This article was published on the headline of the Science and Technology section of The Paper on October 20, 2023
https://www.thepaper.cn/newsDetail_forward_24997404
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After the appearance of the "star witness", the prosecution has successfully portrayed SBF as an arrogant fraudster to the jury, making it difficult for the defense to deal with it. Judging from the composition of the jury, the testimony of the witnesses and the performance of the defense, SBF is indeed in danger this time.
Many of the details revealed in this case will have a negative impact on the crypto industry, and the exposure of the defendants and related persons’ behavior will leave a very negative impression on Washington and Wall Street.
In November 2022, the cryptocurrency exchange FTX went bankrupt and liquidated, leaving a "big hole" of up to US$8 billion, which caused an uproar in the crypto market. U.S. federal prosecutors called the case "one of the largest financial frauds in U.S. history," comparable to the Enron scandal and the Madoff investment scandal.
At the core of this financial earthquake is FTX exchange owner Sam Bankman-Freed (SBF). Before FTX went bankrupt, the exchange had more than 1 million users. SBF himself was active in both the political and business circles of the United States. Many politicians, including President Biden, have received huge political donations from him. Many public figures, including NBA star Curry, have supported FTX with the support of SBF. After FTX went bankrupt and everything was settled, everyone realized that SBF had squandered the funds that ordinary users had placed in the exchange.
The collapse of FTX reflects the incompetence of regulation. In order to avoid accountability, US regulators began to indiscriminately "kill" US crypto companies. As regulation continues to tighten, industry insiders began to blame SBF, and they kept asking, "When will SBF go to jail?"
Eleven months after FTX went bankrupt, the Manhattan Federal Court in New York began the trial of SBF. The trial attracted a lot of attention, and people got to know this chaotically managed exchange better and saw how SBF and other executives destroyed a financial empire through a series of irresponsible behaviors. Many of the plots revealed were exciting.
1. SBF is in danger
The trial of SBF's case has been going on for more than two weeks. The pace of the prosecution is very fast, and all the "star witnesses" have appeared. These core witnesses include SBF's friend, former FTX founder and CTO Gary Wang; SBF's lover, former FTX founder and Alameda Research boss Caroline Ellison; former FTX engineering director Nishad Singh, etc. These witnesses were core personnel in FTX before, and they were with SBF day and night, and they knew every process in the company's operations. They have all pleaded guilty. In order to make them cooperate, the prosecution promised them a reduction in sentence, so they unreservedly pointed out SBF's illegal operations in this trial, and even made many of SBF's privacy public, making SBF embarrassed. After the appearance of the "star witnesses", the prosecution has successfully portrayed SBF as an arrogant fraudster to the jury, making it difficult for the defense to deal with it. Seeing such a one-sided situation, some people have begun to speculate on SBF's sentence, and it seems that his conviction is a foregone conclusion. Judging from the following aspects, SBF is indeed in danger this time.
First, the composition of the jury is unfavorable to SBF
The game between the prosecution and the defense began when the jury was selected. In the criminal courts of the United States, it is the jury that decides whether the defendant is guilty or not. Only when 12 jurors reach a consensus can a conviction be made. The composition of the jury in this case roughly includes a physician assistant, a social worker, a Metropolitan North train conductor, a librarian, a vehicle maintenance worker for the U.S. Postal Service, a special education teacher, a nurse, an advertising practitioner from Ukraine, and a retired investment banker. About three-quarters are women and one-quarter are men. On the surface, such a composition does not favor any party.
However, upon closer analysis, some factors are unfavorable to SBF. First, one of the jurors was once an FTX user and lost money in the FTX bankruptcy case. Jury members will communicate with each other, and some members with stronger wills are likely to influence the opinions of other members. This member who lost money is likely to share this experience with other members, forming a negative impression of SBF among other members. Second, the jury of the Manhattan Court is from the Southern District of New York, and many have experience or training in traditional finance. Traditional finance emphasizes rigorous accounts and rules, and FTX's chaotic financial management will inevitably leave a very negative impression on these people. Third, the majority of the jury is female, which was fully utilized by the prosecution. When Coraline Allison appeared in court, the prosecution sent the chief female prosecutor Danielle Sassoon to ask questions. In addition to the basic facts, the questions specifically involved the complex relationship between Coraline and SBF as lovers and subordinates, highlighting SBF's indifference to Coraline and the unequal relationship between them. The jury was given the message that Coraline was younger and of lower status, that there was a subtle coercion in their relationship, and that SBF had influenced Coraline's way of thinking and pushed her into direct fraud. Coraline cried in public during the trial, and during the break, the prosecutor protested to the judge that SBF had used facial expressions to pressure witnesses during their testimony. These elements would undoubtedly arouse sympathy among female jurors and further reinforce SBF's negative image. Fourth, each member had previously served on a jury and had reached a unanimous conviction, which meant that these people were most likely not some kind of "non-cooperators," which the defense urgently needed. Only the existence of "non-cooperators" could prevent the 12 people from reaching a unanimous conviction.
Second, the witness testimony made it difficult for the defense to confront
What is very unfavorable to SBF is that the prosecutors successfully reached a plea agreement with several former FTX executives. They are all insiders who witnessed the rise and fall of FTX together with SBF. In order to reduce their own sentences, their testimonies were "bloody", and every sentence was fatal to SBF.
For example, Gary Wang and SBF were close friends since high school. From his opening testimony alone, we can feel the difficulty of the defendant defending himself:
On the day of his testimony, Gary Wang first introduced himself as the co-founder of FTX. Then, the prosecutor asked: Did you commit any crime while working at FTX? A: Yes. Q: What crime did you commit? A: Wire fraud, securities fraud, commodities fraud. Q: Did you commit the crime alone or with others? A: With others. Q: Who did you commit these crimes with? A: SBF, Nishad Singh, Coraline Allison. Q: Do you see the people who committed the crime with you in this court today? At this time, Gary Wang pointed to SBF. Q: Mr. Wang, how did you and the defendant commit wire fraud? A: We gave Alameda Research privileges on FTX, allowing it to withdraw unlimited funds from the platform. We lied to the public about this. Q: When you say withdraw unlimited funds from the platform, what do you mean? A: It has the ability to withdraw unlimited funds from the FTX account.
This testimony clearly points out two core charges against SBF. One is the illegal misappropriation of public deposits. FTX is an exchange and Alameda Research is a market maker, both of which are under the control of SBF. According to common sense, the funds authority granted by the exchange to market makers should be similar, but SBF and Gary Wang privately gave Alameda Research $65 billion in withdrawal authority in the form of code in 2019. Through this path, SBF instructed Alameda Research to illegally misappropriate about $14 billion in customer deposits. Due to the large amount of misappropriation, when FTX went bankrupt, about $8 billion of funds could not be repaid, causing significant losses to customers. The second is fraud. This mainly refers to two major frauds. One is about Alameda Research's withdrawal authority. SBF has always insisted that Alameda Research has no privileges as a market maker. On the day of the authority modification, SBF also posted on Twitter that Alameda Research's authority is the same as other market makers, and there is no privilege, and the fact that Alameda Research and FTX share a capital pool has never been disclosed since then. Another time was on the eve of FTX's bankruptcy at the end of 2022. In order to avoid a run, SBF publicly stated that customers' funds were safe and there was no need to worry. Many people believed it and left their money in FTX, only to lose everything.
Under the direction of the prosecution, several core witnesses disclosed the details one by one. It is believed that those incredible operations will definitely leave a deep impression on the jury.
Third, the impression of SBF as an arrogant fraudster has basically been formed.
In addition to the core charges, many details disclosed by "star witnesses" helped the prosecution create an image of SBF as an arrogant and irresponsible fraudster.
As for SBF's personal character, his former lover Coraline Allison revealed some explosive details.
First, SBF has ambitions to be president. SBF told Carolan Allison that he had a 5% chance of becoming president of the United States in the future. This ambition also explains why he spends a huge amount of money on political donations. SBF has made huge political donations to many Democrats, including Democratic President Biden. SBF is also a frequent visitor to Capitol Hill. Some congressmen call him "Lovely Sam". Before the collapse of FTX, SBF used his political influence to operate in Congress to launch a crypto bill that was in his own interests. This is far from being achieved by other people in the crypto industry.
Second, SBF took pragmatism to the extreme, even to the point of distorting his values. A testimony from Carolan described this very vividly: "Q: In the process of working with the defendant, did he talk to you about the moral issues of lying and stealing? A: Yes. He said he was a utilitarian. According to the utilitarian standard, rules like not lying and not stealing are not that important. He believes that the only important moral rule is to maximize utility. So creating greater benefits for more people is the real justice. Q: Does he think lying or stealing fits into this framework? A: He believes that rules like not lying or not stealing do not fit into that framework. Q: What effect does the defendant's attitude toward lying and stealing have on you? A: I think it makes me more willing to do things like lying and stealing. When I started working at Alameda, if you told me that a few years later I would send false balance sheets to lenders or take clients' money, I probably wouldn't have believed it."
Third, SBF is superstitious about his hair. SBF has always used a messy curly hair as a symbol of his image. Even though he has acquired a huge fortune, he usually refuses to take care of his hair, believing that such hair brings him good luck. Such superstitious behavior is incompatible with the rational image of a "trading genius" that is widely circulated in the outside world.
Witnesses revealed several horrific details about the company's chaotic management.
The first is the unfounded insurance fund. The exchange's insurance fund is a risk management tool designed to protect the exchange's users and the market from abnormal volatility, unexpected losses, and bad trading practices. The role of the insurance fund is particularly important in cryptocurrency and derivatives exchanges, because the volatility of the crypto market is high and is more likely to lead to sudden losses. Like other exchanges, FTX previously claimed that it had an insurance fund, but in fact the money did not exist. FTX's actual operation is that when it is necessary to disclose the amount of the insurance fund, core executives such as Gary Wang will use a random number generator to make up a random number and release it to the public. Such extremely irresponsible behavior also exposes customer funds to risks.
The second is accounting fraud. In Carolan’s testimony, it was mentioned that once the head of the loan department of Genesis (a well-known crypto company) asked Alameda Research to provide the latest balance sheet. SBF was afraid that Genesis would find out from the balance sheet that Alameda had misappropriated customer assets from FTX, so he asked Carolan to falsify the accounts. Carolan prepared 7 fake balance sheets, and SBF selected the most outrageous one and sent it to Genesis.
Fourth, the defense performed poorly.
Although SBF spent a lot of money to hire the famous lawyer Mark Cohen, the prosecution has many "star witnesses" and the defense's performance has been lackluster so far.
In the final moments of the first week facing Gary Wang, the defense even began to stall for time with invalid questions, such as repeatedly asking "Did you know each other in high school?", which the witnesses had already said many times in court. This move led to multiple warnings from the judge, leaving the defense with the impression that they were at a loss.
There is a reason for the defense's behavior. The prosecution is very familiar with the witness, and the two sides have communicated very well. Judging from the performance of the witness, it is not ruled out that the prosecution has instructed and rehearsed the witness. The defense is meeting the witness for the first time and is unfamiliar with the witness and the testimony. Naturally, it is impossible for them to respond more freely than the prosecution. As a delaying strategy commonly used in trials, the defense delays time in order to drag the trial into the next stage, so that they can fully study the witness testimony during the recess and formulate the next strategy.
2. Subsequent Development of the Case
The SBF case will continue for several weeks, and more witnesses will appear. As a well-known lawyer, Cohen's team will not remain passive. The prosecution's most important trump cards have almost all been played in the first three weeks, and Cohen's team has enough time to study countermeasures. There are two things to watch in the subsequent development of the case. One is whether the defense can reverse some of the decline, and the other is whether SBF will testify in court himself.
First, the defense's strategy to turn the situation around
Since the evidence presented in the first three weeks was very sufficient, observers generally did not expect SBF to make a comeback. However, from some actions of the defense team in the past week, it can be seen that they are trying to reverse the situation and try to reduce SBF's guilt.
During the third week of Nishad Singh's testimony, the defense lawyers showed a clearer strategy. On the one hand, they tried to reinterpret the facts that were difficult to refute. As Cohen asked the jury in his opening statement on the first day of the defense, what if everything SBF did was "completely reasonable"?
In the third week, Cohen selected several points in Singer's testimony and reinterpreted them, trying to show the jury that these things made perfect sense from SBF's perspective. For example, Singer had spent a lot of money on various business activities and political donations on behalf of SBF, with the amount reaching nine figures. In the eyes of the prosecutors, this was a misuse of FTX user funds. But Cohen tried to describe these as reasonable public relations expenses. As for FTX's $30 million Bahamas penthouse, Cohen told the jury that this was not a manifestation of luxury, but a completely reasonable residence for those who truly believed they were billionaires.
On the other hand, Cohen's team turned to devaluing the credibility of witnesses in the face of unquestionable facts, raising "reasonable doubts" in the witnesses' recollections. For example, Cohen tried to get Singer to admit that he chose to live in FTX's luxurious penthouse despite his claim that SBF's many irregularities made him uncomfortable.
The fact that the "star witnesses" were slightly more favorable to the defense was that they were clearly pandering to the prosecution, they were all trying to cooperate in order to reduce their sentences, and their testimonies were obviously rehearsed, all of which would reduce their credibility in front of the jury. The defense may use these facts to further question the testimony.
Second, whether SBF will testify in court
After all the "star witnesses" have appeared, the remaining important point is whether SBF himself will appear in court. It is foreseeable that if SBF appears in court, it will be more disadvantageous to him. If there is anything wrong in his answers, his sentence will inevitably be extended. The defense lawyer will definitely advise him not to appear in court.
However, considering that SBF frequently appeared in court to defend himself despite the dissuasion of professionals after FTX went bankrupt, there is still a possibility that he will appear in court to defend himself despite the dissuasion in the subsequent trial. SBF was once an Internet celebrity among traders and entrepreneurs at his peak, and these experiences may make him overconfident in his ability to influence others. In any case, if SBF appears in court himself, it will definitely be the biggest focus of this case.
III. Impact of this case on the crypto industry
Many details revealed in this case will have a negative impact on the crypto industry. For example, before facing billions of dollars worth of investments or loans, FTX and Alameda Research rarely conducted rigorous due diligence or financial audits. The exposure of these behaviors will leave a very negative impression on Washington and Wall Street.
In the second week of witnesses, Zach Prince, CEO of crypto company BlockFi, testified that most cryptocurrency companies have difficulty obtaining audits, so the financial data their team can access is only "the financial information that the borrowers are willing to share with us." This must be unacceptable to people in the traditional financial industry.
It can be imagined that these details will further strengthen the government's determination to regulate the encryption industry.
Author: curiousjoe, a cross-border researcher of international politics and cryptocurrency.
