The Sam Bankman-Fried Case Is Not About Crypto, It’s About Fraud

Regardless of what one thinks about cryptocurrency—whether one believes cryptocurrency is the future of money, or whether one believes cryptocurrency is only a fad or a scam—the most common misunderstanding about the upcoming trial of Sam Bankman-Fried, also known as SBF, is that the case is about cryptocurrency.

I led an investigation, 20 years ago, as a result of which special agents from the Drug Enforcement Administration and the Internal Revenue Service, along with prosecutors from the U.S. Attorney’s Office for the Southern District of Florida, obtained an indictment against an organization involved in shipping cocaine and heroin to the United States, financed in part by Miami real estate. That case, however, was not about real estate. It was about drug trafficking and structuring financial transactions to evade reporting requirements.

And so it is with the case of Bankman-Fried, founder of the cryptocurrency trading firm Alameda Research and CEO of the more widely known cryptocurrency exchange FTX. Cryptocurrency is not on trial. The case against Bankman-Fried is not about cryptocurrency. It’s about fraud.

The Indictment

In a seven-count indictment, Bankman-Fried is charged with wire fraud on customers of FTX; conspiracy to commit wire fraud on customers of FTX; wire fraud on lenders to Alameda Research; conspiracy to commit wire fraud on lenders to Alameda Research; conspiracy to commit securities fraud on investors in FTX; conspiracy to commit commodities fraud on customers of FTX in connection with purchases and sales of cryptocurrency and swaps; and conspiracy to commit money laundering.

In essence, Bankman-Fried is accused of misappropriating and embezzling FTX customer deposits and using billions of dollars in stolen funds to enrich himself, support the operations of FTX, fund speculative venture investments, and pay for Alameda’s operating costs. He is also accused of providing false information to FTX’s investors and Alameda’s lenders.

Bankman-Fried has pleaded not guilty and his trial is set to begin on October 3.

How Prosecutors Will Likely Set Out to Prove Their Case Against Bankman-Fried

Prosecutors have indicated that they intend to call at least three of Bankman-Fried’s alleged co-conspirators to testify at trial. They have also indicated that they intend to call other former employees of Alameda and FTX, as well as customers of FTX, investors in FTX, and lenders to Alameda. They have further indicated that they intend to call an expert witness whose financial analysis should show the nature and extent of Bankman-Fried’s alleged fraud.

In presenting their case against SBF, prosecutors will likely want the jury to understand the history of Alameda and FTX. Prosecutors might begin by calling a witness who can testify to the formation of Alameda in 2017, and FTX in 2019.

Prosecutors will likely also want the jury to feel comfortable with testimony and exhibits that will make frequent references to cryptocurrency. For that reason, prosecutors might ask one of their early witnesses to explain to the jury how trading firms like Alameda work, or are supposed to work; and how exchanges like FTX work, or are supposed to work.

Likewise, prosecutors might want one of their early witnesses to explain to the jury how customers of cryptocurrency exchanges use fiat money, like dollars, to purchase cryptocurrency, how transactions are recorded on a blockchain, and how customers can hold, trade, or convert that cryptocurrency back to fiat money.

With that background and understanding in place, prosecutors could begin building their case against Bankman-Fried.

Insider Testimony Against SBF

From court papers filed in the Bankman-Fried case, prosecutors are likely to call as witnesses at least three of Bankman-Fried’s alleged co-conspirators—Gary Wang, who co-founded FTX with Bankman-Fried and was Chief Technology Officer at FTX; Nishad Singh, who was Head of Engineering at FTX; and Caroline Ellison, who was an employee at Alameda Research and was later CEO at Alameda Research—each of whom has agreed to cooperate with the government.

Wang, Singh, and Ellison will all be able to provide valuable insider testimony about Bankman-Fried’s acts. They will also be able to provide equally valuable evidence relevant to proving what Bankman-Fried knew or what he intended when he was committing those acts. The reason this evidence is so important is because for each crime charged, to convict Bankman-Fried, prosecutors must prove not only that he committed the unlawful act, but also that he had the requisite mental state, meaning he acted with the knowledge or intent required by the statute.

Evidence relevant to proving what Bankman-Fried knew or intended could come from statements he might have made, directions he might have given, or other actions he might have taken, at the time he was committing those alleged unlawful acts.

Prosecutors have indicated that they intend to introduce evidence that Bankman-Fried made misrepresentations to customers, investors, and lenders. They have also indicated that they intend to introduce evidence that Bankman-Fried directed Wang and Singh to implement features into FTX’s code which Bankman-Fried was then able to exploit to allow Alameda to misappropriate billions of dollars in FTX customer assets.

Additionally, prosecutors have indicated that they intend to introduce evidence that Bankman-Fried caused false statements to be made to a bank in order to open an account to receive FTX customer deposits. And, they have indicated that they intend to introduce evidence that Bankman-Fried used FTX customer funds for political contributions, and used straw donors to conceal the source of those contributions, in an effort to gain influence over political and regulatory decisions that would have affected Alameda’s, and more importantly FTX’s, business.

Additionally, but importantly, expect Wang, Singh, and Ellison to explain the control Bankman-Fried had over both companies.

The Employees Of FTX

Expect prosecutors to introduce books and records from Alameda and FTX, as well as emails, text messages, or messaging app communications. Some of that evidence will be able to be introduced through Wang, Singh, or Ellison. Some, however, will almost certainly be introduced through other employees of Alameda and FTX.

Some of those employees might also be asked to expand upon the control Bankman-Fried had over both companies.

Humanizing The Case

It is easy to hear about millions or billions of dollars moving around, especially digitally, and to feel somewhat removed. There were, however, real people hurt by what happened at Alameda and FTX. If what happened was a crime, and if Bankman-Fried is criminally responsible, then prosecutors will want jurors to know. Doing so humanizes the case.

Prosecutors have indicated that they intend to call customers of FTX, investors in FTX, and lenders to Alameda, to testify as witnesses at trial.

Do not be surprised if through a customer of FTX prosecutors introduce into evidence some of FTX’s commercials, which featured celebrities like Tom Brady, Gisele Bundchen, and Larry David endorsing FTX as “the safest and easiest way to buy and sell crypto.”

Do not be surprised if prosecutors play those commercials for the jury.

And do not be surprised if, after playing those commercials for the jury, prosecutors ask the witness what if any effect those commercials had on his or her decision to become or to remain a customer of FTX.

Making The Point To The Jury

The Federal Bureau of Investigation led the SBF investigation, and it will likely be a special agent from the FBI who prosecutors call to explain how Bankman-Fried allegedly conspired with others to commit money laundering. That testimony should be fascinating.

Finally, and importantly, prosecutors will call their expert witness to explain the nature and extent of Bankman-Fried’s fraud. The numbers could be staggering, and they will ultimately be explained in terms of real dollars—not bitcoin, not ether, and not any other cryptocurrency—because the case against Bankman-Fried is not about cryptocurrency. It’s about fraud. Fraud finds a way.