Column: Sam Bankman-Fried claims trial judge botched rulings on advice-of-counsel defense
The opinions expressed here are those of the author, a columnist for Reuters.
By Alison Frankel
Sept 16 (Reuters) -Former FTX CEO Sam Bankman-Fried contends in an appeal of his 2023 fraud conviction that the Manhattan federal judge who oversaw his trial irreparably tainted the proceeding with “bizarre” and “egregious” rulings on Bankman-Fried’s right to cite advice he received from the crypto exchange's lawyers.
U.S. District Judge Lewis Kaplan of Manhattan made a series of grave mistakes when he severely curtailed Bankman-Fried’s ability to tell jurors that FTX lawyers were involved in approving some of the corporate policies and practices at the heart of the government’s criminal case, according to Bankman-Fried’s Sept. 13 brief to the 2nd U.S. Circuit Court of Appeals.
The trial judge, argued Bankman-Fried’s lawyers at Shapiro Arato Bach, misconstrued key appellate precedent when he excluded most of Bankman-Fried’s potential testimony on advice from FTX’s lawyers.
But that wasn't all, according to Bankman-Fried's lawyers: Kaplan also erred when he demanded an unconstitutional, mid-trial “deposition” to preview Bankman-Fried’s testimony, the brief said, and when he invented a “public interest” justification for barring Bankman-Fried from telling jurors that lawyers were involved in FTX business practices that prosecutors subsequently characterized as suspicious.
Kaplan then compounded all of those earlier errors, Bankman-Fried’s lawyers said, when he improperly instructed jurors that Bankman-Fried could not cite lawyers’ involvement in FTX corporate decision-making as a defense against the government’s charges.
To be sure, Bankman-Fried’s primary argument on appeal, as my Reuters colleague Luc Cohen reported last week, is that Kaplan wrongly excluded evidence that just before Bankman-Fried was ousted and the company entered Chapter 11 bankruptcy, FTX had sufficient assets to pay back customers whose deposits were allegedly misappropriated. Bankman-Fried’s brief asserted that by allowing prosecutors to present a “false narrative” that FTX customers and investors could never recover their allegedly looted fund, Kaplan left the jury with only “half the picture.”
I’d argue that the 2nd Circuit’s consideration of Bankman-Fried’s advice-of-counsel arguments will have broader implications than fact-specific questions about FTX’s assets when it entered bankruptcy.
White-collar criminal cases, after all, often implicate guidance that defendants received from their lawyers. And lawyers who advise corporations will doubtless be interested to hear from the 2nd Circuit about whether their work might potentially surface in criminal trials.
The Manhattan U.S. Attorney’s Office declined to comment on Bankman-Fried’s new brief. Bankman-Fried's lead appellate counsel, Alexandra Shapiro of Shapiro Arato, did not respond to my query. The new brief did not specify which FTX law firms provided advice, but pre-trial briefing focused on work by Fenwick & West. The firm did not immediately respond to a request for comment but has said throughout fallout from the FTX bankruptcy that it provided only routine legal services to the crypto exchange.
The 2nd Circuit’s controlling precedent on the advice-of-counsel defense is a 2017 ruling in a fraud and conspiracy case against the founder of a pharmaceutical importing company. Despite asserting that lawyers for his company had assured him of the legality of the business model, the defendant was convicted for deceiving buyers about foreign products that were not approved by the U.S. government.
The 2nd Circuit vacated the conviction, holding that in order to rebut prosecution arguments about his intent to commit fraud, the executive was entitled to testify about how advice from his lawyers affected his state of mind. The appeals court also said, however, that to assert a formal advice-of-counsel defense to jurors, defendants must prove that they sought advice in good faith, presented their lawyers with all of the relevant facts and followed the counsel they were offered.
In advance of Bankman-Fried’s trial, the government relied on that 2017 precedent to argue that Bankman-Fried could not seek a jury instruction based on advice he received from his lawyers. Kaplan's pretrial rulings left open a slim possibility that Bankman-Fried could point to advice from FTX lawyers to cast doubt on his intent to commit fraud, but the judge said he would need details on Bankman-Fried’s testimony before allowing jurors to hear information that might confuse them.
That’s why Kaplan ordered an extraordinary mid-trial hearing to probe the former CEO’s potential testimony about lawyers' involvement in several FTX business decisions.
After the hearing, the judge ruled that Bankman-Fried could only testify that lawyers were involved in approving FTX’s data retention policies, including the automatic deletion of messages sent on a messaging app.
Kaplan precluded Bankman-Fried from testifying about the involvement of FTX lawyers in other corporate decisions, including the structure of loans between FTX and its sister hedge fund Alameda, which allegedly received misappropriated FTX customer funds. The judge held that such testimony was not in the public interest because it might leave jurors with the “misleading” impression that lawyers had blessed the alleged conduct.
Bankman-Fried’s appellate brief argues that Kaplan disregarded the 2nd Circuit’s 2017 holding that defendants are entitled under the evidentiary rules to offer testimony about legal advice in order to undercut prosecution arguments about their intent.
Kaplan “made an egregious error, bizarrely reasoning that Bankman-Fried’s testimony on advice-of-counsel had to be excluded as contrary to ‘the public interest,’” the brief said.
At the very least, Bankman-Fried’s lawyers said, the trial judge erred by insisting upon a hearing to preview the former CEO’s testimony. There should be no special evidentiary rules, they said, for testimony about a lawyer’s role in corporate decisions in the context of showing a defendant’s state of mind.
"A defendant can legally claim he is not guilty because he relied on a lawyer and therefore acted in good faith,” the brief asserted. “And here, that is what Bankman-Fried was trying to do—and would have done had the court not unlawfully barred his defense.”
If such testimony might confuse jurors, they said, it’s up to prosecutors to provide clarity through cross-examination, just as they do with all other testimony.
Kaplan and some of his Manhattan federal court colleagues, the brief said, have nevertheless invoked their inherent authority, citing “policy reasons,” to vet potential advice-of-counsel testimony before defendants can present it to jurors.
It’s time, the brief said, for the 2nd Circuit to shut down such efforts. “Lower courts should not be permitted to create their own discovery rules,” the brief argued.
Like I said, the brief raises important questions not just for white-collar defendants but also for the corporate counsel whose advice may be at issue in criminal cases.
Prosecutors are due to tell their side of the story in December.
Read more:
Sam Bankman-Fried's jury only saw 'half the picture,' lawyer says in appeal
Bankman-Fried, prosecutors spar over anticipated blame-the-lawyers defense
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