Current state of cryptocurrencies: SBF (somehow) has another bad day in court

This week, the Second Circuit Court of Appeals heard arguments in Sam Bankman Freed’s appeal of his criminal conviction. The three-judge panel seemed highly skeptical of his lawyers’ claims.

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FTX founder Sam Bankman Freed’s case will always be uphill. Senior Judge Lewis Kaplan, the Southern District of New York jurist who oversaw the case, is generally respected, and the bar to secure a new trial is high.

why is it important

Barring a presidential pardon, which still seems unlikely, this hearing may have been Bankman-Fried’s last chance to secure early release. He continues to post on the site formerly known as Twitter through a friend, but the case has progressed through the appeals process and will be heard on Nov. 4.

break it down

Circuit Judges Eunice Lee, Maria Araujo Kahn and Barrington Parker all appeared skeptical of appellate attorney Alexandra Shapiro’s argument that Bankman Fried did not receive a fair trial.

To briefly summarize, the appeal centered on a request that the former FTX CEO be retried before a new judge because, in Bankman Fried and his team’s view, Judge Kaplan was biased against him. According to the appeal, Bankman Freed was not allowed to claim that he listened to his lawyers or that FTX’s creditors would be fully recovered.

“(Judge Kaplan’s) decision severed the defense’s knee,” Shapiro said during the hearing.

The judges did not seem to accept these arguments. Judge Khan asked whether FTX’s problem was liquidity rather than solvency, and about recent Supreme Court case law holding that simply receiving funds is enough to convict a company of fraud.

“For example, how does that fit with other recent Supreme Court decisions cited in recent Supreme Court decisions and other recent Supreme Court decisions that held that the fact that the victim may be sane or that it was not intended to be deceived are not adequate defenses?” she asked.

Wizards attorney Martin Auerbach told CoinDesk last week that if the panel asked specific questions about the dry run, it could indicate that the judge has legitimate concerns about the proceedings.

“Hearing such a question, the court may conclude that it has some concern for the full fairness to which all defendants are entitled,” he said.

Mr. Shapiro addressed the matter during the hearing, saying, “The preliminary hearing itself is completely unprecedented, and it would set a terrible precedent if sufficient disclosure was allowed that was not required by the rules in the first place.”

I don’t want to overuse the word, but it seems like the judges were pretty skeptical. Judge Barrington Parker asked: “Are you seriously suggesting to us that if your client had been able to testify about the role played by his attorney in producing these various documents, this record would have added ‘not guilty’?”

Ms. Shapiro even attempted to point to news reports (including yours truly) to support her claim that Judge Kaplan may have pointed the finger at Mr. Bankman Fried during the trial.

“I think any objective observer who reads this record can see that the verdict is incredibly one-sided,” she said. “Frankly, it would be difficult to point to any significant decision that the defense won. But the more important point is that on these two evidentiary issues, Mr. Bankman Freed created a very serious asymmetry that prevented everyone from understanding that he was acting in good faith, that this was a bond exchange, that the assets could be loaned out, and that he did not intend to steal anyone’s money.”

Assistant U.S. Attorney Thane Lane, one of the lead prosecutors in the case against Bankman Freed, claimed that at no point did his team attempt to point out how FTX’s bankruptcy would lead to prosecution of the FTX founder.

“The government’s argument focused on the crisis that consumed FTX in 2022. In reality, funds were being misappropriated when customers were attempting to make withdrawals that FTX had promised would be available and available, but were unable to do so,” he said.

Lane said he didn’t think Judge Kaplan was (understandably) biased against his team, but he also argued that even though the defense faced more opposition than his team, there was nothing egregious enough to change the outcome of the trial.

And in contrast to the various questions the judge asked Shapiro, the judge spent most of his time asking Lane, specifically about the amount of the forfeiture ($11 billion) and what purpose it actually served.

“If one of the factors we consider is the harm to the victims, and in this case all the victims have a chance of making a full recovery, how can we justify this $11 billion figure?” Justice Lee asked.

Lane said this amount accounts for the overall lost value of FTX’s victims, and that the funds are intended to support FTX’s bankruptcy estate’s efforts to repay creditors.

“We would like to highlight one important aspect of this issue, and that is that a customer’s bankruptcy claim is tied to the dollar value of the crypto asset balance on FTX at the time of bankruptcy,” Lane said. “So when we talk about a 100% recovery for a customer, it’s tied to that amount. … The value of those three Bitcoins now is about eight times the value of those three Bitcoins as of November 2022. So these victims are no closer to being fully recovered in bankruptcy. And in some kind of real economic sense, they are fully recovered as a percentage of the dollar value of their Bitcoin balances as of November 2022.”

The committee has not clearly indicated how it will rule on the appeal motion itself, and it may take some time before issuing an opinion.

Other court cases include:

• Samourai Wallet developer Keonne Rodriguez pleaded guilty to one count of conspiracy to operate an unlicensed money transfer machine and was sentenced to 60 months (5 years) in prison, the statutory maximum sentence sought by prosecutors. Rodriguez’s lawyers asked for a one-year sentence followed by probation, but Judge Dennis Cote of the Southern District of New York said he could not believe that Rodriguez had “accepted” the fact that he had “engaged in very serious antisocial criminal behavior for many years,” based on letters he wrote in support of his sentencing memo. Fellow developer William Lonergan Hill, who also pleaded guilty to the same charges, is scheduled to be sentenced on November 19th.
• The judge overseeing the U.S. Department of Justice’s prosecution of Anton Peraire-Bueno and James Peraire-Bueno declared a mistrial late Friday after the jury hearing the case said the jury was unable to reach a unanimous decision on the charges. The two brothers were indicted last year on charges of wire fraud, conspiracy to commit wire fraud, and conspiracy to commit money laundering for allegedly stealing $25 million in cryptocurrency by exploiting MEV Boost (Maximum Extractable Value), software that allows Ethereum operators to preview upcoming transactions. The trial began in mid-October.

this week

• There are no public hearings or regulator-sponsored events scheduled this week. The House will adjourn for another week, and the Senate will resume Monday afternoon.

If you have any thoughts or questions about what we should talk about next week, or any other feedback you would like to share, please feel free to email us. (email protected) Or find me at Bluesky @nikhileshde.bsky.social.

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See you next week!