10/26/2023
On Thursday, Sam Bankman-Fried took the stand in a pivotal hearing to determine whether he could testify before a jury about how legal advice from FTX lawyers impacted his decisions at the cryptocurrency exchange.
Bankman-Fried claimed that FTX allowed him to use customer funds deposited with Alameda Research based on a "terms of service" document drafted with assistance from FTX's chief lawyer.
This marked the 31-year-old cryptocurrency luminary's first attempt to use his own words in court to defend his actions during the dramatic collapse of FTX in 2022. Prosecutors allege he misappropriated billions from FTX to finance investments, political contributions, and real estate.
"Did you believe you were acting in accordance with the previous terms of service?" his attorney inquired while he was on the witness stand.
"Yes," Bankman-Fried replied. These statements were made without a jury present, as Judge Lewis Kaplan decided to send them home for the day to deliberate on whether Bankman-Fried's testimony regarding legal advice would be admitted.
The legal counsel he received seems pivotal to his defense, although his attorney emphasized it wasn't a formal "advice of counsel" defense. They hoped the judge would allow Bankman-Fried to discuss his reliance on FTX lawyers who participated in drafting customer terms of service, implementing auto-deletion policies for company communications on Slack and Signal, setting up bank accounts for Alameda, and crafting loans to company executives.
"Bankman-Fried's knowledge of the involvement of counsel in these matters is directly relevant to his state of mind and good faith at the time," his attorneys wrote in their letter.
They also argued that he had no intent to harm his customers and believed that FTX customers "would not be harmed at all because the use of customer deposits was permissible and consistent with the rights and obligations comprising the FTX-customer relationship." The spectacle of Bankman-Fried's testimony drew a packed courtroom, with people lining up as early as 3 a.m. ET to gain entry. When Bankman-Fried took the stand in the afternoon, the crowd included well-known author Michael Lewis, who published a book about Bankman-Fried titled "Going Infinite" earlier this month.
Bankman-Fried's testimony provided a preview of how he would appear before a jury. He frequently prefaced his answers by apologizing in advance for any potential lack of responsiveness to the government's questions during cross-examination. Judge Kaplan took the time to indirectly admonish Bankman-Fried.
"The witness, let's say, has an interesting way of responding to questions," Kaplan remarked.
During his testimony, Bankman-Fried also delved into discussions regarding why his messages were or weren't configured to auto-delete and whether he was aware of certain special privileges granted to Alameda, including an exemption from FTX's collateral and liquidation policies when trading with FTX.
Many of Bankman-Fried's statements contradicted earlier testimonies from some of his closest colleagues, including Alameda CEO Caroline Ellison and FTX co-founder Gary Wang, who contended that Bankman-Fried was heavily involved in company decisions. Bankman-Fried acknowledged that he and others took personal loans and loans for company investment purposes from Alameda and that the legal department drafted those promissory notes.
He asserted that he discussed loans with FTX attorneys and found comfort in the fact that lawyers endorsed those loans. According to Bankman-Fried, Alameda was, in "many circumstances," allowed to borrow funds from FTX because of the company's terms of service. FTX's general counsel, Can Sun, he said, played a "heavily involved" role in drafting a May 13, 2022, version of those terms, and Bankman-Fried authorized Sun to "move forward" with the terms.
The FTX founder also believed that borrowing from assets held by FTX, acting as security or collateral, was permissible. Several former colleagues testified that Alameda effectively had an unlimited credit line at FTX and could maintain a negative balance without being liquidated. Bankman-Fried said that in May 2022, he was not specifically aware of the negative balance feature characterized by colleagues as "allow negative."
Bankman-Fried also defended his use of an auto-deleting function on Signal, a messaging app used by top executives at FTX and Alameda. He explained that he had discussed the auto-deletions with lawyers to the extent that formal business decisions should be retained, while informal ones did not need to be preserved. He believed it was acceptable to delete informal chats.
A lack of documentation left by Bankman-Fried presents a challenge for prosecutors as they guide jurors through the collapse of the once-booming cryptocurrency exchange and attempt to prove that the former CEO intended to defraud customers, investors, and lenders.
According to Ellison, Wang, and other former FTX employees, Bankman-Fried deliberately limited records. He omitted sensitive company information from emails, messages, and other records, and instructed his staff to use self-deleting messaging apps. Ellison testified that Bankman-Fried suggested thinking about the "New York Times test," meaning that anything put in writing on Slack should be something they'd be comfortable seeing on the front page of The New York Times.
Bankman-Fried discussed the so-called New York Times test on Thursday, recalling his prior experience at a firm called Jane Street where they operated under the assumption that anything written down could end up in The New York Times. "So when you write something down, what's the chance it could be misinterpreted or taken poorly," he remarked. Bankman-Fried stated that he did not "specifically recall" conversations on Signal between himself, Ellison, FTX executive Nishad Singh, and Wang regarding whether to shut down Alameda.
Wang testified that they realized they didn't have the funds to repay Alameda's loans. Ellison and Wang testified that they had in-person and messaging conversations with Bankman-Fried about this matter.
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