This is Bloomberg Law with June Brusso from Bloomberg Radio.
The Sam Bankman, freed on trial in Manhattan Federal Court looks different from the Sam Bankman freed that presided over a crypto empire. Gone are the thick, unkempt curls that became his trademark and the subject of a series of memes. The baggy cargo shorts, the T shirts and sneakers. In their place, a neat, close cut hairstyle reportedly done by a fellow inmate, a navy business suit, dress shirt, tie
in shoes. A jury of nine women and three men were sworn in today along with six alternates, and the prosecution and defense laid out their cases for the jury in opening statements. Joining me from the courthouse is Bloomberg Legal reporter Ava Benny Morrison, who was in the courtroom today. Did Sam Bankman freed look different from the way we've seen him before his arrest?
Yes, definitely. That was one of the things that first struck me when he walked in the courtroom. He looked a lot thinner than he has in the past several months, and his trademark hair was no longer it was cut a lot shorter. You might remember he's always had this very messy, curly head of hair. And the weight loss, I guess has happened over the past several weeks when
he's been in the Metropolitan Detention Center in Brooklin. His lawyers have complained that he's only been able to eat peanut butter and bread and water because he's a vegan and they don't have any meals that accommodate him. In terms of his mannerism, he seemed pretty cool, calm and collected. He engaged a lot with his lawyers. He was keeping notes on his own laptop in a XL spreadsheet. He was pointing at different potential jurors during the jury selection process.
He was having jokes and smiling with his lawyers. So he seemed to be in a pretty good spirit.
And the jury tell us about the jury that was finally selected.
The jury that was selected was nine women and three men. Most of them are public service jobs worked for the government. There is a train conductor on the jury, a retired corrections officer who used to work in a prison, a special ed teacher, someone who works at a hospital. So it was a real mix, but it was a very long process to get there.
The prosecution laid out its case in opening statements and painted this picture of Sam Bankman Freed as a calculating criminal. Tell us what struck you?
Yes?
The theme throughout the prosecution's opening address was that Sam Bankman Freed single handedly orchestrated this multi billion dollar forward at FTX, and that he tricked all of his customers and investors and people who loan money to Alameda Research, which was the hedge fund affiliated with FTX. They painted him as this sort of criminal mastermind who woodwinked everyone
over many many years. They said that he only told a few people within in a circle about the secret borrowing relationship that existed between FTX and Alameda, and those people were Caroline Ellison and Gary Wang and Nishad Scene. Now, the prosecution didn't mention those three witnesses by name, but we know that they are more than likely going to testify against them.
Bankma Free at this trial, and the defense wants the jury to see him as a math nerd.
Yes.
So the defense's response to what the prosecution's allegations were that this is being spun to suit their case essentially, and that he's just a math nerd who doesn't party, doesn't drink, worked really hard, went to MIT and built a multi billion dollar company and was extremely successful, and that the loss of customer funds was partly due to market downturns last year that were outside of his control and also poor risk management at his company. There was
a bit of a hint in the defense statement. The defense said that Sam Batemantrey trusted and relied on Carolina, his ex girlfriend and the CEO of al Ameter Research to one Alameda because he had taken a backward steps from it a couple of years ago to really concentrate on what was happening with FTX, But in hindsight, there was some four risk management going on at the company.
And the defense also said that Sam had approached Caroline in twenty twenty two when there were the market volatility in the crypto industry and said, hey, I need you to pedge the Alameda to protect against the possible market
downturns last year, and she didn't do that. The defense didn't stay out right that you know, this is all Caroline's fault, but there was certainly a flavor that she may wear some of the blame in their case, so you did get a little bit of a flavor of a blank game going on here.
Did they call any witnesses today?
We heard from two witnesses. One was a customer of FTX who lost more than one hundred thousand dollars. He sort of explained how he signed up, what his expectation who were in terms of what they would do with his customer funds. And then we also heard from a former STX developer who worked at the company for a couple of years, was best friends with Sam growing up. They went to MIT together and they lived in the Bahamas with the thirty million dollar pen house together.
And finally, do you know what witnesses are coming up tomorrow?
Yes, we're going to continue hearing from the former STX developer who testimony started today, and we're also going to hear maybe from one of the cooperating witnesses, Gary Wong, and the prostitution indicated this afternoon that he would be one of two witnesses who would take the case till the end of the week.
I know you're going to be in the courtroom tomorrow as well, and we'll talk to you then. Thanks so much, Eva, that's Bloomberg legal reporter Eva Benni Morrison coming up next more analysis of the case against Sam Bankman Fried. I'm Jim Grass when you're listening to Bloomberg. Joining me is John George Aarres, a partner at the Warren Lage Group. Before the prospective jurors came into the courtroom, the prosecutor said that no plea discussions were ever held with Bankman Freed,
and no offers for a plea deal were made. They made plea deals with three other top people at FTX and Alameda. Do you find that odd that they didn't offer Sam Bankman free to deal.
Typically the prosecutor's office will offer a deal, but I think this case is unique because of the size of
the fraud. I mean, the crypto industry. This is easily the largest fraud that's impacted it, and I think the prosecutors have taken a very hard line position from the first announcement of the indictment that they want to hold Sam Bankman Freed responsible for what they're viewing as an ady to one hundred billion dollar fraud, and the fact that they didn't offer him a deal, and the fact that they have three other individuals who were really at the top of FPX, and they have Caroline Ellison who
was his former partner and also running Almata Research. They must feel strongly that the evidence that's going to be presented and the testimony that's going to be brought forward is so powerful that they're going to be successful on their claims. A prosecutor may head to their bets or may notice some weaknesses in their case and say, what's
cut a deal? But I think a the unique nature of this case and the size of the fraud, and be the strength of the evidence they believe they have has led to this result, which is no offer, no deal.
How much does the prosecution's case depend on the testimony of those three cooperating witnesses you mentioned.
I think from the prosecutor's view, obviously someone needs to tell the story, so they need these individuals to talk about the impropriety that was going on with STX, and really at the core of this is misuse of customer funds and mining to customers. These are individual retail investors that put their money into FDx and believe that the money was being held there. The reality appears to be
much different. The reality appears to be that this money was being used for many different things, including Sam Bagminfreed buying properties for himself as well as making political contributions and investing in our Nator research. I think there will be enough documents to show the flow of funds, but I do think that it's important for the individuals to testify to stay and give context to the jury about what the internal conversations were and what was happening in
this ecosystem and everything around it. So could they prove the case solely based on documents and show the flow of funds. I think that they could make a strong case that these funds were exiting FTX and going to places that they shouldn't have been. But it's obviously important to them that these three individuals, Gary wang Nischad Singh and Caroline Ellison all give context to that, and I think that will be very important.
Caroline Ellison had an on again, off again romantic relationship with bankman Freed. Does that complicate her testimony well?
From the defensi's point of view, it's very typical in a way collar case to attack the credibility of the witnesses. That will certainly be a part of their story. Potentially they could say she's a scorned ex lover. She has a motivation to say negative things about Sam Bankman Freed. But in addition to that, they also have the plea deals, and they're going to use those plea deals. This is the they're going to use those free deals to say, Caroline, you got a deal that is helping you avoid the
highest level of prosecution. You struck that deal, and you're making these statements today not because they're truthful, but because you basically saved yourself. So I think it's really two things. But I do believe that their relationship is something they can mine into and that the defense will probe and say you are saying these things because your relationship with Sam bankmin Free did not work out.
Can you explain you know what the prosecution is alleging happened here.
Absolutely, So there's seven criminal charges. They're pretty broad, but it's why are fraud securities, fraud, money laundering And there's a couple different components. The first component is lying to the retail investors, lying to them in that the funds that they deposit on FTX would be made available to them. They can make withdraws and transactions with the funds that they deposited freely and as they chose to, but in reality the funds that they had depositive were usurped for
Almada research. There were transfers of I think around eight billion dollars ends up, for lack of a better word, going missing. And this goes into the political donations that Sambang and Freed made, This goes into Almada research, and
this goes into him buying personal properties for himself. So one component is the lying to the investors, and then there are other components which are lying to potential creditors and lenders of FTX stating that the financial health of FTX is completely fine, when in reality the funds that are supposed to be held and FTX were no longer there.
So the core conduct is the same that all stems out of the money that were deposited were essentially misappropriated in use for other things, and that led to defrauding investors, that led to defrauding lenders, and that led to essentially money laundering and misappropriating funds for something that was other than their intended use, which is an investment in FTX.
Prosecutors have something like fifty potential witnesses and they've produced so far thirteen hundred exhibits ahead of trial. You know, cryptocurrency, altering code, flow of money between FTX and Alameda financial transactions. Is it a difficult case to keep simple enough or interesting enough for a jury.
I think that the prosecution's focus will be on exactly that keeping it simple. At the core of this case crypto and the fact that it was crypto and that it involves code, and that it's a new digital asset. I believe it's something that they're going to try and minimize, and they're just going to focus on what is a traditional fraud. You lied to people about what you were going to do with the money they entrusted you with, period,
You lied to lenders about the financial viability of the company. Period. The defense will certainly try to put forward the story that the terms in use of FTX gave them broad latitude to move funds as they chose to fit, and that maybe they didn't have proper risk management tools, but
it didn't arise to the level of fraud. So I think the government has an interesting story from the perspective of this is a huge sum of money, This is a very public figure, and I believe that they'll be able to boil it down to the base level of the conduct that occurred here. However, that is a complication that they faced. You know, I do believe that the defense is going to put the spotlight on the complexity of crypto and how maybe the jury should not treat
this as just a typical, normal financial transaction. But in some I do think that the government will be able to boil this down to a base level where a jury can really understand what happened.
The judge has issued a number of pre trial rulings that were setbacks for SBF, including revoking his bail and jailing him. He ruled that bankmin Freed couldn't call seven expert witnesses, and he made a decision this week that his lawyers couldn't refer in the opening statements to the advice of counsel defense, which they wanted to use to show that bankman Freed didn't have criminal intent here and was relying on the advice of his attorneys. How serious are these setbacks?
These are fairly serious facts, the first one being revoking bailn being put in prison, and that was because there was alleged tampering of witnesses occurring in advance of trial. So that shows that SBS is a bad actor trying to influence the tropil ahead of time. And SDS has been, probably much to his lawyers this day, very public about saying things, very public about saying I messed up, that people need to know the truth. He did, I believe,
a sixty minute interview on this. He really went out and put himself in the public sphere and already made a ton of statements that I'm sure the government is going to use against him. But as for the pre trial rulings, the judge is narrowing the case down to what the relevant defenses are that can be presented, and the fact that the judge struck down the reliance on
council defense. It's a very very powerful defense if you are able to show that an individual well fully disclosed what was happening to an attorney and that an attorney rendered advice, and then the individual who gave him the advice followed that punctiliously and went along with what the
lawyer said. What the judge's ruling indicates to me is that there were likely some communications about what was happening, but it didn't rise to the formal level of an advice of council defense, which is very formulaic and it has to be laid out clearly with evidence otherwise, you know, anyone that had a passing conversation with an attorney would say, or even an accountant would say, oh, well, I relied
on their advice, and that should exonerate me completely. It's a blow for the defense because their story is getting narrowed in advance of trial, and what they're going to have to focus on most likely is that, yes, things happen that may have been in proper from a business perspective, but it did not rise to the level of criminal intent.
And looping back on one of our earlier questions, I believe that's where the three witnesses that were formerly at the top of SPX and Almeta, we'll be able to give a lot of context into what those conversations were between themselves and SBS.
The judge has left it open they can't refer to the advice of council defense and opening statements, but later on in the trial he may allow them to use it.
So what the judge is signaling is that formal defense in order for it to be advanced. It's going to have to be laid out through witnesses, through documents. Right, there has to be an attorney client relationship in the first instance. Then there has to be disclosure of what's happening at STX. Then there has to be advice, and
then following that advice. So at this point, the judge is likely not wanting to cloud the jury's mind with evidence that has yet to come forward, and a defense counsel, especially in a criminal trial, you want to be flexible and you also want to play your cards close to your chest. When it's time to reveal the evidence, you start revealing it because burden in all these cases, right, the burden of proof for a criminal prosecution is on the government and they have to meet that burden of proof.
So when it comes time for the defense to lay out what their narrative is, what their defenses are, the judge appears to be giving them the opportunity to do that, but they're saying, we haven't seen any of that. At this stage, you don't get to just baldly refer to an advice of counsel of defense without making the proper evidentiary show.
Most defendants don't testify at their own trials. But how likely do you think it is that he will take the stand.
It's a very difficult question because he does have so many prior statements out there, and he may need to give them some context. He may need to make certain things clear that when he was saying he messed up,
that he didn't have the intent to mess up. It was just that he didn't have the proper risk controls in place, you know, given the stakes that we have here, right if SBS is convicted of these charges, the sentencing guidelines provide that he could be in jail for I mean over one hundred years, so with his life on the line. Essentially, it may come a time after the government presents their case, which it appears it's going to
take them about a month in total. You had mentioned the amount of documents that are out there, the amount of witnesses that they might profer for the hearing, It'll take them about a month to lay it out, and then based on the nature of that testimony, if they feel the defense Council feels that they can put SBF on the stand and have him contextualize or explain some
things in a better way. They may call him, but there's a huge risk in doing that, because if you call the defendant as a witness, you are opening up them to cross examination on everything that they testified about, and that might be a moment for the government to really go at SBF and damage him and put the nail on the proverbial caulsin.
For his case.
So it's a very very difficult question, and you've rightly pointed out that a defendant rarely testifies in their own case.
For SBS, this is freedom on the line for the prosecutors. What's at stake.
It's extremely important because they are staking their credibility. They are staking the regulatory environment of the crypto industry. On this case, FTX before the collapse was the darling of the crypto industry. We have individual celebrities like Tom Brady endorsing them. They were all over Super Bowl at they were very had a huge public profile. So when the government takes on a case like this, it's a heavy
burden for them. They have shown to the public, or made allegations to the public that this was a resoundingly large fraud and that there are issues with the crypto industry and the people that are operating it. And this also sends a message to the crypto industry in general, which is you will be prosecuted under the laws that we have in place if you do not follow them. So this is a major pressure for the government to get this right, which is why I think they're going
to go through an extremely detailed and lengthy presentation. Four weeks of putting on evidence in and of itself showed how much evidence that they have and how seriously they're taking this. So it is a big task for the government. I'm not sure that it's a huge risk because they seem fairly comfortable with the evidence that they have, but obviously if SBF is exonerated and he's found not guilty on these charges, it is a major blow to the government.
Thanks so much for being on the show. That's John George Aris, a partner at the Warren Law Group. Coming up next, the Supreme Court appears ready to reject a challenge to the Consumer Financial Protection Board. You're listening to Bloomberg. The fate of the Consumer Financial Protection Bureau was at stake in a case asking the Supreme Court to declare its funding system unconstitutional. But justice is across the ideological Spectrum seemed to be struggling with that argument.
Is there not in the Constitution? Where do we get I don't understand.
We can't just suddenly decide that things are troubling without some kind of legal reference point.
Well, I'm trying to understand your argument that I'm a total loss.
The word perpetual I'm having trouble with because it implies that it's entrenched and that a future Congress couldn't change it, but Congress could change it tomorrow.
This is the standard be Is it like an intelligible principle of money spent? I mean, I think we're all struggling to figure out, then, what's the standard that you would use and just assuming that you're right.
Unlike most federal agencies, the CFPB, the federal government's consumer financial watchdog, doesn't rely on the annual budget process in Congress. Instead, it's funded directly by the Federal Reserve. But the Solicitor General told the justices that the CFPB was indistinguishable from many other federal agencies, including ones that date back to the country's founding, and both liberal and conservative justices seem to agree. Here are Justices Elena Kagan, Clarence Thomas.
Annual line item appropriations. We're some appropriations, but massively not all appropriations, and so you're just flying in the face of two hundred and fifty years of history.
I get your point that this is different, that it's unique, that it's odd that they've never gone this far, but that's not having gone as far is not a constitutional problem?
Joining me is Harold Krant, a professor at the Chicago Kent College of Law, tell us about the question in the case. It's based on the appropriations clause of the Constitution.
The propation clause in the Constitution is situated in Article one. It's one of Congress's great powers to conteract any kind of presidential overreach, because the president can't do anything or the exectu bridge can't do anything unless Congress gives it the money to perform certain functions. And the clause itself says that no money shall be drawn from the treasury
but in consequence of appropriations by law law. And the question that was raised in the case is does appropriations by loss imply every year appropriations does it imply a strict amount of money? Because in this case, under the twenty ten law that created the agency, Congress gave it an open ended funding mechanism which should actually be drawn from another agency, the FED and the FED and the amount of money that the CFPB could use the maximums
twelve percent of the Fed's budget. So the argument was this is somewhat of an unusual appropriations decision. The fact that Congress decided what the funding mechanism means is that enough. And that's what the debate really was about in the Supreme Court, and both sides had a hard time finding some kind of line to draw to distinguish permissible congressional appropriations from impermissible ones.
Justices on both sides seemed to be generally confused by the arguments by former US Listener General Noel Francisco on behalf of the trade associations, and.
Understandably because they were searching for some kind of intelligible principle to use that term that they could use in order to side with those attacking the CSPB, and there was no intelligible principle. I mean, the former Stalist general reached out for some factors that there's no real cap in this case, no real cap of how much money that can be spent. I mean that's not exactly true,
but I understand what he was saying. There's also no time duration, meaning that with Congress doesn't act, the agency bcves this money year after year. And finally, it's true that this case is different is because another agency distributes the money as opposed to Congress directly. But this former Salister General couldn't say which one of these factors was the most important. He basically said, well, this is sweet, generous. All three of these things are going on in this case.
He also added sort of a subsidiary point that there's no sort of market check on what the CFPB does. They can just keep getting more and more money and nobody will be upset by it because it's hidden through the FED. And what the Justice is said, well, well, where's the line. How do we apply this in the future. Give us some kind of understanding about which is the most important point, because if we take one and strictly, the entire country fall apart. Because Congress has been giving
this kind of appropriation to one form or another. One of these factors has been present in countless appropriations throughout history.
The decision came out of the ultra conservative Fifth Circuit from a panel of three Trump appointed judges, and that Circuit seems to be trying to push the envelope in many cases that the Supreme Court is taking this term. In other words, here this was a novel argument to bas this on the appropriations clause.
I sense that the Court may be moderating slightly and that it sort of understands that because of the signals that is given in past cases, there are lower court judges who are becoming more and more adventurous as the ones in the Fifth Circuit. And there may be a residual feeling not in all the justices, but in some that that just goes too far, that you have to have some kind of principled decision backed by history, which in other context is very important to the court, and
this simply doesn't exist in this case. So it seems relatively clear, though not for sure, of course, that the Court will rebuff the Fifth Circuit saying that it went just too far, because it'd be incredibly difficult to craft an opinion that wouldn't jeopardize countless other agencies. I mean,
just give a couple of examples. The Post Office gets to enlarge its budget depending upon what it brings in with postal fees, as does any federal agency that relies upon permit systems, and the Custom's Office was structured that way as well. And the Congress has made sort of perpetual delegations to fill Social Security checks every year, and it doesn't have to re up those every year. So each of these factors that the challengers raised exist in
many fundamental statutes. So it's very difficult, and the Court is aware that if they try to draw aline it may jeopardize very basics of executive branch government.
At stake is really every regulation and enforcement action the CFPB has taken since its beginning, and organizations representing the mortgage industry, housing industry, and realtors warn the court of the potentially catastrophic consequences of a broad decision, saying that it could set off a wave of challenges and the housing market could descend into chaos to the detriment of all mortgage borrowers.
The actual challenge was to a payday loan, and if the Court focused only on knocking on the payday loan rule, then the markets would not be rattled. But the concern is realist. What's the remedy's going to be? It's hard to conceive of what the Court could do if it found this appropriation's defect. Would it make up an appropriation from Congress? Would it say the entire statues unconstitutional and send it back to Congress to decide what to do. And if they did that, what's going to govern the
mortgage industry and their interim? And that was the concern. Now. The good news is that no Justice during the Soter General's argument, asked her what she thought about the appropriate remedy. That might be another signal that the Court is not
going to hold this unconstitutional. There was some discussion later with the challengers about what remedy they seek, but it's very difficult to craft a remedy without roiling both the mortgage and the credit markets, not to mention jeopardizing lump sum appropriations to other industries and so forth.
Even Justice Clarence Thomas made a state meant that it didn't seem unconstitutional. Defenders of the CFPB were worried about this case. It was seen as the most significant test of the agency's thirteen year existence. It's been before the Court before in twenty twenty. Tell us what happened then?
Yeah, the earlier case challenged in some ways, the very existence of the agency is on the ground that it had an unconstitutional structure in that there was only one director of this agency, and the Court felt that because it was just a single member at the head of the agency, that the agency would be too independent of
presidential supervision. And even though there are some agencies also having only one head, most of our independent agencies have three or five people at the head, which dilutes the authority, according to the Court, of any one individual commissioner or director of an agency. So in the former case, in some of law case, the Court also had a remedial question. It could have punted the whole thing back to Congress, and the Congress restructure the CFPB as it chose fit.
What it did was it gave the President the power to remove the head of the agency at will as a remedy. But the remedy that would have been just as logical would have been to say that there are now three members on the CFPB and then allow the President to appoint two others, because that would have gotten rid of the constitutional flaw that the Court identified.
What was the Fifth Circuit's remedy. Would the remedy have been to dismantle the CFPB because there wouldn't have been funding.
So the remedy wasn't clear under the Fifth Circuit's decision. Certainly, what the Court indicated was that the payday loan rules, which were challenged in this case, they would have been
held unconstitutional. The question that, of course, would have been, if just the payday loans rules were held unconstitutional, well, what would happen to every other rule that was issued by the agency With this is just ushered the stampede to the court that no matter what kind of action there was challenging enforcement action, a rule or whatever that the agency issued, that the courts then falling fascifred president would have had to knock those down as unconstitutional as well.
This is one of several cases coming before the Court this term that challenge agency authority attack on the administrative state. Do these CFPB arguments indicate that the conservative justices might not go as far as conservatives who are against big government might want, or is it just based on the facts of this case?
Well, the Court ushered in all of these cases by signaling that it was re examining the very sort of accepted basis of the administrative state that's existed for in some ways for seventy five years, in some ways since
our nation's history. So the Court has invited these kinds of challenges, and I think now that so many challenges are taking place, and course, like the Fifth Circuit or chopping at the bid to pare down the authority of executive branch officials, the Court is going to have to make a tough call about where to draw the line. Even though this case would have had tremendous significance and
still could if the agency loses. There's another case that's penning and hasn't been set for a argument yet, the Jocracy case, which itself has incredible seeds of doing great mischief to the administrative state because they're both raised and non delegation argument, which would limit the authority of agencies to interpret broad congressional statutes in ways that they have
to as an everyday basis. But the other argument is given is that agencies can no longer go before agencies to bring most enforcement actions, but rather have to proceed in court with a jury trial, which would take an immense amount of time and money and lose the ability of an expert tribunal to understand the facts of the case.
So if those arguments are held by the court, and that's this circuit challenge, that would be again a shoe tectonic shift in terms of a loss of agency, flexibility and power.
Thanks for joining me, Hal. That's Professor Harold Krant of the Chicago Kent College of Law. And that's it for this edition of The Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, and at www dot bloomberg dot com slash podcast Slash Law, And remember to tune into The Bloomberg Law Show every weeknight at ten pm Wall Street Time. I'm June Grosso and you're listening to Bloomberg