The Breakdown - SBF Pleads Not Guilty; Trial Set for October

Episode Date: January 5, 2023

On today’s episode, NLW discusses Sam Bankman-Fried and FTX, including his bail hearing from December, the unusual request to keep his bail bond-backers private, and his not guilty plea from yesterday’s arraignment.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with today’s editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Image credit: Michael M. Santiago/Staff /Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDes. What's going on, guys? It is Wednesday, January 4th, and today we are discussing why Sam Bangman-Fried is pleading not guilty to charges of fraud. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation. come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, guys, so as I suggested yesterday, today is FTX catch-up day.

As much as we'd all like to move on for it, FTX is going to have lingering effects and continue to shape news cycles for some time to come. That is especially true after yesterday when Sam entered his plea in federal court in New York. But before we get into the details there, let's take a few steps back. At the end of our normal shows last year, in fact, our last normal show before the year-end interviews, the big, massive story was that not one but two of the principles around Sam had flipped and pled guilty and were actively cooperating with Southern District of New York prosecutors. This all transpired in pretty dramatic fashion. On Wednesday evening, December 21st,

it was announced that Sam was in U.S. custody and being transported back to the U.S. from the Bahamas. And almost as soon as the extradition papers had been signed and his flight was in the air, the STNY announced that Gary Wang and Carolyn Ellison had both pled guilty and were cooperating with investigators. Now, in the case of Caroline, this wasn't so surprising, as it had already been assumed that she was cooperating with investigators given her confirmed presence in New York City just a few weeks earlier. However, with Gary, it was a surprise.

There had been all sorts of crazy theories around who Gary was or who he might be. might be connected to, and it was widely assumed that he was just gone and in the wind somewhere. Well, that wasn't actually true. The charges Gary and Carolyn pled guilty to were somewhat less extensive than what Sam had been accused of, but still significant. Gary faces up to 50 years in prison, while Caroline faces up to 110 years in prison based on what they've pled guilty to. The same night that the SDNY announced these guilty pleas, the SEC and CFTC also filed complaints, which Caroline and Gary agreed not to contest. The documents surrounding all of the this offer some of the best seeming confirmation of the chain of events that led to not only

FTX's collapse, but it's pretty fraudulent design from the outset. For example, the documents contain apparent confirmation from Gary that he had coded, quote, software that allowed Alameda to divert FTX customer funds at the direction of Sam. There are also some interesting accusations. For example, that of the $224.7 million loaned from FtX to Gary, the documents suggest that they were, quote, not intended for Wong's personal use, but were instead used by Bankman Freed for other purposes, including additional venture investments. Gary claims that he only withdrew 200,000 for his own purposes. So that's where we were, and the next big thing on the docket after these announcements was Sam's bail hearing. This happened at the end of that week before

Christmas, and you all pretty much know the story at this point. Sam was granted bail with the term seeming incredibly splashy. Bail was set at $250 million, the biggest bail in history. 25 times larger than Madoff and 50 times larger than Jeff Skilling, the former CEO of Enron, except it was more PR than reality. First of all, it was a $250 million bond with only a tiny fraction of that needing to be put up as collateral. The collateral that we know of is that Sam's parents put up their $4 million house as collateral, and two additional anonymous sources also pledged other assets. Now, these two anons have been the source of some questions and consternation.

At the arraignment yesterday, Sam's legal documents, team asked the judge to keep the identities of the two additional people who backstopped his bond secret. Usually the court will announce names, addresses, and incomes of anyone providing a bail bond. In their letter supporting the request, Sam's lawyers wrote that his parents, quote, have received a steady stream of threatening correspondence, including communications expressing a desire that they suffer physical harm. Consequently, there is serious cause for concern that the two additional sureties would face similar intrusions on their privacy, as well as threats and harassment if their names appear unredacted on their bonds or their identities are

otherwise publicly disclosed. The judge allowed the identities of the two additional people to remain secret, but did so, quote, without prejudice, which means that they're allowing objections to be filed with the court and leaving open the potential for this decision to be reversed at a later hearing. Immediately after the hearing, Inner City Press, who is an independent court reporter who covers the Southern District of New York lodged an objection. We could see other media outlets lodging objections in the coming days as well on the grounds that the identities of Sam's supporters are matters of legitimate public interest. But more on that in a bit. Now, when the bail was originally granted before Christmas, the conditions were fairly standard. Sam was confined to his parents' California

home with allowances for exercise and food shopping. He had to surrender travel documents, be fitted with a tracking device, and pledged not to attempt to leave his county without permission. Sam was also prohibited from making any transactions or taking out any credit lines above $1,000 without approval. Now, concerningly, to many, there were no limitations placed on Sam's use of computers and nothing specifically about access and crypto funds, which we'll get to the issues with that a little later. Now, the judge who had been slated to handle Sam's case recused herself from the matter the day after bail was granted, although she did not handle the bail hearing. Judge Ronnie Abrams disclosed that her husband's law firm had advised FTX in 2021, but stated that he had no direct

involvement in providing legal services to the failed exchange. She claimed that legal confidentiality, meant that she had no knowledge of the service render. Judge Abrams said in her filing, quote, nonetheless, to avoid any possible conflict or the appearance of one, the court hereby recuses itself from this action. Judge Lewis Kaplan, who is appointed by Bill Clinton, has now taken over the case against Sam, Carolyn, and Gary Wong, and presided over the arraignment.

Now, before we get to the rest of the arraignment, let's talk about the other intrigue and details from the past couple of weeks. As mentioned before, it was notably not a condition of Sam's release to have any restrictions on his use of the internet. And so, of course, on-chain analysts were watching crypto wallets tied to the disgrace CEO for any movement. Within a few days, the funds started moving. Arkham Intelligence reported that last Wednesday, around $1.7 million worth of crypto were moving in wallets previously linked to Alameda research. A range of Ethereum ecosystem tokens were sold and consolidated across numerous wallets,

with a number of transactions in relatively small amounts. The funds were then exchanged into Bitcoin using multiple cross-chain conversion services that can also act to obscure the source of funds. Ironically, this is probably the largest Bitcoin holdings that these companies ever had. While these movements could have been attributed to liquidators, the lack of clarification from parties involved in the FTX bankruptcy is concerning to many. Bowtied Aguana added some additional information on Thursday, noting that a wallet that had previously been identified as belonging to Sam had made transfers as part of this movement of funds.

According to Aguana's research, some of these aggregated funds were sent to a no KYC exchange based in the Seychelles. In their thread, Aguana stated that, quote, as the Ethereum blockchain is an immutable public ledger, this on-chain evidence is permanently available to law enforcement and the courts. Sam, for his part, could not stay off Twitter and denied touching the funds, tweeting on Friday for the first time since his arrest. He wrote, I'm not and couldn't be moving any of these funds. I don't have access to them anymore. Now, one industry observer speaking with Coin Telegraph suggested that this movement of funds may not constitute a breach of his bail conditions.

They said, quote, I don't know that this necessarily qualifies as spending money. They're his assets already. Obviously, however, the movement of assets previously identified as controlled by Alameda research should be a cause for concern to the FTX bankruptcy team who have a legal responsibility to protect these assets for the benefit of creditors. Now, bringing it back to yesterday's arraignment, prosecutors at Sam's hearing raised this issue with the court, requesting that Sam's bail conditions be modified to specifically prohibit him from transferring assets owned by FTX or Alameda Research. Sam's lawyers agreed to the new conditions in principle, but requested a couple of days to agree

to exact wording. The prosecution was not satisfied with this, arguing that over those extra days, more assets could be moved. However, ultimately, they conceded that they did not have evidence that Sam was behind the movement of funds. The judge agreed with the prosecution's argument and modified Sam's bail conditions to prohibit any additional movement of funds. Molly Crane Newman, a court reporter for New York Daily News, tweeted that, SBF became animated when prosecutors successfully requested that the judge prohibit him from accessing or transferring FTX assets, furiously writing notes to his attorneys on a legal pad and pointing to them with a bureau. Now, another continuing to evolve part of this story is the tension between the Bahamas and

the U.S. bankruptcy process. According to a blog post released last Thursday by Bahamian regulators, the securities commission of the Bahamas directed the transfer of $3.5 billion worth of crypto assets into their custody. The regulators continued to deny that they instructed FTX to prioritize withdrawals to Bahamian residents. A loophole which saw $100 million worth of assets drained from the exchange after worldwide withdrawals were halted and caused frenzied transactions of counterfeit identification paperwork and locally KYC'd accounts in the lead-up to the FTCS bankruptcy filing. On Friday, the U.S.-based bankruptcy team at FTX released the information they have on the Bahamas seizure. According to FTC's administrators, the Bahamas regulator sees less than

$3 million worth of Ethereum, along with 195 million FTT tokens and assorted valueless tokens as well. They claim that at the time these tokens were worth around $296 million in total. and are now worth less than $167 million. Those valuations are still, of course, on the generous assumption that FTT tokens maintain enough liquidity to cash out at anywhere close to the current price, which I don't think is remotely possible. FTCS administrators state that they have no additional information from the Bahamas regulators to explain the discrepancy between the amount visible in identified wallets and the $3.5 billion

claimed. They urged the Bahamas regulator to, quote, provide the public with accurate information about the seized cryptocurrency. They further asserted that none of the former FTXs' executives nor the Bahamas regulator, had the legal authority to seize the assets and have requested that they be returned to the bankruptcy estate. Now, these two teams have been at odds from the beginning. In another filing on the ongoing dispute with the Bahamas-based liquidators, the U.S.-based team claimed that FTX digital markets, the Bahamian company, was, quote, never the center of the

FTX group and is, quote, a virtual nullity in the FTCs empire. They argued that any information shared with their Bahamas counterparts would be abused, with U.S. bankruptcy lawyers stating in a prior hearing that, quote, we do not trust the Bahamian government, and we simply don't trust that the liquidators will be able to hold this information and not provide it to the Bahamian government. The Securities Commission of the Bahamas has already collaborated with the JPLs to obtain access to digital assets and to mint tokens. The Bahamas regulators responded to that, saying such public assertions by the Chapter 11 debtors were based on incomplete information. This came in a media release on Monday, January 2nd. That starts, the Securities Commission of the Bahamas must once

again correct material misstatements made by Mr. John J. Ray the 3rd, the representative of the USFTX debtors in both the press and court filings. At the time of recording, this was the last tweet that Sam liked. So that tension continues to simmer. But back to the big thing now, the arraignment yesterday. Arrainments are very brief preliminary hearings to allow defendants to enter their plea and set a timetable for the case to begin. At his arraignment yesterday, Sam Bankman-Fried pled not guilty to all eight charges and is now set to face trial beginning around October 2nd of this year. The trial is anticipated to last around four weeks. Now on the one hand, this wasn't unexpected. For the couple days leading up to the arraignment, news outlets had been reporting that

Sam was likely to plead not guilty. At the same time, for many, it still seemed pretty shocking. There was, on the one hand, the fact that Caroline and Gary had already flipped and pled guilty, to many that seems like a pretty massive wall for Sam's defense to have to climb. There was also the fact of how much Sam had seemingly admitted in random internet conversations in the month and a half he was free after being deposed as FTX's CEO after the bankruptcy. Scott Melker tweeted, Breaking, SPF pleads not guilty to a bunch of crimes that he has basically already admitted to committing in Adderall-fueled Twitter rants and apologies.

Even Rand Nooner, who is not my favorite perspective on a lot having to do with this industry, tweeted, let me get this straight. SBF admits on tens of podcast spaces and streams to defrauding investors, commingling funds, wire fraud by transferring funds, Alameda's account. He arrives at court and pleads not guilty, and now gets to go back to his parents for 10 months? So what then might Sam be thinking? Well, one part of it might be a simple play for time. Dave Weisberger, the CEO at Coinrout, said the reason for the plea is almost 10 months of freedom as he awaits the trial. If he pled guilty, he would go into custody almost immediately.

I bet he pleads guilty right before the trial to try and get a reduced sentence. This is one arbitrage he seems to be doing right. There is also the simple possibility that in the limited time his team had to negotiate, there was no deal on the table that Sam thought was actually worth throwing out his chances of winning a lesser sentence through an actual trial. This is a kid who lives his entire life based on EV or expected value calculations. If he was looking at a plea deal for 25 to 50 years, effectively destroying his life anyway, maybe he thinks, why not go for the higher upside play of getting out of it or getting out of more of it, even if it has a lower chance to work? Whatever the case, over the next four weeks, the government will produce all of its

documentary evidence to Sam's legal team to allow them to prepare a defense. I think the big thing right now for the community is, one, coming to grips with the fact that we're going to see a trial around this, and that it's going to drag the whole thing on and on throughout the entirety of 2023. And two, the continued questions of how Sam's money and the influence he accrued in the very short amount of time that he was collecting that money, or more accurately stealing it, is allowing him to have a very different experience than most people who show up at the STNY. At Meta Lawman, lawyer James Murphy wrote, Discussing Sam's request to have the personal details of the two people who provided his

bond remain private. Meta Lawman, lawyer James Murphy wrote, The prosecution admitted that they have not yet interviewed the new secret guarantors of SPF's bond. Bond guarantors are supposed to be interviewed to determine whether they qualify as financially responsible persons. So this will be done in secret at some point. He also wrote, So here's the scorecard from today's hearing. No mention. of the two co-conspirator fugitives. Prosecutors say there's no evidence SPF had anything to do with moving Alameda's assets.

And the prosecutors and the judge agree to keep the names of Guarantor's secret. Not normal. Still, as I said before, on that particular point, already at least Inner City Press has filed an objection to get this information unlocked, so who knows what will happen in the future. But that is the story from now.

Hopefully this will be something we can check in on lightly every couple of weeks instead of something that needs to dominate our time here. But for now, at least you have the information as it's happened over the last couple weeks. Until tomorrow, be safe and take care of each other. Peace.