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The trial of the former CEO of the bankrupt exchange FTX Sam Bankman-Fried (SBF) is set to begin on October 3. This event could mark the beginning of the end for the disgraced founder as he faces up to 100 years of imprisonment.
In line with this, there is a need to go down memory lane and get familiar with how it all fell apart for the former Billionaire and his Crypto Empire, which included FTX (the third-largest crypto exchange by trading volume as of then)
Contrary to what some might think, FTX’s woes didn’t begin when Binance CEO Changpeng “CZ” Zhao tweeted about his company’s intention to liquidate their FTT (FTX’s native token) holdings.
The spotlight was already on the crypto exchange following a Coindesk article released on November 2, 2022, which revealed that FTX’s sister company, Alameda Research, had 71% of its assets in crypto tokens, with FTX’s native token FTT and SOL representing 48% of these assets. This was worrisome because the FTT token wasn’t as healthy as one would expect it to be.
For context, FTX and Alameda held most of the token’s total supply, so any negative action by the crypto exchange could significantly impact the token’s price. Although Alameda Research’s CEO (as of then) Caroline Ellison tweeted that her company had more than $10 billion of assets, which weren’t reflected in the balance sheet Coindesk revealed, that didn’t really alleviate concerns as there were already talks of Alameda being insolvent with FTX and FTT being caught up in the mix.
It would seem that these rumors got to Binance and its CEO Changpeng “CZ” Zhao, as CZ tweeted days later on November 6, 2022, that Binance had decided to liquidate their remaining FTT holdings due to “recent revelations” that have come to light.
This news was significant because Binance held 24.35 million FTT at the time, accounting for 7.4% of the token’s total supply. As such, a sell-off was going to impact FTT’s price negatively. FTT happens to be the token in which most of Alameda’s assets were dominated, so any significant crash in FTT’s price was going to affect the company.
CZ stated that the liquidation process was going to take “a few months to complete” due to market conditions and limited liquidity. Many didn’t believe this, though, as on-chain data revealed that a crypto whale transferred 23 million FTT to Binance the previous day in what seemed like Binance’s attempt to dump its FTT tokens on the market.
CZ’s tweet, alongside the Coindesk article, eventually sparked a bank run on FTX, with users panic-withdrawing their crypto assets from the exchange. FTX reportedly saw $6 billion in withdrawal requests during that period and eventually had to pause withdrawals when it could no longer fulfill those requests.
FTX Went To Binance For Help
On November 8, 2022, CZ revealed in a tweet that FTX had asked for help following the liquidity crunch that the crypto exchange was facing. He mentioned that Binance and FTX had signed a non-binding LOI (letter of intent) with the intention for the former to acquire the latter and help “cover the liquidity crunch.” However, this transaction was subject to full due diligence, which was going to be conducted.
The deal didn’t, however, materialize as Binance backed out of the deal. On November 9, 2022, the largest crypto exchange by trading volume announced that it will no longer move to acquire FTX following the corporate due diligence that was conducted “as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations.”
In all this, many blamed CZ for FTX’s collapse as they presumed that his initial tweet about Binance liquidating their FTT holdings was done to trigger a bank run on FTX, something which seemed plausible considering that FTX was a direct competitor of Binance.
However, there is no denying the fact that FTX and Alameda had liquidity issues, with a reported hole of around $9 billion in their balance sheet. As such, FTX was bound to encounter problems sooner or later. CZ’s tweet only helped to accelerate the process and expose the rot in the crypto exchange and its sister company, Alameda Research.
FTX Filing For Bankruptcy
On November 11, 2022, FTX, FTX US, Alameda Research, and “approximately 130 affiliated companies” (jointly known as the ‘FTX Group’) filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the District of Delaware.
Sam Bankman-Fried ultimately stepped down as the CEO, with John J. Ray III taking over the reins of the company in a bid for him to use his expertise to over the company’s recovery efforts and repayment of creditors.
The company’s bankruptcy filing, released on November 17, 2022, revealed how Sam Bankman-Fried and other executives poorly managed FTX. Most notable was how the crypto exchange handled customers’ deposits. It reportedly had no proper record of these deposits and used an unsecured group email account to store private keys to customers’ assets.
The crypto exchange lacked an organized structure as major decisions were made online without any permanent record kept. Probably in a bid to cover his illicit activities, SBF encouraged employees to use apps that had an auto-delete feature.
The bankruptcy filing also suggested that SBF and other top executives misappropriated customers’ funds. They apparently used some of the funds to acquire properties and assets without proper documentation.
Despite stepping down as CEO of Alameda Research in 2021, Sam Bankman-Fried continued to run the trading firm behind the scenes. He apparently used the company as his personal bank, including taking out an undocumented loan of $1 billion. Top FTX executives like FTX Director of Engineering Nishad Singh and FTX Digital Markets head Ryan Salame also received $543 million and $55 million, respectively.
Despite his wealth of experience in the corporate world, FTX’s newly appointed (as of then) John J. Ray III marveled at FTX’s collapse as he tagged it as “unprecedented.” According to him, he had never seen such a “complete failure of corporate controls” in his 40 years of corporate practice.
Authorities Step In
FTX had its headquarters in the Bahamas, where Sam Bankman-Fried also happened to be residing. As such, there was a need for the Securities Commission of the Bahamas (SCB) to be involved in the whole issue.
Following FTX’s bankruptcy filing, the SCB sprung into action and filed to the Supreme Court in the country to freeze the exchange’s assets and applied for the appointment of a provisional liquidator. On November 14, 2022, the Supreme Court approved this request and appointed partners from PricewaterhouseCoopers (PwC) as joint provisional liquidators of FTX’s assets.
The Royal Bahamas Police Force also announced that it was working closely with the SCB to ascertain whether or not any criminal misconduct occurred in FTX’s operations. It was around that time the criminal charges against SBF started building up as Bloomberg reported that the American and Bahamian authorities were in communication about the possibility of extraditing SBF to the US to answer questions over his role in FTX’s collapse.
While investigations were ongoing, Sam Bankman-Fried continued to deny any wrongdoing as he granted several interviews and appeared on different X (formerly Twitter) spaces. A notable occurrence during this period was when he released a series of tweets suggesting that he was unaware of some of the activities that went on his crypto exchange.
On November 30, 2022, SBF made his first ‘public appearance’ at the NYTimes Dealbook Summit, where he denied knowingly participating in any fraudulent activity in his company. According to him, he “didn’t knowingly commingle funds” between Alameda Research and FTX.
Sam Bankman-Fried’s Arrest
On December 12, 2022, SBF was arrested by the Bahamian authorities. His arrest came following a formal notice by the US government informing the Bahamas government about the criminal charges that had been instituted against the FTX founder. This prompted speculations that Sam Bankman-Fried was likely to be extradited to the US for trial.
Although the Bahamas had an extradition treaty with the US, the process wasn’t expected to be straightforward, as SBF could contest any extradition process. However, he chose not to, as he willingly agreed to be extradited to the US. This came after the FTX founder had spent close to 10 days in one of the worst prisons in the world.
On December 21, 2022, SBF was extradited to the US following the Bahamian government signing the Warrant of Surrender for Bankman-Fried.
On that same day, Damian Williams, attorney for the Southern District of New York, confirmed that SBF’s associates Gary Wang and Caroline Ellison had pleaded guilty to the fraud-related charges against them and were “cooperating” in the ongoing case. Wang is FTX’s co-founder, and Ellison was the CEO of the defunct trading firm Alameda Research.
Following his extradition to the US, Sam Bankman-Fried made his first court appearance before U.S. District Judge Lewis Kaplan in a Federal Court in New York. He pled not guilty to all the charges leveled against him by the prosecution.
Meanwhile, the court granted him a $250 million bail (which his parents secured) and ordered him to live with his parents pending his trial, which was set for October 2023.
Update On FTX’s Bankruptcy Proceedings
Meanwhile, while Sam Bankman-Fried’s trial was taking shape, FTX had already begun recovery efforts as part of its bankruptcy proceedings. As part of its efforts, FTX filed an action against Genesis to recover almost $3.9 billion in cash. The bankrupt crypto exchange also filed another action to recover $71 Million from Philanthropy and Life Science ventures.
These recovery efforts have paid dividends, as the crypto exchange has been able to recover $7 billion in total assets to date. FTX and its CEO, John Ray III, are also considering the possibility of restarting the crypto exchange, as revealed by one of its latest court filings. The company has also drawn up a repayment plan as to how it intends to pay its creditors and customers.
The Build-Up To Sam Bankman-Fried’s Trial
Sam Bankman-Fried continued to maintain his innocence despite the revelations that continued to surface about his management of FTX. In May, his lawyers filed a motion to dismiss all but three of the charges leveled against him.
The charges against him included ones relating to securities fraud, wire fraud, wire fraud conspiracy, money laundering, and securities fraud conspiracy. However, the only charges that the lawyers didn’t ask to be struck out were conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to commit commodities fraud.
His lawyers argued that most of these charges were only added after his extradition to the US and didn’t form part of the agreement with the Bahamian Government. According to them, four of them actually violated the “Treaty’s rule of specialty provision.”
Back To Jail
On August 11, US District Judge Lewis Kaplan, the Judge in charge of Sam Bankman-Fried’s case, ruled that the FTX founder’s bail be revoked and that he be remanded at the Brooklyn Metropolitan Detention Center (MDC) until his trial begins on October 3.
This ruling came after the court found him guilty of trying to influence the prosecution’s witnesses while he was on bail. The prosecutors also accused him of violating his bail conditions by providing the New York Times with Caroline Ellison’s diary. Ellison, his former girlfriend and ex-CEO of Alameda Research is one of the primary witnesses in the Prosecution’s case against SBF.
Following this, the Department of Justice (DOJ) amended the charges against Sam Bankman-Fried, narrowing it down to seven. The charges include Wire fraud of FTX customers, conspiracy to commit wire fraud on FTX customers, wire fraud on lenders to Alameda Research, conspiracy to commit wire fraud on lenders to Alameda Research, conspiracy to commit securities fraud on FTX investors, conspiracy to commit commodities fraud on FTX customers, and conspiracy to commit money laundering.
The DOJ dropped the charge of violation of campaign rules against SBF despite stating that the FTX founder had spent $100 million to gain political favors. According to them, the charge was dropped as it wasn’t part of the charges included in the extradition agreement with the Bahamian Government.
Sam Bankman-Fried Requests For Release
On August 18, Just a week after his bail was revoked, Sam Bankman-Fried was already requesting to be released. In a letter addressed to Judge Kaplan, SBF’s lawyers asked that their client be released on weekdays to enable him to prepare for his defense adequately. They stated that SBF didn’t have enough time and resources to review the discovery materials against him.
Judge Kaplan, however, denied this request. That didn’t deter his lawyers as they came back with another request – For the court to preclude the government from using certain evidence during the trial.
They justified Sam Bankman-Fried request (made in a letter dated August 25) by stating that it was almost impossible for SBF to review the discovery materials, which the Prosecution had just produced before the trial commenced.
Additionally, they once again requested that their client be released on weekdays so they could provide him with an internet-enabled device that he could use to review the “millions of pages of documents and terabytes of data in discovery.”
A virtual hearing was held on August 30 for the court to rule on the pending requests made by SBF’s lawyers. Judge Kaplan denied the defense’s request to preclude some of the prosecution’s evidence. However, he gave the defense the option of requesting a postponement of the trial if they felt they needed more time to review the discovery materials. SBF and his lawyers opted not to request for one, though.
Meanwhile, a later date was set for the court’s ruling on SBF’s request to be released, and Judge Kaplan once again denied this request. In his ruling, delivered on September 12, he suggested that SBF’s lawyers had not provided sufficient reason as to why their client should be released. According to him, the claims that Sam Bankman-Fried didn’t have enough resources to review the discovery materials against him were “relatively unsupported.”
He also noted that SBF had ample time (while he was on bail) to review these documents and that there was the possibility of a postponement, which the defense opted not to request for.
On September 21, SBF was dealt a double blow. Firstly, the Court of Appeals denied his motion for release pending trial. Sam Bankman-Fried and his lawyers had appealed Judge Kaplan’s bail revocation ruling, but the appeal court found that the Judge made the right call and rejected the arguments laid forward by SBF’s lawyers.
Secondly, Judge Kaplan issued a written order in response to the DOJ’s request to exclude SBF’s expert witnesses. He ordered that three of the seven witnesses could not testify because their testimony was irrelevant or could confuse the jury. He also stated that the defense can only call the four other witnesses to rebut the prosecution witnesses.
Were SBF’s Parents In On His Crimes?
As part of its recovery efforts, the defunct crypto exchange FTX filed a lawsuit against SBF’s parents to recover “millions of dollars in fraudulently transferred and misappropriated funds” from them. FTX alleged that Allan Bankman and Barbara Fried used their influence in the company to “directly and indirectly” enrich themselves at the company’s and its customers’ expense.
Interestingly, FTX, in the filing, suggested that Sam Bankman-Fried’s parents knew or ignored the red flags as to the fraudulent scheme that was being carried out in the company and instead chose to focus on milking as much money as they could from the company, including receiving a $10 million cash gift alongside a $16.4 million property in The Bahamas despite the company being on the edge of bankruptcy.
Although SBF’s parents have denied these allegations, many, including a former SEC attorney, believe that civil and criminal charges should be brought against them by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ), respectively.
Final Attempt At Freedom
On September 25, SBF’s lawyers made one last attempt at getting the FTX founder freed by asking the court to grant him a temporary release for the duration of his trial. They stated that this was necessary for the preparation of his defense.
However, Judge Kaplan remained unconvinced with their argument and denied their request for a temporary release. The Judge noted that Sam Bankman-Fried posed a ‘flight risk’ as he was still young and could abscond if he felt the trial wasn’t going in his favor.
SBF’s lawyers had argued that they would have less time to spend with their client (at the MDC) once the trial began, which was one of the reasons why a temporary release was necessary. To address this concern, Judge Kaplan ordered that Sam Bankman-Fried be brought to the courthouse earlier (around 7 a.m.). That way, Sam Bankman-Fried and his lawyers can prepare their case before the court sits.
Sam Bankman-Fried When The Trial Commences
SBF’s trial is more than certain to begin on October 3. When this happens, the burden will be on the Prosecution to prove SBF’s guilt beyond a reasonable doubt. Sam Bankman-Fried is being charged with seven counts of fraud-related crimes, and the Prosecution will have to supply evidence to prove each of these charges.
To do this, they are expected to rely on the witness testimonies of SBF’s associates, including FTX’s co-founder Gary Wang and Alameda’s ex-CEO Caroline Ellison. As part of their plea deals, these individuals have agreed to testify against the FTX founder and state everything they know regarding the misappropriation of funds in both FTX and Alameda Research.
The DOJ also plans to summon FTX clients and investors as witnesses with the aim of proving that these individuals relied on representations made by the defendant and his associates. They believe this is integral to proving that Sam Bankman-Fried breached his duty to them when he allegedly misappropriated customers’ funds.
Both parties will be guided by Judge Kaplan’s order in response to their in limine motions as to the evidence and arguments they are allowed to or precluded from raising during the trial. For instance, SBF’s lawyers won’t be allowed to raise any evidence of his “prior good acts” or any of his charitable ventures. They are also not allowed to talk about his family background, pre-trial detention, wealth, and age, as they are not relevant to the charges against him.
However, they will be allowed (subject to them informing the court and government) to cross-examine some of the prosecution’s key witness on their recreational drug use in a bid to discredit their testimonies.
Meanwhile, the prosecution has been granted leave to raise direct evidence of SBF’s alleged illegal campaign finance scheme as the court deemed it integral to proving some of SBF’s alleged charges, including wire fraud on FTX’s customers. Judge Kaplan also stated that this evidence could prove that a “mutual trust” existed between the defendant and his defendants while proving his crime of money laundering.
The jury is tasked with providing a verdict (whether guilty or not guilty) on each of the charges leveled against the FTX founder. This verdict must be unanimous, meaning that all the jurors must agree that Sam Bankman-Fried is indeed guilty. Sam Bankman-Fried faces up to 100 years imprisonment if found guilty of all charges.
According to the trial calendar released by the courts, jury selection will be conducted on Tuesday, October 3, and Sam Bankman Fried’s trial will officially commence on Wednesday, October 4. The trial is expected to run till November 9, but it could take longer depending on how things pan out.
As part of the jury selection, both parties can pose certain questions to the potential jurors. Noteworthily, Sam Bankman-Fried’s lawyers have objected to some of the prosecution’s proposed jury questions, arguing that they paint a prejudiced image of their client.
The trial, as it is, will be the most popular crypto-related trial so far, with victims of the crypto exchange scattered around the globe.
FTT Token at $1.1 as SBF's trial starts in one day | Source: FTTBUSD on Tradingview.com
Featured image from The Times of Isreal, chart from Tradingview.com