The Challenges Facing Sam Bankman-Fried’s Lawyers

On the second day of Sam Bankman-Fried’s fraud trial this month, one of the lawyers for the cryptocurrency mogul delivered an emphatic message to the jury. Mr. Bankman-Fried is not a criminal, the lawyer declared, and every decision that led to the collapse of his FTX crypto exchange had been made in “good faith.”

That message has since been clouded by more than two weeks of testimony from 15 government witnesses, most of whom have blamed Mr. Bankman-Fried for FTX’s spectacular implosion last year. He lied repeatedly, they said, running roughshod over his top lieutenants and directing them to treat customer deposits as if FTX were a piggy bank.

The testimony has dealt a blow to Mr. Bankman-Fried’s “good faith” defense, which will be put to the test this week. Federal prosecutors are scheduled to rest their case on Thursday morning, and the FTX founder’s lawyers are then set to call four witness in federal court in Manhattan — including Mr. Bankman-Fried, who has pleaded not guilty to seven counts of fraud, conspiracy and money laundering.

At a hearing on Wednesday, Mark Cohen, a defense lawyer, confirmed that Mr. Bankman-Fried, 31, would take the stand. That is a risky move for any defendant. But given the prosecution’s success in building its case, legal experts said, it was all but inevitable that Mr. Bankman-Fried would want to tell the jury his side of the story.

“There is nothing revelatory to say this is an uphill battle,” said Caroline Polisi, a criminal defense lawyer. “The prosecution has done a good job.”

Mark Botnick, a spokesman for Mr. Bankman-Fried, declined to comment.

From the beginning of Mr. Bankman-Fried’s case, he was expected to face major hurdles in court. He was the face of FTX and also founded a crypto trading firm, Alameda Research, where FTX customer deposits were redirected. Prosecutors have charged him with orchestrating a vast scheme to use those deposits to finance venture investments, real estate purchases and other spending.

But so far, his trial appears to have gone even worse for Mr. Bankman-Fried than anticipated, legal experts said. Over the past few weeks, prosecutors have cast the case as a garden-variety fraud investigation. They have stuck to relatively simple concepts and used only a handful of the complicated financial flow charts that can be hard for juries to decipher.

Prosecutors have also called fewer witnesses than expected, and many of them received only minimal pushback from Mr. Bankman-Fried’s lawyers. A trial that was expected to last six weeks could now wrap up within a month.

Mr. Bankman-Fried’s testimony could create new risks for the defense. In criminal cases, lawyers usually advise their clients not to testify because of the chance that prosecutors might trip them up on cross-examination.

“Any headway the defense has made in the case evaporates,” said Michael Bachner, a criminal defense lawyer and former assistant district attorney in Manhattan. “But if the case is not going well, there is not much to lose.”

With Mr. Bankman-Fried’s proclivity for talking and his past ability to charm major investors, he may have simply concluded that he is the best person to sell his story to the jury, legal experts said.

“Up until the now the case has been exclusively about the cooperators” who agreed to testify against Mr. Bankman-Fried, said Daniel Richman, a former federal prosecutor who now teaches at Columbia University. “When he testifies, it becomes about him.”

Even before the trial, obstacles had piled up for Mr. Bankman-Fried’s lawyers.

In a pretrial ruling in September, Lewis A. Kaplan, the federal judge overseeing the case, sharply limited the number of expert witnesses the defense could call, stating that the proposed testimony was irrelevant or might confuse the jury. He also curtailed some legal arguments that Mr. Bankman-Fried’s lawyers wanted to raise, including the claim that prosecutors relied too heavily on one of FTX’s outside law firms in building its case.

After the trial began, Judge Kaplan kept a tight leash on Mr. Bankman-Fried’s lawyers, interrupting their questioning of prosecution witnesses and often overruling their objections.

“Counsel, when I rule, that’s the end of the discussion,” Judge Kaplan told Mr. Cohen at one point. “Could we agree on that?”

But nothing has been as damaging as the testimony from about half a dozen of Mr. Bankman-Fried’s closest advisers and friends, three of whom had pleaded guilty in the case and agreed to cooperate with prosecutors. They told the jury that Mr. Bankman-Fried had known for at least six months that FTX wouldn’t be able to return $8 billion in customer money that Alameda had borrowed.

Caroline Ellison, who ran Alameda and has pleaded guilty to helping steal money from FTX customers, testified that Mr. Bankman-Fried did not believe that the normal rules of running a business applied to him. Nishad Singh, an FTX executive who has also pleaded guilty, said his former boss had spent extravagantly even as the exchange careened toward collapse. And Gary Wang, an FTX co-founder and the third cooperator, said Mr. Bankman-Fried had directed him to write computer code that enabled the theft of customer deposits.

Mr. Bankman-Fried’s lawyers tried undermining some of those claims in their cross-examinations — but failed to elicit any major concessions or gaffes that undermined the prosecution.

When they questioned Ms. Ellison, Mr. Singh and Mr. Wang, they focused on the witnesses’ motivation for pleading guilty. The lawyers tried suggesting that the three were telling damaging stories about Mr. Bankman-Fried to avoid prison time. They pointed out that each cooperator had met with the government dozens of times and that in some cases, their trial testimony differed from notes taken months ago by F.B.I. agents.

But over and over, prosecutors interrupted the flow of questions with objections, forcing Mr. Cohen to move back and forth in the chronology of FTX’s rise and fall as he tried to weave a narrative. Prosecutors also blocked the defense from presenting the jury with a document intended to attack Ms. Ellison’s credibility during her cross-examination.

When Mr. Singh was on the stand, Mr. Cohen got him to acknowledge that he used a company loan to buy a house last October — a month after he had grown distraught, he said, about the apparent theft of FTX customer money.

But questioning the motivation of cooperating witnesses tends to lose its impact when prosecutors have more than one offering similar testimony, said John P. Fishwick Jr., a former U.S. attorney for the Western District of Virginia.

“When you have three company insiders who are cooperators, that is a heavy lift on cross-examination,” he said.

Elizabeth Holmes, the founder of the failed blood-testing company Theranos, used a similar “good faith” defense in her criminal fraud trial in 2021. She was accused of defrauding investors and patients by lying that Theranos’s blood-testing device worked. (It didn’t.) Her lawyers argued that any bad business decisions had been driven by a desire to build a workable device and were not intended to deceive her wealthy investors.

“It is looking a bit like Elizabeth Holmes’s defense,” Ms. Polisi said of the claim by Mr. Bankman-Fried’s lawyers that his business decisions were reasonable. “They are trying to portray him as a bit of a hapless young guy who got in over his head and didn’t have the bad intention that prosecutors are assigning to him.”

Ms. Holmes testified at her trial that she was manipulated by her much older business partner, who was also her former boyfriend. But the testimony backfired, giving prosecutors an opening to question Ms. Holmes about her attempts to muzzle Theranos employees who became whistle-blowers, showing that she wanted to stop bad news from getting out.

Ms. Holmes was convicted on securities fraud charges in January 2022 and sentenced to more than 11 years in a federal prison.