Yahoo Finance Sam Bankman-Fried tells judge he relied on advice from lawyers at FTX
Sam Bankman-Fried took the witness stand Thursday in a hearing intended to help a judge rule on whether the FTX founder can testify in front of a jury about how advice from FTX lawyers impacted key decisions he made at the cryptocurrency exchange.
Bankman-Fried said under questioning from his defense attorney Mark Cohen that he believed that his trading firm Alameda Research was allowed to borrow customer money deposited with FTX due to a "terms of service" document that was drafted with help from FTX’s top lawyer.
The claim made by the 31-year-old crypto star was his first attempt to use his own words in court to defend his actions during the dramatic collapse of FTX in 2022. Prosecutors allege he stole billions from FTX and used it to finance investments, political donations, and real estate.
"Did you believe that you were managing FTX in accordance with the earlier terms of service?" his lawyer asked him in the courtroom while he was on the stand.
"Yes," replied Bankman-Fried, who wore a gray suit, white shirt, and tie.
He made the comments without a jury present. The judge overseeing the case, Lewis Kaplan, decided to send the jury members home for the day so he could decide whether the testimony Bankman-Fried planned to offer about legal advice would be allowed.
The advice he received appears to be important to the defense case, though Cohen told the judge during the hearing that Bankman-Fried's position is not a formal "advice of counsel" defense. Cohen said he hoped the judge would permit Bankman-Fried to discuss before a jury how he took comfort in his consultations with FTX attorneys.
His lawyers argued in a document filed with the court this week that Bankman-Fried be allowed to testify about his reliance on FTX lawyers who took part in drafting customer terms of service for the exchange, helped implement auto-deletion policies for company communications over Slack and Signal, helped set up bank accounts for Alameda, and drafted 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 lawyers wrote in the letter.
They also argued he had no intent to steal from his customers, and that he believed 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 of people who lined up as early as 3 a.m. ET to get inside. As 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 gave a preview of how he will appear before a jury. He frequently apologized in advance for potentially not being responsive to the government's questions on cross-examination. Judge Kaplan took time to admonish Bankman-Fried indirectly.
"The witness, let's say, has an interesting way of responding to questions," Kaplan said.
He spent part of Thursday also discussing why his messages were or were not set to auto-delete and whether he was aware of certain special privileges that Alameda had, including an exemption from FTX's collateral and liquidation policies, when trading with FTX.
Many of Bankman-Fried's statements contrasted earlier testimony from some of his closest colleagues, including Alameda CEO Caroline Ellison and FTX co-founder Gary Wang, who argued that Bankman-Fried was closely involved in company decisions.
Bankman-Fried said he and others did take personal loans and loans for company investment purposes from Alameda and that the legal department would draft those promissory notes.
He said he discussed loans with FTX attorneys and that the attorneys suggested that venture investments could be structured as loans. He said he took comfort from the fact that lawyers signed off on those loans.
Alameda, he said he believed, 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, was "heavily involved" in drafting a May 13, 2022, version of those terms, and Bankman-Fried said he authorized Sun to "move forward" with the terms.
The FTX founder also said he "believed that it was permissible for there to be borrowing from assets FTX was holding, that were acting as security or collateral."
Several former colleagues have testified that Alameda had what amounted to an unlimited credit line at FTX and could carry a negative balance without being liquidated. Bankman-Fried said in May 2022 he was not specifically aware of the negative balance feature that colleagues characterized as "allow negative."
Bankman-Fried said he knew that Wang had implemented special features for Alameda so that FTX would not experience chaos, saying he was "aware of some speed bumps in place on Alameda’s account" but didn’t know their "exact nature."
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 said he did discuss the auto deletions with lawyers to the extent that formal business decisions should be retained while informal ones did not need to be saved. He said he thought it was OK to delete informal chats.
Scant documentation left by Bankman-Fried is one hurdle facing prosecutors as they walk jurors through the downfall of the once-booming crypto exchange and try to prove that the former CEO intended to defraud customers, investors, and lenders.
According to Ellison, Wang, and other former FTX employees, Bankman-Fried limited records by design. He omitted sensitive company information from emails, messages, and other records, and instructed his staff to use self-deleting messaging apps.
"He said that we should think about the New York Times test, meaning that anything we put in writing on Slack should be something we are comfortable seeing on the front page of the New York Times," Ellison testified.
Bankman-Fried discussed the so-called New York Times test on Thursday, saying that at a trading firm where he once worked called Jane Street "there was something called the New York Times test" and "it was operating under the assumption that anything you write 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."
Bankman-Fried said he didn’t "specifically recall" conversations on Signal between him, Ellison, FTX executive Nishad Singh, and Wang about whether to shut down Alameda.
Wang has testified that they realized they didn’t have the money to pay back Alameda’s loans. Ellison and Wang testified that they had in-person and message conversations with Bankman-Fried about it.
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