Surprising No One, Prosecutors Win Early Rounds Against SBF
Plus, how many B2B transactions still use checks?
Number of the Week: $57 trillion (explanation below)
Surprising No One, Prosecutors Win Early Rounds Against SBF
There’s only one fintech game in town this week—the trial of Sam Bankman-Fried (aka “SBF”), cofounder of collapsed crypto exchange FTX, on multiple charges of fraud, conspiracy and money laundering. In some kind of cosmic joke, the SBF fraud trial is taking place at the same time and roughly same location as the civil fraud trial of Donald Trump. When Michael Lewis’s book Going Infinite was published this week, it contained a buried revelation that SBF had explored whether it was possible or legal to pay Trump not to run for president in 2024; through some unnamed channel, supposedly word got back that Trump’s price was $5 billion. (FIN editor and publisher James Ledbetter reviewed Lewis’ book and two others in The Washington Post.)
Based on the trial’s first week, it seems impossible that SBF will avoid a prison sentence. First, as Lewis’s book notes, less than one-half of one percent of those charged with federal crimes in 2022 were acquitted; those are pretty long odds. Second, the testimony of at least three witnesses seems incredibly damning. Specifically:
Matt Huang, managing partner of the crypto investment firm Paradigm, testified that the whopping $278 million his firm put into FTX has been marked to zero. Given FTX’s bankruptcy, this isn’t shocking, but it helps the prosecution make the case that FTX’s actions caused financial harm, which is crucial to proving the fraud charges. Asked if Paradigm would have invested in FTX if it knew that FTX was using its customers’ deposits to trade through sister company Alameda Research, Huang said “likely not.” According to TechCrunch’s trial report, Huang said: “If it became known that they were doing that, I think the exchange would lose credibility in the brand and people wouldn’t want to use it, so it would be existential to the business.” And arguably most damaging of all, Huang said that before Paradigm invested, he’d expressed misgivings about the gaping lack of financial controls at FTX, noting that SBF “was very resistant to having investors on the board,” which sounds super sneaky. Of course, this testimony hardly makes Paradigm look virtuous, but then again it was not alone in what now looks like an epic failure of due diligence.
Adam Yedidia, an MIT college roommate of SBF’s who went to work for FTX as a developer, testified that after playing a paddle tennis game in mid-2022 with SBF at the company’s Bahamas-based complex, he confronted his boss about a large discrepancy in Alameda’s accounts. SBF seemed nervous, and said: “We were bulletproof last year, but we’re not bulletproof this year.” Asked when the company would be bulletproof again, SBF said between six months and three years. Yedidia testified that he left the company when he learned that Alameda was trading with FTX customers’ accounts. “I was concerned that as a developer at FTX I may have unwittingly written code that contributed to the commission of a crime,” he told the court. It’s important to note that Yedidia was never charged with any crime and therefore, unlike several others in SBF’s inner circle, is not cooperating with prosecutors to save his skin, although he does have an immunity order, according to Axios.
The most explosive, if predictable, testimony came from reclusive FTX cofounder Gary Wang, who has known SBF since high school and pled guilty to wire, securities and commodities fraud. If he were convicted on all counts, the chances were good that the 30-year-old Wang would spend the rest of his life in jail. According to Insider’s trial coverage, Wang agreed to cooperate with prosecutors in his first meeting with them, six days after FTX declared bankruptcy. “I thought I was likely to be charged and I wanted to get a shorter prison sentence,” Wang told the court. Wang testified that FTX’s biggest sin began at its origin; as The New York Times summarized Wang’s testimony:
Mr. Wang said that he…had written FTX’s computer code to grant Alameda special privileges at Mr. Bankman-Fried’s direction beginning in 2019. “He asked us to do it, and we told him we did it,” Mr. Wang said. That effectively allowed the trading platform to make unlimited withdrawals from the exchange, he said. None of that was disclosed to customers, investors or lenders to the firms, he added. “We gave special privileges to Alameda Research on FTX,” Mr. Wang said. “And we lied about this to the public.”
This court carnage is only bound to intensify on the 10th, when Caroline Ellison, SBF’s onetime girlfriend who ran Alameda and has also taken a plea, is supposed to testify.
How can SBF’s lawyers possibly overcome this onslaught? On the podcast Against the Rules with Michael Lewis, Rebecca Mermelstein, partner at O’Melveny, predicted that the defense would lean heavily on “hindsight is 20/20,” and that the cooperating witnesses were telling the prosecutors what they wanted to hear. (The episode was guest-hosted by Jacob Weisberg, cofounder of the podcast’s producer.) She’s probably right, but that is a very weak defense. Not only does it require jurors to believe that former FTX employees say they’re guilty of things that they’re not guilty of, but they would compound these lies by perjuring themselves in federal court.
Another tactic alluded to before the trial is the “advice of counsel” defense, which amounts to “the lawyers let me do everything I did.” Again, while this defense might be deployed, it seems highly unlikely that FTX’s lawyers actually approved giving Alameda access to FTX customer accounts or giving Alameda the exclusive ability to run up effectively limitless losses.
There was chatter on the Against the Rules podcast about how SBF’s conviction will somehow be the end of crypto. This seems implausible; far more likely is that FTX’s implosion at the end of 2022 is already priced into the overall perception of the crypto market. At least in the U.S., the stock price of FTX rival Coinbase is a rough proxy for crypto as a whole, and it’s trading well above where it was when FTX filed for bankruptcy.
Outside the U.S., massive inflation rates in places like Argentina, Turkey and Venezuela guarantee that there will be thousands, if not millions, of people seeking havens provided by currency not driven by government banks. If anything, a conviction for SBF will likely help the crypto industry purge itself of a pariah. Crypto’s not going away any time soon, for better or worse.
FINvestments
🦈Number of the Week: Business-to-business payments in the United States amounted to $57 trillion in 2022, and nearly half of those were made by check, according to a Mastercard survey. That’s despite the fact that checks are by far the likeliest payment to attract fraud.
🦈Sometimes it seems like companies drag their feet to pay their bills, but this week a startup called Stampli announced it has raised $61 million to build out its system that applies artificial intelligence to the accounts payable team. Key investors include Blackstone and Bloomberg’s venture arm.