Professors analyze implications of guilty verdict in FTX trial

Sam Bankman-Fried, founder of now-bankrupt Futures Exchange Trading (FTX), was found guilty on all seven criminal charges against him last Thursday, carrying a potential sentence of up to 110 years. After a swift four-hour jury deliberation, he was convicted of wire fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering.

Bankman-Fried’s conviction comes almost a year after the collapse of FTX, which sparked questions about cryptocurrency governance and the merits of blockchain technology in academic and regulatory circles. Stanford professors told The Daily the FTX saga highlighted existing gaps in U.S. financial regulators’ abilities to keep pace with the evolving industry. They said the bankruptcy and verdict has likely damaged faith in both financial institutions and crypto technologies.

The trial culminated in three days of testimony from Bankman-Fried himself, during which he largely evaded prosecutors’ questions and stated some variation of “I don’t recall” over one hundred times. “This is a storytelling problem,” said Stanford Law School (SLS) professor Joseph Grundfest. “When a New York jury hears you say you don’t remember 100 times … credibility really starts being eaten away.”

Bankman-Fried’s trial, which began on Oct. 3, centered around allegations that he had deceived customers and investors in his exchange by placing over $8 billion of their money, meant to be held in FTX, into its sister trading firm, Alameda Research, to cover its financial windfall from the falling price of crypto. Throughout the trial, the prosecution presented the jury with a dense trail of texts, emails, recorded conversations and code edits that sought to lay the blame squarely at Bankman-Fried’s door, even as the defense insisted that FTX’s downfall was not the doing of a criminal but a failed entrepreneur and “math nerd.”

Critical moments for the state were defined by the testimony of three former colleagues of Bankman-Fried, who had each pled guilty to various forms of fraud and agreed to testify against Bankman-Fried in exchange for state leniency: Gary Wang, Bankman-Fried’s friend from his days as an undergraduate at MIT and CTO at FTX; Caroline Ellison ’16, Bankman-Fried’s former girlfriend, Stanford alum and former CEO of Alameda Research; and Nishad Singh, a childhood friend of Bankman-Fried’s younger brother and head of engineering at FTX. 

The jury heard all three witnesses repeatedly claim to be acting with incomplete information under Bankman-Fried’s unilateral supervision. “I wasn’t sure which interpretation [of the money Alameda was borrowing] was correct,” Wang said in his testimony. “I trusted [Bankman-Fried’s] judgement.”

According to Grundfest, Bankman-Fried’s case will likely go to an appeal, potentially on pharmaceutical grounds. Throughout his incarceration, Bankman-Fried struggled to obtain his prescription of Adderall for his ADHD. Grundfest believes lawyers could potentially portray this as denial of effective counsel.

As another highly publicized white-collar crime trial ends, it has implications for Silicon Valley and Washington, D.C. alike. Although cryptocurrency is a relatively recent development in the financial world, the funneling of customer and investor money into places where it shouldn’t be is an example of textbook financial fraud, according to professor of finance and economics at the Stanford Graduate School of Business Anat Admati. “This was not about the crypto [era] specifically. It was an age-old problem,” she said.

From the perspective of Fagel, who has worked in securities litigation for thirty years, Bankman-Fried’s trial, as far as financial fraud went, was only “new in that crypto is new.” 

“Speaking as someone who worked in government, the government is notoriously slow at adapting to new developments,” Fagel said. “They were not on top of regulating crypto exchanges, which got very big, very fast.” Because of this regulatory gap, he suggested that individual citizens inform themselves on regulated industries to protect themselves from fraud. 

“I do think we have a regulatory system that works,” he said. “But if you put your money into crypto, you are not benefitting from a regulated industry.” Venture capitalists can afford to throw their money into shadier investments in the hope that one succeeds, Fagel said, but ordinary people can’t. 

Fagel and Admati expressed concerns about the impact of FTX’s downfall in eroding trust in financial institutions. “We live in a society that depends on organizations that need to be trustworthy… so I hope this leads people to reflect more on what they’re doing and about rules that are meant to protect them,” Admati said. 

She referenced Michael Lewis’ new book, “Going Infinite,” which originated in a request from Lewis’ friend to give an appraisal of Bankman-Fried’s financial trustworthiness. After meeting with Bankman-Fried, Lewis gave his friend the go-ahead to invest his money. “You’re putting your own money at risk with no due diligence after a conversation you found interesting or fascinating,” Admati said. “Please do not invest money like that.”

According to Stanford Law professor Jeff Strnad, the trial has also unfairly damaged public opinion of the entire cryptocurrency space, from legitimate decentralized exchanges to blockchain research. “My personal belief [is that] FTX had nothing to do with crypto technology,” said Strnad, who teaches LAW 1043: Blockchain and Cryptocurrencies. “But researchers I know have lost their funding, lost their jobs… that whole frontier is put back 3-4 years.” 

According to Strnad, this trend seems to stem from a conflation of FTX with other promising use cases of blockchain technology. “The average person in the public who is not really informed about what’s going on associates cryptocurrency with shady things and scams,” Strnad said.

With the first bitcoin paper published in 2008 and the proliferation of cryptocurrencies in 2017, marked by a twenty-fold increase in Bitcoin’s valuation, the cryptocurrency industry is still in its infancy, and many questions remain unanswered.

“This situation with Bankman-Fried is most likely to lead to his incarceration without a larger resolution of the really difficult problem of how to regulate crypto,” Grundfest said. 

Rebecca Joseph contributed reporting.


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