7.Advice-of-Counsel Evidentiary Hearing
46 lines(Witness excused)
JUDGE KAPLAN: I'll hear you briefly on the issue I have to decide.
Mr. Cohen.
MR. COHEN: Your Honor, given the hour, I will be brief.
I think there is a couple of things running through the government's examination, to the extent it was actually about these topics, that sort of goes beyond the mark here.
Our position is not that any of these are entitled to a formal advice-of-counsel defense -- we have been very clear with the Court from the beginning to that effect -- nor is our position that the government might challenge the weight of the evidence or the way that our client interpreted things. That's also not the test here. But we think there is a sufficient basis for us to elicit the testimony about the topics covered today.
The government is free to cross-examine Mr. Bankman-Fried, as it has already done today, and the issue is not whether they think the evidence has great weight, no weight, or whatever weight. The issue is whether we ought to be allowed to do that.
As to each of the topics, Mr. Bankman-Fried testified that he consulted with counsel, and he took comfort from those consultations, which is all we have ever taken as a position. We have never advanced the formal advice-of-counsel defense, as your Honor knows.
The narrow point on industry practice is the only thing different from the five other topics, and there we think there was a basis for him to say that the use of one omnibus wallet to hold multiple customer funds or funds from multiple customers, and that was contrasted with funds held by FTX operationally was something we believe was done by other exchanges through the other information he learned from other exchanges, and we think that there is a basis for that.
I don't think the issue is whether the testimony or whether the evidence has sufficient weight, no weight, or so forth. The question is whether we have made a sufficient showing to put it forward, and, without belaboring the direct and the cross, we think there is a sufficient basis.
That's all I have.
JUDGE KAPLAN: Let me ask you a question. I am going to approach it in stages.
Let's assume that somebody robs a bank, knocks over Wal-Mart, whatever, and comes upon a large sum of illegally obtained money and the person decides it might be a good idea to salt this away and make sure nobody is going to discover it. Do we agree that engaging in a transaction, an object of which is to conceal the source of the money, is money laundering, assuming the jurisdictional hooks are satisfied?
MR. COHEN: On your Honor's hypothetical, yes.
JUDGE KAPLAN: The next step is the guy says, let me figure out how to do this, and he goes to a lawyer. And he says to the lawyer, I want to buy an expensive condo on billionaire's row and I want to form a limited liability company, which we ought to call Gold Dust, and I've got just the apartment and I'd like you to prepare a contract of sale, and the lawyer is not told where the money came from, not one word, not one word about why the objective is to hide the money or the source, and the lawyer incorporates or organizes the LLC, the lawyer prepares the contract of sale. The lawyer represents Gold Dust at the closing and now the defendant is apprehended, the buyer, the true buyer, and charged with money laundering.
And the defense is, well, but I had a lawyer. I had a lawyer who organized the LLC. I had a lawyer who did the contract of sale. I had a lawyer at the closing. And I offer this as evidence that I didn't have a criminal intent in hiding the money. I did just exactly what the lawyer said.
And how is that different from what you are trying to do in principle? I am not saying anything about your client's guilt or innocence.
MR. COHEN: I understand your Honor is speaking a hypothetical.
I think the pivotal difference is, it's the defense's position in this case that in your Honor's hypo, the source of the funds is robbing a bank, so obviously an illegal act. That's what we are fighting over in this case.
Our client, our position is that the source of funds, the use of funds was not improper and our client did not believe it was improper or, at minimum, that it was inconclusive. It's not the same hypothetical situation.
JUDGE KAPLAN: Those are all defenses on the merits.
MR. COHEN: Those are defenses on the merits, but in those situations, speaking with a lawyer when you yourself don't believe you have done everything wrong, is a relevant consideration.
JUDGE KAPLAN: It's sure relevant if you tell the lawyers what all the facts are.
MR. COHEN: True. I know he was criticized, but I think Mr. Bankman-Fried was clear about when he had conversations with lawyers and when he didn't, and some of them were not as clear as others.
I agree with your Honor. But there were times, for example -- I think the cleanest example that your Honor asked the question about was, how do you structure these founders loans. How do you do them? Do you do them as a loan, as a dividend? How can we do that? Our position is obviously that the source of the loan in the first place was not improper. If we agreed it was improper, we would be in a different proceeding. That's why I think --
JUDGE KAPLAN: How does the fact that some lawyer drew up a promissory note shed any light on whether it was improper in the first place?
MR. COHEN: If the client is doing something he thinks is proper and asks the lawyer to process it and draw up paperwork and the lawyer doesn't raise any other concern, again, our position is the commercial conduct is inconclusive or unclear. It's not robbing a bank. Under the cases we cited many letters ago, the client can take some comfort from that. It is not a pure advice-of-counsel defense. We are not saying --
JUDGE KAPLAN: I understand that. You know I understand it because I wrote an opinion about it and it states your position clearly. I understand your position. I'm pretty dubious about it in some applications here, but I understand your position.
Let me hear from the government.
MR. ROOS: Just briefly, your Honor.
Mr. Cohen framed the issue, the defendant's defense as whether he believed the use of funds was improper. So I think, directly on your Honor's hypothetical, some of the areas they have highlighted for lawyer involvement go to collateral issues.
So, for instance, lawyer involvement in the terms of service, the defendant testified on the stand that he didn't talk about any of the specific provisions before the terms of service were enacted. He didn't raise the use of customer funds by Alameda. He didn't raise Alameda's ability to borrow from FTX.
So I think, much like the loan or the property in your Honor's hypothetical, this is sort of collateral involvement of lawyer that doesn't go to the core defense, which is the use of funds and whether or not it was proper, the same I think I heard on the payment agent agreement, which is that he believes Dan Friedberg was involved in drafting the agreement, but I didn't hear any testimony that Dan Friedberg was informed about the use of funds that may have been occurring under the payment agent agreement or that there was a conversation with the lawyer that said the payment agent agreement authorizes you to use the funds. The same, again, with the loans.
By the way, the case already has a bunch of testimony about these loans. It was the subject of cross. It was the subject of cross and direct of Can Sun last week. But, again there, this is what is happening with money, which may or may not be customer funds, but, again, that is the defense whether or not it's customer funds, not whether or not a lawyer subsequently papered a transaction.
So I think for each of these, when you are doing the 401, 403 balancing test, the question is what is the probative value of lawyer involvement on the margins where there is not evidence that the lawyer is aware, after this hearing, aware of the relevant facts central to the defense, coupled on the 403 side of the risk of prejudice, confusion, and a misleading impression being given to the jury, and those are the cases your Honor cited in your opinion on that, from just suggesting, oh, there was lawyers involved when it doesn't go to the core thing. It goes to buying the apartment, not to robbing the bank.
JUDGE KAPLAN: There is one other point I wanted you to respond to, and I want to get to my notes.
What about the testimony relating to industry practice on the omnibus wallets?
MR. ROOS: Thank you, your Honor. I meant to hit that.
I actually think, based on the limited testimony that we heard about omnibus wallets, I am not sure there is actually a dispute amongst the parties about whether or not customer funds were kept in an omnibus wallet. I have not heard -- I don't recall hearing any witness saying that each individual user's funds was held in an individual user on chain wallet. I think the question in the case is whether those customer fund omnibus wallets were commingled or accessed.
JUDGE KAPLAN: And depleted.
MR. ROOS: And depleted.
I think when you look at it from that perspective -- and I think even Mr. Rehn opened by saying there were these omnibus wallets that had customer money, and they stole a bunch of money out of it.
So I don't think the existence or the practice of using an omnibus customer fund wallet is in dispute in the case. So I think, then again, assessing the marginal relevance of the testimony of what other industry participants are doing, weighed against the potential prejudicial risk, as articulated in the government's motions in limine about inviting discussions about whether Huobi or some other exchange are custodying and how they are custodying, there is not much of a probative value there and it is outweighed. Just to be clear, we are not saying the omnibus wallet is improper.
JUDGE KAPLAN: Let me just look at something for a minute.
Mr. Sun, Can Sun, testified as general counsel of FTX: "Q. Did you get questions from regulators about how FTX handled customer deposits? "A. They were received and kept in an omnibus wallet for all customer funds that was separated from FTX's own proprietary funds as well."
You are telling me there is no dispute about that, is that right?
MR. ROOS: That's what that witness said. I think that's what the government's position was. I thought I understood that the defendant was saying that customer funds were kept in a separate omnibus wallet, but maybe I misunderstood.
MR. COHEN: Your Honor, if I might, I'm happy to hear that the government is now saying there is no dispute on that. But it's one thing --
JUDGE KAPLAN: They called a witness to testify to it. That's kind of a hint.
MR. COHEN: Sure. But it's one thing for the defendant to testify to that and then be cross-examined on how that's just his opinion. It's quite another for him to be able to say in fact this was industry practice. That's the point I'm trying to make.
JUDGE KAPLAN: There may be a difference between saying on the basis of personal knowledge that it's industry practice and saying, I talked to a lot of people. I don't have any names, don't know where or when. But after doing all of that, it's my view that it's industry practice, which is essentially what he said.
But I put that to one side. I imagine the two of you can work this out overnight. If you can't, I'll rule on it in the morning. I'll rule on everything else in the morning.
Anything else?
MR. COHEN: No.
JUDGE KAPLAN: Any new forecast about how long we are going to be with Mr. Bankman-Fried?
MR. COHEN: Well, I still -- I'd like to take the night to take a look.
JUDGE KAPLAN: Obviously, I'm not holding you to it.
MR. COHEN: I will have a much better sense in the morning, your Honor.
MS. SASSOON: Your Honor, the government is obviously planning cross-examination.
JUDGE KAPLAN: What a surprise.
MS. SASSOON: We will try to keep it tight. But if the defendant is unresponsive, it could take longer.
JUDGE KAPLAN: I understand that.
To voice a complaint I have voiced more than once in 29 years here, what did you understand is sometimes a good question, but not so often. Let's not spend the day at sidebar about it.
MR. ROOS: Judge, one last thing. There are a few times Ms. Sassoon asked the defendant about whether he has any records that supported a consultation with a lawyer and his answer, and it was fine in this setting, of course, was my subpoena got denied or whatever the --
JUDGE KAPLAN: He said we have been asking for it for a long time.
MR. COHEN: I can address that, if you'd like, Mr. Roos.
MR. COHEN: As your Honor may recall, we issued a 17(c) subpoena to Fenwick & West, and the debtor counsel objected and the subpoena was denied. If you go back and look through the categories of requests, one of them was for a data-retention policy. I believe that's what my client was thinking of.
JUDGE KAPLAN: Did you serve a trial subpoena?
MR. COHEN: No.
MR. ROOS: My point is, not where did that answer come from. My point is, he shouldn't be permitted to say that on the stand. There was an application. It was denied. My recollection is for a lot of reasons, including failing the Nixon standard. There hasn't been another request, it sounds like, so it's not a permissible answer to say, I tried but failed.
JUDGE KAPLAN: If the defendant goes off in that direction and there is a request for it, I will consider and hear both sides on the issue of whether I should instruct the jury that the defense had the right to serve a trial subpoena on the debtor seeking such a document and whatever else, if anything, might be appropriate in that regard.
JUDGE KAPLAN: Thank you.
(Adjourned to October 27, 2023 at 9:30 a.m.)