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Bankman-Fried hints at blame-the-lawyers defense in criminal case

2023.05.31 18:07

© Reuters. FILE PHOTO: Former FTX Chief Executive Sam Bankman-Fried, who faces fraud charges over the collapse of the bankrupt cryptocurrency exchange, leaves federal court in New York City, U.S., February 9, 2023. REUTERS/Mike Segar

By Alison Frankel

(Reuters) – Indicted FTX founder Sam Bankman-Fried seems to be gearing up to blame the lawyers who helped him establish the crypto exchange.

That’s the subtext of a motion filed on Tuesday by his lawyers at Cohen & Gresser, who are defending Bankman-Fried against federal charges of fraud, conspiracy and bribery. They’re asking for access to documents from Fenwick & West, the Silicon Valley law firm that represented FTX and sister hedge fund Alameda Research from the companies’ inception through their collapse in November 2022.

Fenwick & West did not respond to my email queries. The firm has not yet filed a response to a civil suit by FTX customers who named Fenwick as a defendant.

Bankman-Fried has pleaded not guilty to the charges. The defense motion claims that Fenwick & West advised him, FTX and Alameda on at least four matters at the heart of the Manhattan federal court indictment against the onetime crypto billionaire.

The California law firm, for instance, allegedly provided counsel to FTX on the creation of shell companies that opened accounts at Silvergate Bank to receive deposits from FTX customers, according to Tuesday’s motion. Those shell company bank accounts are a critical element of the government’s bank fraud conspiracy charge.

Fenwick & West also allegedly advised FTX that it was not required to register with the U.S. government as a money transmitting business, according to the new motion. Prosecutors have charged Bankman-Fried with conspiring to violate wire transfer laws by failing to register but his lawyers said in the new motion that Fenwick’s alleged advice “directly contradicts the government’s theory.”

Bankman-Fried’s filing similarly contends that Fenwick & West reviewed internal agreements in which Alameda loaned money to Bankman-Fried and other FTX executives. The government alleges that the loans were an illegal misappropriation of customer deposits as part of a scheme to violate federal campaign finance laws. Bankman-Fried’s new motion argues that Fenwick & West’s legal advice on the tax consequences of the loans might rebut the government’s contention that the loans were improper.

Finally, the motion asserts that it was Fenwick that instructed Bankman-Fried to communicate with other FTX and Alameda executives via Signal and other ephemeral messaging apps. That alleged advice would undercut the government’s claim that Bankman-Fried directed his colleagues to use Signal and other encrypted communication apps to hide evidence of his crimes.

Bankman-Fried’s lawyers acknowledged in the motion that their assertions about Fenwick & West are based on a very limited set of documents.

The filing does not specifically invoke the words “advice of counsel” to refute government claims that Bankman-Fried acted with criminal intent. But Bankman-Fried’s lawyers seem to be headed in that direction, telling U.S. District Judge Lewis Kaplan of Manhattan that they need to know more about Fenwick’s work for FTX and Alameda to determine if the law firm’s documents exonerate their client.

Those documents could help Bankman-Fried later argue at trial that he was following advice from FTX’s lawyers.

Tuesday’s filing asks Kaplan to order the government to turn over evidence from Fenwick & West or to authorize Bankman-Fried to subpoena documents from the law firm.

The firm would almost certainly rather not turn over client files to Bankman-Fried. Among other reasons, Fenwick & West has been named as a defendant in a sweeping class action by FTX customers. The plaintiffs’ lawyer who filed that case, Kerry Miller of Fishman Haygood, told me on Wednesday that he plans to monitor the Bankman-Fried criminal case for any Fenwick & West documents that might boost the class allegations.

Bankman-Fried’s lawyers from Cohen & Gresser declined comment on the new motion through a spokesperson. The Manhattan U.S. Attorney’s office also declined to comment.

Attorney-client privilege is often a complication for white-collar defendants who want to blame their companies’ lawyers for providing bad advice. Companies – rather than individual executives or outside law firms — control the right to insist that communications with their counsel remain confidential. Companies are typically reluctant to waive privilege for fear that their lawyers’ documents might be used in other cases.

Bankman-Fried’s new motion said his lawyers are in negotiations with FTX’s new counsel about whether the company intends to assert attorney client privilege over relevant Fenwick & West documents. (The motion did not name FTX’s new law firm but it is Sullivan & Cromwell.) Defense counsel also said that Fenwick & West told them it would not turn over any documents without FTX’s permission.

The motion floats two theories for why Bankman-Fried is entitled to access to certain Fenwick & West communications even if FTX claims privilege. Bankman-Fried said the law firm represented him personally in addition to serving as counsel to FTX and Alameda. That assertion seems to hint that Bankman-Fried will claim that he can personally waive privilege over some Fenwick & West communications.

Defense lawyers also argued that FTX, which is in Chapter 11 bankruptcy, has already waived its privilege over certain documents by turning them over to prosecutors. If that’s correct, said former federal prosecutor Harry Sandick of Patterson Belknap Webb & Tyler, it will be easier for Bankman-Fried to obtain Fenwick’s communications.

“It’s hard to see why the defense should be denied access,” Sandick said.

If Bankman-Fried’s lawyers believe that Fenwick documents can help them refute the government’s evidence of criminal intent, Sandick said, they will eventually have to make a strategic decision about how to get the law firm’s communications in front of a jury.

The documents must be introduced through a witness – presumably Bankman-Fried himself or a Fenwick & West lawyer. The strongest defense case, Sandick said, would probably feature testimony from a Fenwick & West witness to bolster testimony from Bankman-Fried about his reliance on advice from FTX lawyers. But contradictory testimony from a law firm witness could undermine Bankman-Fried’s advice-of-counsel defense.

That’s a concern for another day. Right now, Sandick said, Bankman-Fried’s lawyers just want to know whether Fenwick & West’s files will help their client.

“It’s an understandable motion,” he said. “They’re saying, ‘Let’s see what the documents say, then we’ll decide how to use them.’”

Read more:

Bankman-Fried seeks documents from former FTX law firm in crypto fraud case

Bankman-Fried charges should not be tossed, prosecutors say

Bankman-Fried faces long odds of tossing charges despite Supreme Court decision

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