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FTX Founder’s Experts Face Exclusion in Cryptocurrency Fraud Case

Posted on September 8, 2023 by Expert Witness Profiler

FTX Trading Ltd. was a cryptocurrency exchange founded in 2019 by Sam Bankman-Fried. It quickly grew to become one of the largest crypto exchanges. Bankman-Fried also founded Alameda Research, a cryptocurrency trading firm. Federal prosecutors alleged that starting in 2019, Bankman-Fried orchestrated a scheme to defraud FTX customers by misappropriating their deposits to support Alameda’s trading activity.

Specifically, he was accused of diverting billions in customer funds to Alameda without disclosing this practice. Alameda allegedly used the funds to make speculative crypto trades. Prosecutors said Bankman-Fried made false statements about FTX’s financial condition and operations to attract more customer deposits as well as investments into FTX and loans to Alameda.

In November 2022, concerns about Alameda’s financial condition led to mass withdrawals from FTX. This caused a liquidity crunch at FTX, which did not have sufficient funds to meet withdrawal demands. FTX filed for bankruptcy on November 11, 2022. An estimated 1 million customers and investors suffered billions in losses.

In December 2022, federal prosecutors filed criminal charges against Bankman-Fried, including wire fraud, commodities and securities fraud, and money laundering conspiracy. Bankman-Fried was arrested in the Bahamas and extradited to face charges in the United States. He pleaded not guilty. Jury selection for his trial is scheduled to begin on October 2, 2023, in New York. Bankman-Fried might face up to 115 years in prison if convicted.

To summarize, Bankman-Fried is faced with 12 criminal charges, which will be spread across two trials scheduled to begin on October 2, 2023, and March 11, 2024. He has pleaded not guilty to all counts.

Government Seeks to Exclude 7 Defense Experts in FTX Collapse Case

Lawrence Akka

The Government argued that the testimony of all seven experts should be excluded for various reasons. The Government contended that the testimony of Lawrence Akka, an English barrister, should be excluded because he intended to interpret FTX’s terms of service and opine on the legal obligations created by the contract which, according to the Government, usurped the role of the judge in instructing the jury on the law and the jury’s role in applying the law to the facts. The Government also argued that his testimony was also unreliable because it did not consider the full context for interpreting the agreement, and he had not reliably established that there was a uniform definition of “trust” that he could apply. The Government added that his testimony should also be excluded under Rule 403 because it was likely to mislead and confuse the jury about the relevant legal standards.

Joseph M. Pimbley

The Government also pushed for excluding the testimony of Joseph M. Pimbley concerning problems with FTX’s software infrastructure, specifically its database and computer code because considering the notice did not adequately disclose his opinions, his testimony would not be relevant to the issues at trial, and it would be an improper attempt to imply through an expert that Bankman-Fried lacked knowledge of alleged infrastructure deficiencies at FTX.

Bradley A. Smith

The Government also demanded the exclusion of the proposed testimony of Bradley A. Smith regarding campaign finance laws and practices because not only was it improper for an expert to testify about the legal framework that applied to political contributions at the federal level, it was also irrelevant since the campaign finance charges had been dropped, and his opinions about Defendant’s “good faith” compliance with campaign finance laws constituted inadmissible state of mind testimony under Rule 704(b).

Pietro (Peter) Umberto Vinella

The Government asserted that the proposed expert testimony of Pietro (Peter) Umberto Vinella warranted exclusion because he lacked qualifications to opine about cryptocurrency markets and FTX considering much of his proposed testimony was irrelevant or speculative, and his opinions about financial services industry customs and the reasonableness of FTX’s actions were misleading and unfairly prejudicial.

Andrew Di Wu

The Government challenged the background testimony of Andrew Di Wu on cryptocurrency’s history and markets which also drew comparisons between FTX and other cryptocurrency exchanges deeming it irrelevant, speculative, and dismissive of the Court’s legal instructions.

Moreover, the Government also argued that the testimony of Thomas E. Bishop and Brian Y. Kim should be excluded because the defense failed to provide sufficient disclosure about their anticipated expert opinions and the bases for those opinions, as required by Rule 16. The notices for these two experts only identify general topics but do not state any actual opinions or analysis.

In summary, the Government argued that the seven proposed defense experts had either failed to provide adequate notice of their opinions, intended to provide irrelevant or improper legal opinions and testimony on industry practice, lacked qualifications, or intended to provide speculative and unreliable testimony that was substantially more unfairly prejudicial than probative. For these reasons, Daubert hearings were requested to assess relevance, qualifications, and reliability.

As the start date of the trial of FTX co-founder Sam “SBF” Bankman-Fried approached, new court filings indicated that SBF could pay his expert witnesses more than $1,000 an hour should they testify on his behalf.

Some of the witnesses, such as former Federal Election Commission Chairperson Bradley Smith, charged SBF’s legal team $1,200 an hour to testify about issues such as the United States’ campaign finance laws and straw donors, according to a court filing on August 28. Bradley Smith clarified that he had no financial stake in the case’s outcome. He was receiving compensation solely for his time and services, billed at a rate of $1,200 per hour. He emphasized that his compensation was not based on the opinions he provided in the case or on the final outcome of the legal proceedings.

Additional expert witnesses, such as Akka and Pimbley, might charge £800 (equivalent to $1,000) and $720 per hour, respectively, if they testify, as indicated in the court filings. The hourly rates for other potential expert witnesses for SBF’s case vary, ranging from $400 to $650.

On the other hand, Peter Easton, an accounting professor at the University of Notre Dame, who is a proposed witness for the prosecution, would charge $1,175 per hour as per the court data.

SBF seeks to request a trial postponement. If the request is submitted by September 1 and is approved, SBF’s trial will be rescheduled to March 11, 2024.

Key Takeaways:

  • Experts cannot testify to legal conclusions, interpret contracts, or opine on whether the Defendants had the requisite mental state to commit the crimes. This improperly usurps the role of the judge and jury.
  • Experts noticed by the defense failed to provide adequate disclosure of their opinions and analysis as required by the rules of evidence. Vague topics are insufficient.
  • Proposed testimony on background information, industry practices, actions of third parties, and regulatory uncertainty from several experts is irrelevant to the issues the jury must decide. It is also likely to mislead and confuse the jury.
  • Testimony opining that the Defendants acted reasonably or in good faith compliance with laws and regulations is impermissible state of mind evidence.
  • Some experts lack qualifications to testify about cryptocurrency markets and exchanges. Their opinions are unreliable and speculative.
  • Expert testimony that is cumulative of facts that can be established through percipient witnesses is unnecessary and improper. In summary, the government argues the proposed experts either lack proper qualifications, offer legal opinions and testimony irrelevant to the facts at issue, or provide unreliable and prejudicial opinions. The testimony should therefore be excluded or limited through Daubert hearings.