The NYU School of Law Program on Corporate Compliance and Enforcement (PCCE) is following the collapse of FTX and the civil and criminal enforcement actions arising from FTX’s and its founder’s alleged misconduct. In this post, several white collar defense, former federal prosecutors, and cryptocurrency experts, offer their reactions to the verdict in the Sam Bankman-Fried (SBF) trial on November 2, 2023.

Sam Bankman-Fried’s Testimony: More Harmful than Beneficial

by William Komaroff and Seetha Ramachandran

In March, we commented on the addition of an FCPA count to the indictment against Sam Bankman-Fried and noted that it provided a largely independent path to conviction from the charges that required the government to show SBF knowingly stole FTX customer deposits. The FCPA charge (and several others) were severed from wire fraud and conspiracy charges on which SBF was convicted last week. It remains to be seen whether the government will continue to pursue the severed charges in a subsequent trial. Its decision may hinge on what it views as the appellate risks associated with the conviction it just obtained. 

Regardless, one take away seems clear. The devastating testimony of SBF’s inner circle at FTX explains why and how the government was able to charge and bring this case to trial so quickly: The fraud was brazen, and there were no credible, innocent explanations for the misconduct. Testimony from a single cooperator can sometimes allow a defendant to turn the case into a “he said, she said” dispute. In a criminal case that can be enough to suggest reasonable doubt.  But when multiple government cooperators and witnesses corroborate each other, that defense is a very tough sell. In SBF’s case, it explains, in large measure, the defense decision to have SBF testify. Without a counter-narrative from the defendant, supported by some direct evidence of good faith from the defendant himself, any defense argument to the jury would fall flat. But even though SBF’s testimony theoretically provided a pathway to put such evidence in front of the jury, the overwhelming cooperator testimony coupled with how the government dismantled SBF’s purported good faith on cross-examination ultimately led to the jury’s quick verdict last week.  

While the outcome at trial likely would have been the same whether or not SBF testified, his decision to testify could come back to haunt him at sentencing. Judge Kaplan can, and likely will, conclude that SBF committed perjury at the trial and consider that at sentencing. While the enormous loss amount will automatically result in a very high recommended sentencing guidelines range, the Judge’s view of the defendant on the witness stand will have an equally important impact on how the Court arrives at what it concludes is a just sentence. For these reasons, SBF may strongly come to regret his decision to testify.

William Komaroff and Seetha Ramachandran are Partners at Proskauer Rose LLP.  Both are former federal prosecutors at the U.S. Attorney’s Office for the Southern District of New York (SDNY) and Ramachandran was also a former Deputy Chief in the Asset Forfeiture and Money Laundering Section (AFMLS) in the U.S. Department of Justice in Washington, D.C.

SBF’s Guilty Verdict: A Madoff-Sized Fraud Scheme Without Regulatory Impact?

by David I. Miller

On November 2, 2023, after a month-long trial, and only four hours of deliberations, a jury sitting in the Southern District of New York convicted defendant Sam Bankman-Fried (“SBF”) on all seven criminal fraud counts.  The government tried its case—only 10 months after unsealing its indictment against SBF—with multiple cooperating witnesses who had been some of SBF’s closest confidants and significant corroborating evidence, emphasizing the traditional nature of the alleged fraud. By all accounts, the evidence was overwhelming against SBF for perpetrating perhaps the largest financial fraud since Bernie Madoff.

While FTX’s rapid downfall, and the ensuing prosecution, shocked customers and enhanced scrutiny of the cryptocurrency industry, at bottom, SBF’s alleged conduct was customary theft and fraud and did not appear to turn on unsettled legal issues accompanying the blockchain space.  But the sheer amount of customer money that was stolen—upwards of $10 billion—the global nature of SBF’s acts, and the number of defrauded customers, has focused the political discourse concerning cryptocurrency regulation.  To this end, Congress has concentrated on the industry over the past year in a way it has never before—including with substantive pending legislative proposals—which some argue is a welcome development given enduring criticism of the SEC’s regulation-by-enforcement approach.

To be sure, there were some important legal issues addressed in SBF’s prosecution, and the defense may raise significant legal questions on appeal—for example, the court’s exclusion of certain reliance-on-counsel testimony—but an appeal appears to be a steep uphill battle.  SBF is also facing trial in March 2024 on bank fraud, unlicensed money transmitting, and FCPA-related charges that were severed from this trial, and his incentive to plead guilty may be undermined by the overlapping facts with this recent trial and likely appeal.  Notwithstanding the potential second trial, the court will likely impose a lengthy sentence after this trial for several reasons, including the brazen scope and magnitude of the fraud, and, as the government argued, SBF’s perjurious trial testimony.  In sum, while SBF is likely facing significant prison time, and his conviction may provide some needed closure to several victims of the FTX saga, other than shining a brighter light on the crypto industry, this case does not squarely implicate the important legal questions raised by regulatory challenges to the blockchain space.

David I. Miller is a shareholder at Greenberg Traurig, LLP and a former Assistant US Attorney for the Southern District of New York.

Crypto has its MF Global Moment

by Ijeoma Okoli

Former FTX CEO, Samuel Bankman-Fried, has been found guilty of wire fraud, conspiracy to commit wire fraud, conspiracy to commit money laundering, conspiracy to commit commodities fraud, and conspiracy to commit securities fraud.[1] The convictions are the result of the US Department of Justice proving beyond a reasonable doubt their allegations including that Mr. Bankman-Fried conspired to defraud customers by misappropriating their deposits.  These misappropriation allegations formed the basis of the fraud charges that resulted in convictions on November 2, 2023, almost a year after FTX collapsed.

While FTX’s collapse in November 2022 was a catalyst for a number of failures of other crypto market players and the entrenchment of a then-developing crypto bear market, the crypto financial market itself was only the forum of the fraud and not the cause of the fraud.  As US Attorney for the Southern District of New York, Damian Williams, said after Mr. Bankman-Fried was found guilty: “…. [T]he cryptocurrency industry might be new. The players like Sam Bankman-Fried might be new. But this kind of fraud, this kind of corruption is as old as time.”[2] We don’t have to look too far into the past to see another spectacular billion-dollar financial firm collapse resulting from the misappropriation of customer funds.  Almost exactly 11 years prior to the day of the collapse of FTX, MF Global, another multi-billion-dollar firm — but unlike FTX, one operating in the traditional financial markets with a respected former Goldman Sachs partner, US Senator, and New Jersey Governor as its CEO — collapsed amid allegations of misuse of customer funds.[3] Other examples include SEC charges in 2016 and 2018 against Merrill Lynch and Morgan Stanley, respectively, relating to the misuse or misappropriation of customer funds.[4]

It is highly commendable that prosecutors in the US had the resources and the drive to bring Mr. Bankman-Fried to justice, however, the US still needs Congress to act to put in place a comprehensive regulatory framework for digital assets markets to mitigate the risks of bad actors preying on people, while also allowing innovation, legitimate businesses and their customers, which are having difficulty getting regulatory clarity and accessing banking services, to thrive.

[1] Southern District of New York | Statement of U.S. Attorney Damian Williams on the Conviction of Samuel Bankman-Fried | United States Department of Justice; Southern District of New York | Statement Of U.S. Attorney Damian Williams On The Conviction Of Samuel Bankman-Fried | United States Department of Justice.

[2] Id.

[3] Federal Court in New York Orders Jon S. Corzine to Pay $5 Million Penalty for his Role in MF Global’s Unlawful Use of Nearly $1 Billion of Customer Funds and Prohibits Corzine from Registering with the CFTC in any Capacity or Associating with an FCM | CFTC.

[4] SEC.gov | Merrill Lynch to Pay $415 Million for Misusing Customer Cash and Putting Customer Securities at Risk; SEC.gov | SEC Charges Morgan Stanley in Connection With Failure to Detect or Prevent Misappropriation of Client Funds.

Ijeoma Okoli is a finance and regulatory lawyer and strategic adviser on digital assets; a co-Director of the Digital Economy Initiative, an independent digital assets think tank in London focused on US and UK digital assets public policy and a founding member and limited partner of Impact X Capital Partners, an ESG focused venture capital fund. She previously was an Executive Director and Digital Currency Risk Management Lead at JPMorgan focused on designing the firm’s global digital currency risk management and governance framework and advising on crypto related business proposals.

Trial Testimony: High Risk, Likely Low Reward for Samuel Bankman-Fried

by Jessica Lonergan and Tarek Helou

As his trial came to a close, the FTX founder Samuel Bankman-Fried made the decision to testify in his own defense. That decision is a difficult one for any criminal defendant—“high risk, high reward”—but perhaps even more so for a highly public figure charged with fraud. Defendants like Bankman-Fried may make the calculus that telling their side of the story could undermine the government’s proof of scienter—that the defendant knew of and intended to carry out the fraud. Perhaps, the reasoning goes, the defendant himself is uniquely situated to persuade the jury that he was confused or unaware of the scheme.

But while juries are always assessing witnesses’ credibility, they are on heightened alert for any inconsistencies or attempts to minimize or mislead when the witness is the defendant himself or herself. Jurors who were on the fence may be pushed to convict if they believe that the defendant lied to them. While this is true in any criminal case, the risk exponentially rises in a fraud trial, as lying is the very crux of fraud offenses. Jurors who believe that a defendant lied to them while under oath may be more easily persuaded that the defendant lied in other aspects of his life, including, most importantly, the conduct at the heart of the trial.

And defendants like Bankman-Fried who are outspoken public figures have essentially provided the government with a roadmap for their cross-examination. As in the trial of Theranos founder Elizabeth Holmes, prosecutors had a wealth of Bankman-Fried’s statements available to use on cross-examination, dismantling the narrative he had carefully constructed during questioning from his own lawyer. Each time Bankman-Fried’s testimony was contradicted by his own prior statements—and each of the many times he answered that he could not recall—he eroded any trust and sympathy that he had cultivated with the jury.

Finally, Bankman-Fried’s decision to testify may also increase the ultimate sentence that Judge Kaplan imposes. Under the U.S. Sentencing Guidelines, if Judge Kaplan finds that Bankman-Fried lied during his testimony, Bankman-Fried’s offense level will increase by 2 levels. This bump is small, given the astronomical scope of the fraud here. But such a finding—that Bankman-Fried perjured himself—can carry a much larger impact than the relatively minor increase in the offense level. Judges view proceedings in their courtrooms with solemnity, often viewing lying under oath as demonstrating disrespect for the process and the jury.

Given the strength of the government’s case, Bankman-Fried may have believed that testifying in his own defense was his last and only option, despite the risk. The gamble did not pay off.

Jessica Lonergan is Of Counsel and Tarek Helou is a Partner at Wilson Sonsini Goodrich & Rosati. Lonergan is a former federal prosecutor at the SDNY. Helou is a former supervisor in the Department of Justice’s Foreign Corrupt Practices Act (FCPA) Unit and former Assistant United States Attorney in the U.S. Attorney’s Office for the Northern District of California.

Sam Bankman-Fried Guilty Verdict: A Trigger for Enhanced Cryptocurrency Regulations

by Elizabeth Roper and Chehak Gogia

Following the quick and across-the-board conviction of Sam Bankman-Fried (SBF) last Thursday evening, Attorney General Merrick Garland released a statement in which he called the verdict “a clear message to anyone who tries to hide their crimes behind a shiny new thing they claim no one else is smart enough to understand.” It is true that the cryptocurrency industry has, from its inception, been plagued by largely unchecked criminal activity, not only because of the anonymity afforded by crypto (making it attractive for things like money laundering), but also because of the esoteric and often confusing nature of blockchain technology, which arguably makes it easier for people like SBF to take advantage of would-be investors.

According to prosecutors, SBF orchestrated “one of the biggest financial frauds in American history.” Despite the breadth of the scheme and the complexity of blockchain technology, the jury deliberated for a mere four hours before finding SBF guilty on all counts.

Since then, many players in the industry have hailed the verdict as a turning point that will bring legitimacy to the business of cryptocurrency. Noelle Acheson, former head of research at CoinDesk (which first broke the story exposing SBF’s fraud) called the verdict “a huge relief” that demonstrated “crypto service providers can and should be held accountable.” Industry leaders may argue that the verdict demonstrates that “fraud is fraud,” and enhanced regulation for cryptocurrency is unnecessary.

And while the SBF prosecution was certainly the most high-profile in the industry, it was not an anomaly. Between January and June of 2022, the DOJ charged 8 defendants for financial losses of approximately $2 billion. The DOJ charged CEOs, founders, traders, executives, and promoters to recover $56 million in funds. This high rate signals an upward movement in prosecuting these types of cases and demonstrates the DOJ’s willingness to prosecute fraud regardless of the form it takes or technology it uses.

But some major players in the space have been critical of attempts to use existing frameworks to, as they view it, regulate through enforcement, forcing companies to anticipate how regulators will view their business practices in the absence of clear guidance.

So, is more regulation needed? Will the SBF conviction bring legitimacy to the industry? For their part, regulators and lawmakers have pointed to the SBF case as a justification for increasing regulation of cryptocurrency. U.S. Senator Elizabeth Warren (D-Mass.) is leading the push for Congress to establish regulations and crack down on financial crimes by enforcing crypto oversight, and has called the SBF trial a reminder “about the risks that an unregulated crypto industry poses.” Her proposed legislation aims to incorporate digital asset providers and crypto miners as entities that must register as money transmitters under the Treasury Department’s Financial Crimes Enforcement Network. And crypto oversight is gaining bipartisan support.

Overall, it is clear that SBF’s guilty verdict should be viewed as a warning sign for bad actors who, as the Attorney General said, try to hide behind “shiny new things.” But whether it brings legitimacy to the broader industry, and signals enhanced accountability, remains to be seen.

Elizabeth Roper is Partner and Chehak Gogia is Associate at Baker McKenzie. Roper is a former Assistant District Attorney at the Manhattan District Attorney’s Office, where she was Chief of the Cybercrime and Identity Theft Bureau.

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