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Analysis: the logic behind SBF’s defense of following legal advice

sam bankman fried SBF

Today Sam Bankman-Fried’s (SBFs) lawyers filed a letter reiterating plans to use an ‘advice-of-counsel’ defensein the FTX fraud trial. In order for the Government to argue its case, it has to prove fraudulent intent beyond a reasonable doubt. If someone can demonstrate they relied on advice in good faith, that might undermine the Government’s case.

But there’s a second potential reason which is quite particular to the SBF case. One of FTX’s key lawyers was Dan Friedberg, who has a colorful past. A long time ago, he worked for a company embroiled in an online poker scam which allowed a few people to see the poker cards of other players. Friedberg provided controversial advice to the poker firm on how to minimize exposure. A secret recording of the discussions is available on YouTube.

Before joining FTX, Friedberg was a partner at Fenwick & West, advising SBF and his companies from 2017 to 2019. The law firm continued to be FTX and Alameda outside counsel after Friedberg joined the companies – he worked for both.

Friedberg profited handsomely from his tenure at FTX. He received a $1.4 million signing bonus, an 8% stake in FTX.US and a salary of $300,000 on joining in January 2020.

Before moving on to his other generous compensation, it’s worth noting that two years later, FTX.US raised funding at a valuation of $8 billion, making Friedberg’s stake worth in the region of $640 million. [If anyone has details of insider FTX stock sales, please get in touch.]

In June 2021, he received a $3 million cash bonus from Alameda. The FTX Group in bankruptcy alleges that in June 2020 Friedberg was granted 102 million Serum tokens minted by the Solana Foundation, without paying for them. FTX had a close association with Solana. After a considerable price drop, the Serum tokens were worth almost $34 million at the time of the bankruptcy. Even today, they are valued at around $3 million.

FTX Bankruptcy lawyers plant the seed of the defense

The FTX bankruptcy lawyers may inadvertently have helped to provide the defense.

In June they filed a lawsuit against Friedberg, making several allegations, including breach of fiduciary duties. 

“Friedberg directed the preparation of bank account opening documents with false statements, silenced whistleblowers, and supported the fraudulent transfers that enriched Bankman-Fried and other FTX Insiders contrary to the interests of the entities to which Friedberg owed fiduciary duties,” the lawsuit reads.

It doesn’t stop there. It outlines the allegations of silencing whistleblowers. For example, Alameda and FTX were sued over a pump and dump scheme in 2019. The lawsuit alleges that Friedberg arranged to engage the Plaintiff’s attorney, paying $3.3m between 2019 and 2022 “to buy Plaintiffs’ Attorney-1’s silence”.

In December 2021, a former FTX US employee who had worked there for less then two months made allegations about the company and received an “extraordinary settlement” although the amount was redacted. Despite being employed by FTX US, she received the payout from Alameda. The lawsuit also alleges that Friedberg “bought off” the ex employee’s lawyers by contracting to pay them $200,000 a month for five years, a total of $12 million. 

A newly hired Alameda lawyer started asking questions about governance and regulatory issues in December 2021. The queries were particularly about why Alameda affiliates were sending funds without a money transmitter license. Allegedly, Friedberg fired him with a generous package (amount was redacted), despite only being employed for three months.

The Wall Street Journal (article unlocked) also published other allegations.

Does this SBF defense have legs?

One non-factual observation is that CEOs build teams of people that they choose to work with. That includes people with similar interest and ethics. So, the people SBF hired reflects on SBF, especially people he worked with for years. That’s why the buck stops at the CEO.

However, the lawsuit claims that SBF’s father Joe Bankman urged SBF to hire Friedberg “to give Friedberg a central role and to keep Friedberg ‘in the loop . . . so we have one person on top of everything.'”

Friedberg expected to testify

Another observation is that most of the FTX inner circle has been indicted, but not Friedberg. In January, Reuters reported that Friedberg briefed two dozen investigators from Justice, the FBI and SEC at a meeting on 22 November 2022, which was very shortly after FTX and Alameda filed for bankruptcy. “He has not been charged and has not been told he is under criminal investigation,” Reuters reported. 

Alameda’s Caroline Ellison and former FTX CTO Gary Wang pled guilty to criminal fraud on 22 December.

Friedberg is expected to testify as a government witness in the trial starting in October.

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