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I’m writing early this week because Sam Bankman-Fried has an appeals hearing today at the Second Circuit, and his mother Barbara Fried has written a 65-page missive about why he’s innocent beyond the technical realm of the appeal. It’s a fascinating document that I break down in substantial detail below.
I won’t be attending the appeal, partly because it kind of snuck up on me; because I think it has a very slim likelihood of mattering; because I have a lot of other work to do - and because the appeals arguments have already been laid out in print. There’s not much there, but I’ll leave that analysis to others for now.
Maybe I let it the appeal sneak up on me because I’ve been subconsciously shielding myself from thinking too much about it, or the increasingly real if still narrow possibility of a Trump pardon. I’m also frankly kind of exhausted by the whole pardon/appeal thing.
Those processes are nearly automatic, and I don’t blame Bankman-Fried’s family for advocating for him - however embarrassing the effort is. Far more sinister and worrying is the growing, infuriating campaign on Twitter pushing incoherent narratives about why we should “Free SBF.” Some of this crosses over with victims mad about the bankruptcy process who have pilled themselves into believing those issues somehow translate into Sam being innocent.
But an even bigger group of apologists skew notably right-wing, building on his exoneration tour with Tucker Carlson and the New York Sun. The simple answer is that the second Trump administration is a naked kleptocracy, and it has made a general if unstated policy of freeing criminals from prison as a (conscious or unconscious) way of normalizing its own criminality.
I’m not going to do a systematic and total analysis of Barbara Fried’s Magnum Opus, because it’s not entirely coherent itself.
Like most of the defenses of Sam, including the ones he has mounted himself, it hinges on simply ignoring a few critical facts - specifically, the fact that margin accounts could not have accounted for the extent of Alameda’s borrowing from FTX, meaning that the terms of service were incontrovertibly violated and therefore fraud was committed.
Though Barbara Fried teases here missive with the idea that Alameda’s borrowing was legal under U.K. law, she’s not actually offering anything new, except a misdirect to claim all the embezzlement happened in fiat (i.e. dollars) not covered under the TOS, and therefore was legal. That’s not an accurate characterization, for reasons I go into below.
But again, this isn’t offered in the spirit of a complete analysis or rebuttal - frankly, I couldn’t force myself to read this delusional fantasia all the way to the end. Instead, below are some key excerpts, roughly arranged by significance, with commentary. If you want to read the whole thing, it’s your life.
Finally, it must be noted just how strange the presentation of this is - uploaded as a Google Drive document to a new Substack account with a single post. Barbara Fried’s reach seems notably and justly reduced - the essay was barely noticed on Twitter until a good week after it was published.
Barbara Fried’s statements are in italics and bullet-pointed below, with my comments underneath in plain text.
“The government’s misappropriation argument presupposed that there was a category of assets called “customer funds” that either could or could not be loaned out. ‘Customer funds’ is not a legally defined term.”
This just kind of gives the entire game away, in a really hilarious way. Fried’s defense of her son, just like the defenses mounted by Michael Lewis and Fried’s law professor friends Ian Ayres and John Donohue, depends entirely on the claim that Alameda, an entirely separate entity from FTX, legitimately borrowed nearly the entirety of customer balances on the exchange, then lost it. But a substantial part of the fraud alleged was the lack of separation of any kind between Alameda and FTX, contrary to public statements from SBF.
Here as throughout this document, Barbara Fried implicitly and uncritically takes the lies her son were convicted of telling as truths, in the course of trying to exonerate him from other lies.
“Under section 8.2,29 adopted in May 2022, FTX was not permitted to, and did not, loan out digital assets deposited by spot traders, meaning those who chose not to opt into the borrow/lending program. FTX was required to custody those assets on the exchange. That restriction did not apply to margin traders. It also did not apply to fiat assets, whether deposited by spot or margin traders.”
This is actually kind of a revelation, with regards to the fiat - at the least, something I haven’t thought about much, and apparently true: the TOS do indeed refer to “digital assets” specifically.
But here’s the thing - the digital assets weren’t there either. At the time of bankruptcy, FTX only held 105 bitcoin, against nearly 100,000 BTC owed to users of the exchange. Crypto was indeed transferred “out” of user accounts - by whatever direct or indirect means - for funneling into venture, real estate, etc. via Alameda.
Fried, like her son, then quickly shifts emphasis to “margin accounts” which did give FTX right to lend out their funds. Fried emphasizes that “Margin trading accounted for 80 percent of the volume on FTX,” a completely irrelevant metric meant quite clearly to mislead. “Volume” here refers to flows, the volume of trades, not the amount of deposits. By citing high trading volume in margin accounts, Fried wants to distract you from the clear forensic evidence, presented at trial by a highly credible expert accountant, showing that the amount held in margin trading accounts fell far short of Alameda’s borrowing, in fiat and crypto. In other words, FTX was inescapably and indisputably using customer spot crypto deposits.
Throughout the remainder of the document - at least as far as I could will myself to read - Barbara writes as if all of Alameda’s borrowed funds came from margin accounts, and argues for many other points on that false basis.
“The defense was prepared to call an expert in UK law, Lawrence Akka, to testify that the Terms of Service as interpreted under UK law authorized the loans to Alameda at issue in the case … To quote from Akka’s proposed testimony, “FTX was obliged to honour customer withdrawals (i.e. to repay the debt of fiat currency that it owed), but was not constrained to use fiat currency for any particular purpose in the interim.”
This is frankly shocking. Fried teases the idea of “U.K. law” as if there were some different standard for custody or fiduciary duty, but even the U.K. witness was only ever going to testify to the movement of fiat currency - and again, the entire proposition hinges on the idea that there was enough margin borrowing available to explain the amount borrowed by Alameda. There wasn’t. All of this is irrelevant, and presented solely as a misdirect.
“The government introduced no evidence that the loans [to Alameda] violated the terms of service that governed FTX’s contract with customers or the background legal regime governing FTX’s operations. The Disclosure Statement accompanying the Debtors’ Plan of Reorganization explicitly acknowledged that “[t]he user agreements . . . did not provide for the segregation of assets or the return of assets in specie to customers. Nor did such ‘ownership’ language cover the billions in fiat currency owed to customers.” (p. 10).”
I am not a lawyer, but I do know the stipulations made in a bankruptcy court aren’t fungible with those made in a parallel but separate criminal proceeding. The fact is that the evidence presented at criminal trial convinced the jury that Sam had violated his own user agreement, leading them to convict him on charges of fraud. The above is pure, irrelevant misdirection.
Specifically, this also ignores explicit public statements made by Sam that “FTX does not invest customer funds.”
“The prosecution presented no evidence that Sam had ever formed a plan to defraud customers or had ever discussed doing so with his alleged co-conspirators, or established any motive for the alleged crime.”
This is straightforwardly untrue and reflects a truly sad level of deluded and motivated reasoning. Caroline Ellison testified under oath that she and Sam openly discussed that FTX customer deposits were “a good source of capital.” Sam’s motive, as Judge Kaplan himself laid out at sentencing, was maximizing his power and influence.
The co-conspirators were motivated: their testimony “all but guaranteed them minimal or no jail time in return for their testifying against Sam at trial, provided that the government, after the fact, judged their testimony to have significantly helped its case against Sam.”
This is equally desperate and pathetic. The co-conspirators probably did get off light. But they also faced perjury and a complete revocation of their plea deal if they were found to have lied on the stand. The defense never specifically and directly disputed any of the claims made by these witnesses.
Barbara devotes several pages of her missive to expounding on the general idea that cooperating witnesses have motivation to testify against their co-conspirators, without offering any specific claim to falsehoods in actual testimony.
Fried Writes:
“Any modestly robust defense should have blown the government’s case out of the water. But Kaplan ensured that Sam’s lawyers could not mount that defense by blocking them from introducing evidence that FTX lawyers had approved and in some cases structured the loan arrangements in question, that the loans were in fact lawful under UK law, which governed the International exchange, that they were never secret, and that there were at all times sufficient assets in the FTX estate to repay creditors in full within a reasonably short period of time.”
Later, she continues: “after conducting an unprecedented and possibly unconstitutional hearing in the middle of the trial Kaplan blocked the defense from introducing any evidence concerning the role played by FTX lawyers in structuring the transactions that the government was now claiming to be fraudulent.”
This is simply reiterating an “advice of counsel” defense that is rarely accepted for presentation by criminal judges. Kaplan’s exclusion of the arguments is not a strange or malicious decision.
Fried straightforwardly recites the “innocent mistake” theory of what happened at FTX - or as Sam planned to put it before Congress, the “I fucked up” defense. She writes:
“First and most disastrously, the leadership of FTX and Alameda lost track of the outstanding balance of a debt that Alameda owed to FTX as the result of a payment processing arrangement …”
“Second, the CEO of Alameda, Caroline Ellison, failed to hedge against two successive crypto market crashes in the spring of 2022, which reduced the value of Alameda’s crypto holdings by about 70-80 percent, reducing its net asset value (NAV) from (positive) $40 billion at the end of 2021 to (positive) $10 billion in June 2022.”
It’s hard to wrap your head around the misdirect going on here. Another part of the substantive fraud committed by SBF was that Alameda and FTX were not actually separate entities, but SBF publicly lied about their relationship. In fact, as was shown at trial, SBF had continuing influence at Alameda - including actually, he claimed, advising Ellison to put on some of these hedges, a push that looks like coercion in the context of their romantic relationship. But Barbara here is trying to re-establish the very illusion of separation that Bankman-Fried was convicted, in part, for faking.
“Third, the hedges that Alameda management belatedly put on its cryptocurrency holdings in the summer of 2022 to protect against a further market crash failed to work, because the November attack on the exchange cratered the market value of the portion of Alameda’s assets that were directly tied to the value of FTX …
Yeah, that tends to happen when you’re engaged in massive undisclosed related party lending. Enron’s vehicles all blew up at the same time too. Must have been a conspiracy.
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“When the run on the exchange began, FTX immediately called all of Alameda’s assets, which were collateralizing its debt to FTX. After covering about $5+ billion in customer withdrawals over the first two days, FTX ran out of the liquid assets and temporarily halted withdrawals.”
Again, this completely relies on the idea that it was acceptable, against the plain language of customer agreements that (digital) assets would not be transferred or invested for Alameda to have borrowed a huge portion of customer assets. Every element of Fried’s defense fundamentally hinges on refusing to see what’s in black and white right before your eyes.
“FTX likely would have been fine had its chief competitor not triggered a run on the bank”
The “Run on the Bank” phrase has been key to the public strategy from the start. It is inherently and intentionally deceptive. FTX was not a bank, and the disappearance of customer assets could not have been the result of a bank run.
·
January 30, 2024
Late Friday, two Ivy League Professors - Stanford’s Jon Donohue and Yale’s Ian Ayres – published an incredibly stupid but also incredibly revealing defense of Sam Bankman-Fried titled “FTX Was Never Really Bankrupt.”
“The seventh [charge] alleged that Alameda had misrepresented its financial position in a balance sheet given to a lender. The latter charge, which was unrelated to the central fraud charges in the case and of minor importance compared to those charges, will not be discussed further here.”
I genuinely don’t comprehend what she’s saying here, even after reading through a footnote, where she writes:
“The government’s assertion that “if you have a balance sheet for your own private viewing and then you make an external balance sheet to send to your lenders, that’s fraud” (transcript, p. 2981) is false. All companies keep two sets of books—one for internal analyses and the other for external reporting. In addition, all balance sheets necessarily leave out a lot of detail.”
This is intriguingly similar to “run on the bank” in its use of supposedly ‘normal’ accounting or custody practices as analogues for Sam’s, which were deeeefinitely not normal. What mattered most of all is that the jury saw the extent and degree of the adjustments made. This, not the mere existence of multiple balance sheets, was used to reach their conclusion of guilt in defrauding lenders.
“The government’s rush to judgment. The first concerns the unprecedented speed at which the government moved. Eight days after opening an investigation into the liquidity crisis at FTX, it entered into discussions with the co-founders, pursuant to which they would agree to plead guilty…”
Let me just stop you right there. Yes, investigations tend to go very quickly when three out of four co-conspirators immediately confess.
Moving on.
“[The charge] of fraud rests on the allegation that the loans to Alameda and the co-founders violated the rights of customers to control the funds they deposited on FTX. If they didn’t, no crime was committed.
This is quite a strange way to phrase this, and in essence not true. The question wasn’t whether customers “rights” were violated, a phrase Fried uses here seemingly to set up her argument about how this is all perfectly legal in the U.K. But whether FTX violated promises it had made, including promises made in its terms of service and that SBF made in public, not to transfer or invest customer funds.
The implicit workaround, here and in other claims of SBF’s innocence, is again that the investments were made by Alameda using FTX customer funds it had borrowed. As long as that’s how the transfers are characterized, Fried seems to think, there was no crime. Again, there’s also the excluded middle - there were not enough funds available via margin lending to explain the extent of Alameda’s borrowing.
The corollary to any claim that none of this was criminal must be that it was the result of mismanagement, for which everyone is very sorry. As Fried puts it, “All of this could have been prevented if FTX had put in place a professional risk
“management system up to the task of monitoring an exchange that, in the space of two years, grew to a $32 billion business with 20 percent of the crypto trading market and annual revenues of $1 billion. The exponential—indeed, close to unprecedented—speed at which FTX grew partially explains that failure, although it does not excuse it.”
This gets things the wrong way around. Yes, FTX was growing in part because its marketing worked and crypto was exploding. But a) that marketing was itself deceptive in its representations of Sam and FTX, and informed the fraud charges at trial; and b) the growth of the FTX balance sheet was at least in part fueled by the embezzlement being discussed here. It was only through stealing customer funds, for instance, that SBF was able to cement the relationship with Michael Kives that reportedly put Bill Clinton on stage with him at Crypto Bahamas.
Fried Writes:
“while granting the government’s requests for expert witnesses, Kaplan denied the defense six of the seven expert witnesses it requested and severely limited the testimony of the seventh. Among those he denied, critically, was an expert in UK law, which governed the international exchange. The expert, Lawrence Akka, was prepared to testify that under the Terms of Service that governed FTX’s relationship with customers as interpreted under UK law, the loans to Alameda—and the uses that Alameda made of the funds—were permissible. Kaplan justified his refusal to allow Akka to testify on the ground that he (Kaplan) was competent to charge the jury himself on foreign law. But he never charged the jury about the legal significance of the Terms of Service under any country’s law [emphasis in original]. As a result, the arguably most important fact in the case—that the Terms of Service authorized the loans in question—was never introduced at trial.”
At trial, Kaplan did indeed disallow most of the defense’s expert witnesses - because they were not being invited for their expertise on specifics of FTX, but on general principles. Kaplan wrote in his ruling, in sum, that the witnesses were more likely to confuse the jury than enlighten them because they weren’t being called to testify to specifics. The prosecutions experts, by contrast, included forensic accountants who had actually conducted forensic analysis of, for instance, cash flows.
In the example of the U.K. legal expert, for instance, this would suggest the defense did not plan to ask the expert to render judgment on whether specific behavior contradicted FTX’s TOS, but instead to discuss what constituted acceptable custody practices under U.K. law.
“The balance of Kaplan’s instructions to the jury on fraud focused solely on oral and written statements Sam made, which the prosecution argued understated risks posed to customers as a result of the loans in question. As discussed in section B below, the statements cited cannot plausibly justify his fraud conviction”
One of those statements that “understated risk” was Sam’s repeated statements over the years that Alameda Research had no special privileges on the platform. This is another place where the overlapping frauds undercut Barbara’s rebuttals, because the risk being concealed here wasn’t just to depositors whose money was being gambled with, but to active traders who were unknowingly trading against an enemy with an infinite ammo cheat code, Alameda Research.
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Fried complains that the legality of investing or transferring customer funds under the FTX terms of service were testified to at trial not by legal experts, but by, in her dismissive term, “lay witnesses.”
“Adam Yedidia testified that he believed the fiat funds that customers wired to Alameda’s bank account belonged to customers ‘b]ecause they were the ones who sent the money to the exchange, with the expectation that they would be able to use it on the exchange as they saw fit.’”
That seems like a pretty reasonable conclusion based on the TOS, and reasonableness, not some abstract legal theory, is what matters here. Because the charge is fraud, the “lay” testimony spoke to the extent the TOS, and general understandings, misled depositors to believe that their “funds” in general would be custodies on their behalf.
As I mentioned, I wasn’t able to make it through to the end of this strange, strange document - there aren’t enough hours in the day to deal with spam attacks like this. But hopefully the above gives you a sense of its essence: it’s a fascinating document of a mother’s motivated reasoning, and little more.
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