The Breakdown - SBF Takes the Stand

Episode Date: October 28, 2023

SBF start testifying in his own defense. It .... did not go well. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Friday, October 27th, and today you know we are talking about Sam Bankman-Freed testifying in his own defense. 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, friends. What a long-awaited much-anticipated day. Yesterday, Sam went through a mock testimony, which we will talk all about why that happened.

And this morning, he is back on the stand for real in front of the jury. We are going to get into all of that. But first, I think it's worth noting that there really hasn't been all that much of interest happening this week before this very dramatic conclusion of this case. For example, yesterday's morning session featured the final witness for the prosecution before the first two witnesses for the defense. The prosecution witness was an FBI agent who primarily functioned as a way to introduce signal chats into evidence.

He testified that of the more than 300 signal groups Sam was a part of, 288 of them were set to auto-delete messages. Now, after that, the defense introduced brief testimony from the lawyer who had acted for FTCS and Sam when he met with Bahamian regulators the day after FTX filed for bankruptcy. She simply established that Sam had cooperated. with the authorities in turning over the remaining FTCS assets to a liquidator and handing in his passport. The defense's second witness was a financial analyst who performs forensic work. He explained work that he had done to extract customer data from the FTX database and testified to the amount

drawn from Alameda's line of credit. His testimony appeared to be designed to establish how many customers were signed up for margin accounts. This would line up with the theoretical explanation for the use of customer funds discussed last week by FTC's general counsel Kan Sun. Sun had testified that, as the entire scheme unraveled, he explained to Sam that it may have been technically legal to use the collateral assets pledged by futures traders. However, he warned that the size of the hole was far too large to be explained away using this reasoning. Now, this witness's work did not include cross-referencing bank accounts or crypto wallets, making the entire premise of his testimony a little thin. The real deal, the thing that people were excited for was, of course, when in the

afternoon, Sam took the witness stand. There was, however, one big twist. The jury had been sent home, and Sam would be presenting his testimony with only the judge present. The judge explained to the courtroom, there are a number of areas of potential testimony from Mr. Bankman-Fried that the defense wishes to elicit. The government asserts that I shouldn't hear any of it, or to be more precise, that the jury shouldn't hear any of it. The judge explained that despite volumes of letters arguing the point,

he had been unable to come to a decision on whether the evidence would be admissible. This means Sam's testimony would be narrowly focused on the issues in dispute, whether Sam could blame his conduct partly on the advice of lawyers related to auto-deleting signal messages, banking arrangements, and the use of customer funds. Sam has been unable to produce written evidence of this advice. The law firm which provided the advice has objected to a subpoena from the defense. This places unadvise of counsel defense on shaky ground in relation to the rules of evidence. Instead, Sam's defense team is proposing what they are calling a modified advice of counsel defense. The goal here is for Sam to discuss his mindset

relating to what he was told by lawyers without formally relying on the defense. So, the goal of yesterday was that after hearing a preview of this evidence, the judge would be able to rule on whether or not it was admissible in front of the jury. This kind of hearing is apparently extremely rare, but not unheard of. The judge stated that they hadn't required a hearing like this in, quote, some time. So basically, really, really to sum up, Sam's defense wanted to be that lawyers told me to do all this stuff and I just did what the lawyer said. This would matter because if he wasn't knowingly committing fraud because he believed what he was doing was legal because lawyers told him to do it, then he would have a chance at not being guilty.

The issue is that they don't have any copy of that legal advice, so the best that they can do is introduce what Sam was thinking, he heard. So, back to the testimony itself. Sam's testimony began with the discussion of the data retention policy at FTX. He explained that signal messages and emails were automatically deleted as long as they were related to informal chatter. Messages related to business decisions were supposed to be retained. Sam also talked through banking arrangements at FTX.

He said that he believed it was legal for Alameda research to receive deposits from customers. The testimony turned to North Dimension, an Alameda subsidiary, which was set up explicitly to hold bank accounts and receive customer funds in the later stages of FTX. Sam claimed that he was at arm's length from this decision. He stated that FTCS chief regulatory officer Dan Friedberg had prepared the forms, which he thought nothing of signing. Now, a quick little background on Dan Friedberg, because you are going to hear his name a lot, because Sam invoked his name a lot. Long before Dan showed up at FTCS, he was implicated in the 2008 Ultimate Bet online poker cheating scandal. Although he was never individually charged, Friedberg had been an

attorney for the poker site. He was caught on tape at one point, advancing a dubious cover-up. In 2011, on the notorious online poker Black Friday, Ultimate Bet's founders were criminally charged with bank fraud and money laundering. Now, when it comes to FTX, Friedberg has not been criminally charged, but he has been sued in a civil lawsuit by the FTX estate. That's the background. Sam then discussed investments made by FTX. He said that sometimes deals would be structured with Alameda as the investor and sometimes with himself personally named. Sam said that he took comfort that lawyers had structured the deals appropriately. Sam spoke to the terms of service, which he said allowed Alameda to participate in futures trading, including taking out margin loans. He added that the terms

between FTX and Alameda were drafted by Dan Friedberg, as well as outside lawyers from Fenwick and West. Sam claimed the practice of using an omnibus wallet rather than segregated customer assets was common throughout the industry. Again, the theme of the defense's questioning was that Sam had relied upon legal advice in making decisions at FTX. Now, notably, the defense frequently cuts him off and appear to be coaching him to answer questions as briefly and directly as possible. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if?

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Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVI, DBA, Cracken. The plan of having Sam answer questions concisely began to fall apart as the prosecution took their turn questioning him. Sam's answers were often sprawling, filled with caveats and exceptions.

His rambling responses stood in stark contrast to the crisp and direct questioning from the prosecutor, making him seem evasive. The prosecutor drilled in on the data retention policy and auto-deleting signal messages. Sam explained that he first decided to begin auto-deleting messages on his own initiative. He later discussed this decision in relation to formalizing a data retention policy with Dan Friedberg. Sam explained that his team had no written copy of this policy after being unable to subpoena it from FTX. The prosecutor also asked about the establishment of North Dimension. Sam said that he didn't recall instructing Dan Friedberg to set up the company.

Sam was asked directly whether he had any insight over why Alameda stopped accepting customer deposits and North Dimension began. His rambling answer included. that it wasn't a project that I was driving, although it was one that I was made aware of. Sam gave several vague answers about banking arrangements, often claiming that he didn't know or didn't recall. The prosecutors asked directly whether Sam had conversations with lawyers about whether North Dimension had permission to receive customer funds. Sam launched into one of his typically indirect non-answers, admitting generally that the topic of payments processing was discussed with lawyers, but failing to engage with the actual question. After Sam ran out of steam,

the judge cut in to clarify. He finally got to the point that Sam didn't recall any specific conversations about North Dimension. The judge warned Sam to, quote, listen to the question and answer the question directly. Coming to the point, the prosecutor referred Sam to the payment agent agreement which set out the relationship between Alameda and FTX. Sam was asked whether this agreement authorized Alameda to borrow customer funds and withdraw them from the exchange. Sam gave yet another rambling non-answer explaining that it, quote, gives a fair bit of discretion to Alameda about how it acts in general, clarifying that it has no obligation upon demand to FTX of that amount of money. After the prosecutor repeated the question Sam answered, I wouldn't phrase it that way, but I think

the answer to the question I understand you to be trying to ask is yes. The prosecutor then asked Sam to point out where in the payment agent agreement, authority to use customer funds was spelled out. Sam went deep in the tank, remaining silent for two minutes searching for the answer. When he finally came up with something, it was a sprawling answer which covered an entire page in the court transcript. Sam began by explaining that he was not a lawyer, so couldn't really give a legally accurate answer. The answer essentially explained that FTX was allowed to loan assets to Alameda at their discretion, but was generally incomprehensible. In a follow-up answer, Sam admitted that he did not have, quote, contemporaneous conversations with lawyers about exactly

what this agreement meant. He also said he wasn't sure whether this agreement was disclosed to the public. Now, at this stage, from all reports, Sam's testimony became borderline incoherent. While being asked about whether he knew that Alameda was allowed to hold a negative balance on FTX, Sam repeatedly apologized for not being able to answer the question clearly. He explained that he was aware of some, quote, speed bumps coded into the system to prevent Alameda from being liquidated, but it wasn't at all clear what he was referring to. After a lengthy back and forth with the prosecutor with no real progress made, the frustrated judge cut in stating, I've gotten beyond my tether here. I'm going to allow this. I'm going to acknowledge the point you

make, but all things are relative and there is a good deal to what the government says also, and part of the problem is that the witness has what I'll simply call an interesting way of responding to questions. Sam's lawyer quipped back, part of the problem is this type of hearing. However clearly displeased with the implication, the judge reminded him that, quote, If you want to put this defense on, it's through this hearing or not at all. Now, in all this, we never got a direct answer about whether Sam knew that Alameda was allowed to carry a negative balance. Now, the prosecutor clearly annoyed at Sam's non-answers, began asking about what he thought it

meant to safeguard customer assets. She asked, would that include not embezzling customer assets, for example? Sam's lawyer objected to the question, which the judge sustained. Sam plowed ahead with his answer anyway, stating that yes, it would include that. His lawyer, aghast, reminded Sam that, you didn't have to answer that if it has been been sustained. Haven't you been sitting here for four weeks? Sam said, I felt the need to answer that one. Now next, there was a long and confusing line of questioning about how FTCS store digital assets. The prosecutor was trying to get an answer on whether it was standard practice in the industry

to store customer assets in an omnibus wallet and allow related firms to borrow those assets. After Sam dished up another serving of word salad, the prosecutor responded, I apologize now, I'm apologizing. I don't know that I understood that answer. Now, with a hearing already well over time, the prosecutor turned to Dan Friedberg. The former FTCS chief regulatory officer had been mentioned over and over and over again during Sam's testimony. The point that Sam was trying to make was that Friedberg had drafted many of the legal documents related to FTX, including the payment agent agreement with Alameda and loan documents for the many loans given to executives. Sam attempted to portray Friedberg as the one who understood how everything fit together, and that Sam was merely signing

any document that Friedberg put in front of him. The prosecutor asked whether Sam was reticent to hire lawyers in the beginning. Sam answered that he was worried about hiring the wrong type of lawyers. Following up, the prosecutor asked, didn't you tell Carolyn Ellison that Dan Friedberg was unlike most lawyers you knew? Because he was not going to stop you from taking risks? Sam responded, I don't recall saying that in particular. Had I said something like that, and I may have, it would have been, I suspect, with further context, that would have clarified the source of risk that it did and didn't refer to. I apologize everyone listening if you just had an aneurism, but we're going to continue. Putting a bow on the hearing, the prosecutor asked, were you aware

that Dan Friedberg used illegal narcotics with your employees. This time, Sam decided not to answer the question after it was objected to. Now, closing out the hearing, the judge heard brief oral arguments about whether this testimony should be presented to the jury. Sam's lawyers argued that they were not presenting a formal advice of counsel defense, but rather just that Sam reasonably relied on the advice of lawyers. The judge appeared to see right through this point, asking Sam's lawyers, let's assume someone robs a bank, knocks over a Walmart, whatever, and gets a chunk of money. Do we agree that engaging in a transaction to conceal the source of the money is money laundering? Now he gets legal advice about how to buy a condo with the money.

The defendant is charged with money laundering. The defense is, I had a lawyer. I didn't have a criminal intent. How is that different from what you're trying to do in principle? The defense put forward that, quote, our position is that the source of funds, the use of funds, was not improper, and our client did not believe it was improper or at minimum that it was inconclusive. It's not the same hypothetical situation.

The judge retorted, but you need to tell the lawyer what the facts are. The prosecution pointed out that, quote, This is sort of collateral involvement of lawyers that doesn't go to the court offense, which is the use of funds and whether or not it was proper. There's no testimony that Dan Friedberg was told about the agent agreement. And this really was the heart of the issue. Sam's legal team is attempting to introduce evidence that various lawyers at various points in time approved of individual legal documents.

This appears to completely avoid the issue of whether Sam can honestly claim that a lawyer told him it was legal for Alameda to borrow customer funds, or indeed whether any of those lawyers knew about the size of the shortfall at FTX. There is a massive difference between Dan Vrieberg telling Sam it was legal for him to borrow company funds from FTX and telling Sam that it was perfectly legal to borrow billions of dollars from customers which would never be paid back. The judge said they would make a decision on how much of Sam's testimony could be heard by the jury the following morning. So how about how this came across in the courtroom? Matthew Russell Lee of inner city press said from outside the courtroom,

SBF was definitely losing it. Toward the end on the cross-examination, he began to speak in circles. It was interesting. On direct examination, he did fine. He was describing very confidently what it was to be a master of the universe. On cross-examination, I think one of the plans of having a go three hours was to see how he would hold up. It's going to be brutal.

If on these limited issues this happened, just wait for tomorrow. Tiffany Fong said, it seems SBF thinks he can deploy the same tactics he used with journalists on the way up, answering a slightly different question than one asked, or diving into a convoluted word salad and hoping no one notices. Judge Kaplan and the prosecutors are not having it. David Morris wrote, catastrophic, unbelievable. Ban the BBC said, talking in circles is Sam's modus operandi. He gives apparently full and complete answers which say exactly nothing. He's a master of it. The counterpoint came from Martin Scarelli who said, Sam's odds of winning are still around 1%. His testimony is actually great, unlike what folks are saying. He is bringing advice of counsel

defense without truly invoking it, and none of his attorneys pled guilty. This would actually have a shot at saving him if it wasn't for his stupid tweet about deposits being safe. Autism Capital summed up, court is done for the day and Kaplan says he'll rule tomorrow morning on whether Sam's testimony will be permissible or not. Regardless, tomorrow is going to be insane. Hold on tight. So where the judge ultimately landed is, as summed up again by Matthew Russell, there is a danger that the defendant using advice by lawyers in the past is an attempt to suggest legality. The problem is it can be a misleading impression. It's one thing for a defendant to come in and say, I had a plan and told the lawyer everything in the lawyer told me it was legal so I had no

criminal intent. That's not what happened here. Now on the specifics, the judge said, I don't see harm to the public interest to allowing the defendant to reduce evidence that counsel was involved in producing the data protection policy. The U.S. can ask how he knew. So to that extent, I'm granting the defense application. The other, for instance, is the lawyers drafted plain vanilla legal opinions. We're not going to allow that. In the event there is a conviction, I'll write on the subject, no doubt, longer than anyone will like. Basically, the upshot of this is that only data retention is in when it comes to this advice of counsel defense. Judge Kaplan went on, just to illustrate the fact that a lawyer was involved in drafting a promissory note for a loan

Mr. Bankman-Fried took out from Alameda has no relevance to this case. So that is where I'll leave things today. Sam is on the stand right now. I'm sure you will have heard some of it before then, but come back on Monday to hear everything that went down today. And remember that we are close to the end of this thing. Thank goodness. Thanks one more time to my sponsor today, Krakken, go to cracken.com slash the breakdown to see what crypto can be. And until next time, be safe and take care of each other. Peace.