Unpacking Day One of the Bankman-Fried Trial: The "Math Nerd" Defense

Unpacking the First Day of FTX Founder Sam Bankman-Fried’s Actual Trial

The legality of the loans are central to the case against Bankman-Fried. Prosecutors allege Alameda backstopped its bad bets on the crypto market with FTX customers’ dollars plus their crypto deposits. Defense attorneys said the relationship between those two companies was neither secret nor illegal.

Bankman-Fried and his companies were “building the plane in flight,” Mark Cohen, who anchors the defense, said in his opening statement. He told the jury his client, a “math nerd,” did nothing illegal but perhaps unwise, like never hiring a chief risk officer to watch the health of his “innovative” crypto exchange. And he began casting blame at former Alameda Research CEO Caorline Ellison, Bankman-Fried’s ex-girlfriend and a key witness, saying that the defendant told her to hedge the trading firm’s risk on multiple occasions but she didn’t.

FTX Employees Found Alameda’s Secret Backdoor Months Before Collapse

Months before the collapse of FTX, some of its U.S.-based employees discovered the so-called backdoor that Alameda Research allegedly used to withdraw billions of dollars of customer funds from the cryptocurrency exchange, people familiar with the matter said.

The employees who made the discovery reported it to the boss of their division, who discussed it with one of FTX founder Sam Bankman-Fried’s lieutenants, some of the people said.

But the problem never got fixed. In the summer of 2022, the leader of the team that raised concerns about Alameda’s special privileges was fired.

The backdoor figures prominently in the case against Bankman-Fried, whose trial on criminal charges of fraud began in a New York federal court this week. The former head of FTX has pleaded not guilty to all charges.

The SEC’s September Spike: Regulatory Inconsistency within the Fiscal Year

We examine whether performance reporting leads to inconsistent enforcement at the Securities and Exchange Commission (SEC). In a sample of over 13,000 SEC enforcement actions, we show that SEC staff respond to performance-reporting pressures and file more enforcement actions in September, the final month of the SEC’s fiscal year, than in any other month. The increase in case volume in September is not fully explained by staff filing more procedural cases or accelerating case filings. Instead, SEC staff pursue less complex cases and agree to more lenient financial and non-financial sanctions to increase case volume in September. We attempt to rule out alternative explanations for our results, including natural SEC workflow and resource constraints. Overall, our findings suggest that performance reporting creates agency conflicts that lead to regulatory inconsistency within the fiscal year.

Latest Wave of SEC Off-Channel Communications Enforcement Actions: Five Takeaways

On September 29, 2023 — the last business day of its fiscal year — the U.S. Securities and Exchange Commission (SEC) issued the latest in a series of actions charging 10 firms with recordkeeping failures in connection with employees’ use of unapproved applications on personal devices to engage in communications relating to the firms’ business (known as “off-channel communications”).1 The firms charged included broker-dealers, investment advisers, and dually registered broker-dealers and investment advisers as well as one family of firms that self-reported conduct to the SEC. To date, the SEC has charged over 40 registrants and leveled over $1.6 billion in penalties as part of its off-channel communications matters. Other regulators, including the Commodity Futures Trading Commission (CFTC), have brought similar cases.

Here are five key takeaways from the September 29, 2023, orders.

SEC argues Coinbase crypto case not barred by ‘major questions’ doctrine

The U.S. Securities and Exchange Commission asserted on Tuesday that its crypto enforcement campaign is not barred by the U.S. Supreme Court’s “major questions doctrine,” countering sweeping arguments by the crypto exchange Coinbase that Congress has not authorized the SEC to police the industry.

The agency’s defense of its enforcement power came in a brief opposing Coinbase’s motion for a quick judgment against the SEC in the agency’s case, which accuses the crypto trading platform of failing to register as a securities exchange.

United States Attorney Martin Estrada Launches Corporate and Securities Fraud Strike Force

United States Attorney Martin Estrada today announced the formation of the Corporate and Securities Fraud Strike Force, a new section that will focus on complex corporate crimes, abuses by company insiders and offenses that impact the nation’s financial system.

Working with authorities at federal law enforcement agencies, the Corporate and Securities Fraud Strike Force is designed to expand and prioritize complex corporate and securities fraud investigations, some of which will involve corporate executives and other individuals involved in criminal conduct. Members of the Strike Force will examine accounting fraud, insider trading, and other matters that can directly impact the financial system and trading markets. The Strike Force will also examine criminal violations of the Bank Secrecy Act, which is designed to combat money laundering and tax evasion.

When Caroline Ellison Met Sam Bankman-Fried

The situation inside Alameda Research wasn’t anything like Sam had led Caroline to expect. He’d recruited 20 or so effective altruists, most of them in their 20s, all but one without experience trading in financial markets. Most neither knew nor cared about crypto; they had just bought into Sam’s argument that it was this insanely inefficient market in which they might use his Jane Street-like approach to trading to extract billions. They were now all living in Sam’s world, and they weren’t hiding their unhappiness.

“He was demanding and expecting everyone to work 18-hour days and give up anything like a normal life, while he would not show up for meetings, not shower for weeks, have a mess all around him with old food everywhere, and fall asleep at his desk,” said Tara Mac Aulay, a young Australian mathematician who was, in theory, running the company with Sam. “He did zero management and thought that if people had any questions, they should just ask him. Then in his one-on-ones with people, he’d play videogames.”