrest interview with Good Morning America, the same long pause followed by a halting response featured quite heavily in his replies to the prosecution. Here it says that the digital assets may not be loaned to FTX trading. They can't be loaned out. There existed a borrow lending facility. on FTX. And I think that's probably covered, I don't remember exactly where, but somewhere else in the terms of service. At one point, while holding a paper document in front of him, it was possible even from my tiny video feed in the overflow room

to observe that he was visibly shaking. The water bottle with which he was supplied was one of those thin, plastic pollen spring bottles, which audibly snapped and crinkled into the microphone as he clutched it to take drinks of water, sometimes mid-sentence. He did this so often that I noticed he had been provided a second water bottle the following day. When observed repeatedly over a short time period, rather than in reply to a question or two in a friendly interview environment, it became painfully obvious when Bankman Freed was trying to dodge a question or stall for time, which was most of the time. Some phrases became so common that the person next to me joked we should start a drinking game. I may have misinterpreted your question.

I wish I could tell you more. I apologize if this isn't responsive to the question. I am going to answer what I think the question you're asking is. At one point, I mused in my notes that court reporters should be eligible for pain and suffering pay. At several times, the absurdity of his replies elicited laughter from my overflow room. When the prosecutor asked him if he could produce a document upon which much of his testimony relied, a document retention policy, Bankman Freed decided to draw on his own legal expertise. I'm not sure if my answer is admissible, he said.

The judge reminded Bankman Fried that he was perfectly capable of determining admissibility and instructed Bankman Freed to just answer the question. At another point, the prosecutor had backed him into a corner around, Alameda Research's spending of FtX customer funds. Assistant U.S. attorney Danielle Sassoon asked, So is it your understanding that under the agreement, Alameda was permitted to spend FtX customer funds? Bankman Freed replied, I wouldn't phrase it that way,

but I think that the answer to the question I understand you to be trying to ask is yes. After pulling up the agreement in front of him, Sassoon instructed him to point out which line in the agreement he believed permitted such behavior. After pausing for a minute or so, to search the document for something he could offer in reply, he finally broke the excruciating silence with the funniest thing he could have possibly said at that moment.

So I should preface this by saying, I'm not a lawyer. His response ultimately took up an entire page of the transcript published after the fact. Once he was finally finished speaking, Sassoon simply, repeated the question. His lawyer objected, arguing the topic had already been covered. Judge Kaplan overruled the objection, agreeing with Sassoon that at no point in his long-winded reply had he actually

addressed the question that had been posed to him. By the end of the day, it seemed that Bankman Freed's tactics were frustrating Sassoon, and even his own lawyers. When Sassoon asked Bankman Freed to clarify if he meant that ensuring assets were protected from hacks, was the sole way someone might go about safeguarding assets, he replied that no, quote, there are a number of things that I would have considered to be related to that. Sassoon asked, would that include not embezzling customer assets, for example? Mark Cohen objected, and Judge Kaplan sustained. Bankman Freed replied anyway, yes, it would include that.

Cohen said, you didn't have to answer if it has been sustained. haven't you been sitting here for four weeks? Bankman Fried sheepishly replied, I felt the need to answer that one. Ultimately, much of what was discussed on Thursday won't make it to the jury. Of the five topics on which Bankman Fried's defense team wanted Bankman Fried to be allowed to refer to his lawyer's advice, only the questions and answers pertaining to the document retention policy will be permitted. On the others, Judge Kaplan decided that the fact that lawyers had drafted legal documents that were only tangentially related to alleged malfeusance was too likely to be

confusing or prejudicial to the jury. He gave an illustrative example. Quote, let's assume that somebody robs a bank, knocks over Walmart, whatever, and comes upon a large sum of a legally obtained money, and the person decides it might be a good idea to salt this away and make sure nobody is going to discover it. The guy says, let me figure out how to do this, and he goes to a lawyer. And he says to the lawyer, I want to buy an expensive condo on billioners' row, and I want to form a limited liability company, which we ought to call gold dust. And I've got just the apartment, and I'd like you to prepare a contract of sale. And the lawyer is not told where the money came from, not one word, not one word about why the objective is to hide the money

or the source. And the lawyer incorporates or organizes the LLC, the lawyer prepares the contract of sale, the lawyer represents gold dust at the closing, and now the defendant is apprehended, the buyer, the true buyer, and charged with money laundering. And the defense is, well, but I had a lawyer. I had a lawyer who organized the LLC, I had a lawyer who did the contract of sale, I had a lawyer at the closing, and I offer this as evidence that I didn't have a criminal intent in hiding the money. I did just exactly what the lawyer said. And how is that different from what you we're trying to do in principle. I am not saying anything about your client's guilt or innocence. On the remaining topic, Bankman Freed will eventually repeat his testimony from Thursday.

He has one slight advantage now, which is that he will have had the opportunity to confer with his defense team and prepare more polished answers. From the looks of it, that slight advantage won't make much of a difference. Thanks for listening to this issue of the citation needed newsletter. To learn how to support my work, visit mollywhite.net slash support. If you would like to read the text versions of these episodes, sign up to receive the newsletter in your email, or support my work on a recurring basis, go to newsletter.mollywhite.net.