The Trial’s Opening Week

Sam Bankman-Fried (SBF), the former CEO of the now-defunct crypto exchange FTX, is currently facing a criminal trial that began on October 3. Gary Wang, the co-founder of FTX and the prosecution’s key witness, testified for approximately six hours. He stated under oath that SBF directed activities that deceived investors and misappropriated customer funds. SBF, who has pleaded not guilty to seven counts of fraud and conspiracy, argues that he was merely overwhelmed by the fast-paced crypto environment. His defense team, led by attorney Mark Cohen, has yet to present their case.

Alameda Research’s Role

According to a report by CNN, two former FTX employees have testified, shedding light on the intricate financial relationship between FTX and its sister company, Alameda Research. Both companies were founded by SBF and were financially interlinked in a way that was not disclosed to FTX customers. Alameda had access to FTX’s bank account and was even allowed a $65 billion line of credit from FTX, a privilege not extended to any other customer. The defense argues that these arrangements were necessary for Alameda’s role as a “market-maker” on FTX.

Stark’s Detailed Critique

John Reed Stark, a former SEC enforcement lawyer, has been vocal in his criticism of SBF’s defense, particularly the claim that Alameda Research functioned as a market-maker for FTX. Stark vehemently disagrees with this characterization, stating that calling Alameda Research a “market-maker” is as absurd as calling a dishonest airport baggage handler an airline pilot. He asserts that Alameda Research was, in reality, a custom-designed conduit for money laundering orchestrated by SBF.

Stark also delves into the technicalities of what constitutes a legitimate market-maker. According to him, genuine market-makers are broker-dealers who are registered with the Financial Regulatory Authority (FINRA) and are under the regulatory purview of both the SEC and FINRA. Stark emphasizes that Alameda Research does not meet these criteria, making its self-proclamation as a market-maker misleading and illegitimate.

The State of the Crypto Market

Stark goes on to describe the current crypto market as a chaotic, lawless environment, comparing it to a post-apocalyptic anarchy. He criticizes the crypto industry for misusing established financial terms like “market-makers,” “exchanges,” and “brokers” to give the false impression of regulatory oversight and legitimacy. Stark warns that this is a form of “regulatory misappropriation,” a deceptive practice that has been a longstanding concern for the SEC.

Upcoming Testimonies

The prosecution is expected to call Caroline Ellison, Alameda’s former CEO and SBF’s on-and-off girlfriend, as their star witness. Ellison, who has also pleaded guilty to several fraud charges, is expected to provide insights into Alameda’s financial dealings with FTX.