On November 2, 2023, a 12-jury panel convicted Sam Bankman-Fried, the founder and former CEO of cryptocurrency exchange FTX, of seven criminal fraud counts related to his role and connection to the collapse of FTX. Bankman-Fried, commonly called SBF, is a 31-year-old former billionaire that Forbes once named “the world’s richest 29-year-old.” After a four-week-long trial, the jury took only four hours to find SBF guilty. He faces 115 years in prison if he receives the maximum sentence. Let’s get into the details.

Who is Sam Bankman-Fried?

Sam Banman-Fried is the 31-year-old son of two Stanford Law tenured professors. He graduated from MIT in 2014 and started work on Jane Street in Boston. That’s where he met future business and romantic partner Caroline Ellison, who became CEO of one of Sam’s two companies: Alameda Research. Sam and another business partner, Tara Mac Aulay, started Alameda in 2017 while living in Berkley, California. Sam then founded FTX Cryptocurrency Derivatives Exchange in 2019. He quickly shot to fame and became one of the wealthiest billionaires on the planet. Forbes listed him as the 41 richest American in 2021, and his name brought media attention to the world of cryptocurrency.

What happened?

In Fall 2022, news outlet CoinDesk published a report casting doubt over the viability of Alameda Research and alleged that its ties with sibling company FTX were unusually close.
This report led competitor and CEO of Binance, Changpeng Zhao, to post on Twitter that his firm intended to sell its holdings of FTT, FTX’s crypto token. Allegedly, the tweet led customers to quickly pull their money from FTX, which resulted in the company being unable to meet the withdrawals. FTX filed for bankruptcy on November 11, 2022, and federal agents arrested SBF a month later in the Bahamas, the location of FTX headquarters.

What Were the Charges/Allegations?

The Department of Justice filed 13 criminal charges against SBF, 7 of which were the subject of last month’s trial. The DOJ alleged that SBF “mismanaged and misappropriated funds that were used to bankroll risky trading activities,” including loaning himself and others exuberant amounts of money to pay for investments, acquisitions, and real estate, along with below-board political donations, marketing campaigns, and service debt.

The prosecution’s case centered on the financial tie between FTX and Alameda Research. Publicly, SBF claimed that the two companies were distinct entities, with one (Alameda) focusing on trading and the other (FTX) concentrating on helping customers trade cryptocurrency.

However, CoinDesk’s report alleged this was a lie, and the two companies were inextricably intertwined. “The report hinted that large portions of Alameda’s balance sheet consisted of a highly illiquid crypto token, FTT. The token was invented and issued by FTX; holding it would give customers of the exchange discounts on trading fees and other rewards—and FTX another avenue to raise money without giving up equity. Based on the going market price, Alameda valued its FTT holdings in the billions of dollars. Still, FTX and Alameda owned almost all of the FTT, and only a few tokens were in circulation.”

When Zhao made his announcement on Twitter, panic set in with other traders who then rushed to unload their FTT tokens. This in turn led to a price decrease of 75%,  further reducing the value of Alameda’s assets, leading consumers to pull their money off the FTX exchange altogether –causing the company’s crash.

The DOJ alleged that because SBF made illegal business decisions, FTX could not meet the influx of withdrawals because “it had used customer deposits to fund billions of dollars in loans to Alameda.”

As summarized by Wired, the DOJ alleged that FTX, with SBF as its leader, “failed to implement virtually any of the systems or controls necessary for a company entrusted with other people’s money. According to the DOJ, this amounted to a criminal act because SBF deliberately lied to clients and investors about asset segregation and other protections, exposing them to massive, undisclosed risk. Through a pattern of fraudulent schemes, the indictment claims, Bankman-Fried exploited the trust FTX customers placed in him to prop up his businesses, enhance his public image, and enrich himself.”

What Went on During the Trial?

The prosecution used a series of inner-circle employees of both FTX and Alameda to testify as witnesses against SBF. They exposed his fraudulent, criminal activity, which led to the collapse of FTX and billions of dollars in lost revenue from customers and investors.

“The monthlong trial was highlighted by testimony from the government’s key witnesses, including Caroline Ellison, Bankman-Fried’s ex-girlfriend and the former head of Alameda, and FTX co-founder Gary Wang, who was Bankman-Fried’s childhood friend from math camp. Both pleaded guilty [last] December to multiple charges and cooperated as witnesses for the prosecution.”

The jury convicted him on all seven charges after four hours of deliberating. US Attorney General Merrick Garland stated that Bankman-Fried “thought he was above the law. Today’s verdict proves he was wrong.”

What Happens Next?

Sam Bankman-Fried faces up to 115 years in prison if the judge sentences him to the maximum. The judge scheduled a tentative hearing on March 28, 2024, to discuss the proposed sentencing. Additionally, prosecutors now have until February 2024 to decide if they will bring the additional charges against SBF in a second trial scheduled for March 11, 2024. This process, in part depends on whether the US wins permission to do so from the Bahamas government.

Want to Know More?

The story of Sam Bankman-Fried and his fall from grace is far from over. Legal questions surrounding the cryptocurrency world remain rampant in today’s society as courts and legislators try to tackle this developing area of finance law. Interested in crypto? Want to keep track of cases involving corporate fraud and finance? Head on over to Trellis.law and search through thousands of cases regarding similar subject matter.

Sources:

https://www.wired.com/story/sam-bankman-fried-trial-explained/

https://www.forbes.com/sites/britneynguyen/2023/11/03/sam-bankman-fried-faces-110-year-max-sentence-after-ftx-fraud-trial-heres-how-long-experts-think-hell-be-behind-bars/?sh=6eee312a6050

https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/

https://www.coindesk.com/policy/2023/11/02/the-case-against-sam-bankman-fried/#:~:text=Per%20the%20DOJ%2C%20Bankman%2DFried,Assistant%20U.S.%20Attorney%20Roos%20said.

https://www.reuters.com/breakingviews/sbfs-guilty-verdict-will-help-crypto-break-free-2023-11-03/

https://www.cnbc.com/2023/11/02/sam-bankman-fried-found-guilty-on-all-seven-criminal-fraud-counts.html

https://www.forbes.com/sites/stevenehrlich/2021/10/06/the-richest-under-30-in-the-world-all-thanks-to-crypto/?sh=734acc363f4d

https://www.coindesk.com/policy/2023/11/07/whats-next-for-sam-bankman-frieds-legal-case/

Join us in the latest episode of Rethinking Legal Ops Podcast with our CEO Nicole Clark, as she dives deep into the world of legal technology and its transformative impact on the legal industry.

In this episode, we explore:

🔍 The power of Trellis in democratizing access to state trial court data.

💼 Law firm analytics and how it’s reshaping the landscape for legal professionals.

🤖 The rise of generative AI and its potential applications in the legal field.

🎓 Preparing future lawyers for a LegalTech-driven world.

👉 Tune in to the full episode here: https://tinyurl.com/4hz6nsx8

#LegalTech #FutureOfLaw #Innovation #LegalResearch

AI is taking the world by storm. As tech companies compete to produce the best generative AI (GAI), the legal industry is learning how to adapt to this new norm. With new technology comes new legal issues. Law firms are particularly concerned with integrating large language models (LLMs) into their practice because of potential unnecessary legal issues. While there are many companies embracing the development of AI, some companies are saying no to it altogether. Firms embracing this new technology stand to gain significant advantages, possibly outpacing their competitors resisting the GAI revolution. But what are the concerns of firms proceeding with caution when it comes to fully implementing the latest advances in GAI within their practice landscape? Let’s unpack the concerns of some of those waiting on the sidelines.

Risking Copyright Infringement

Law firms are concerned that the output generated from LLMs contain third party intellectual property, and using the information generated by AI could lead to liability for copyright infringement. This is a real risk, as AI companies use third-party, copyright protected content to train their models. The past six months have seen a slew of lawsuits filed against AI companies like OpenAI, the Google, Microsoft, and Amazon-backed company that owns ChatGPT. Artists including writers, authors, and celebrities have filed lawsuits over GAI outputs that infringe on copyrighted material and unauthorized use of intellectually protected content.

Plaintiffs argue “the AI models are trained using copyright-protected content and that certain outputs infringe for copying or being an unauthorized derivative of that content.” Law firms are worried that if they use GAI in such scenarios, they may be liable for unintentionally using copyrighted information. 

How do AI Companies Protect Consumers?

As law firms cautiously begin to integrate AI into their legal practice, “a growing number of responsible providers of AI tools are [in fact] indemnifying users.” For example, in response to customers’ concerns about the risk of IP infringement claims, Microsoft announced their new Copilot Copyright Commitment in September. Microsoft’s AI-powered Copilots are LLMs that work with company data in the Microsoft 365 apps (Word Excel, PowerPoint, Outlook, etc.) to make work more efficient.

To protect customers from lawsuits concerning IP and copyright infringement claims, Microsoft pledges to customers that they can use Microsoft Copilot services and the output they generate “without worrying about copyright claims.” Microsoft stated that if customers are legally challenged on copyright grounds, Microsoft will assume responsibility for the legal risks involved.

This legal concept is called indemnification. To indemnify means to compensate for harm or loss. Applied to GAI, it means that if a customer uses an AI tool created by a company, and the AI generates copyrighted output, and the customer is then sued for using that output, the AI company will assume legal responsibility.

Specifically, “if a third party sues a commercial customer for copyright infringement for using Microsoft’s Copilots or the output they generate, [Microsoft] will defend the customer and pay the amount of any adverse judgments or settlements that result from the lawsuit, as long as the customer used the guardrails and content filters [Microsoft] built into [its] products.”

Motive Behind Indemnification

Why are companies like Microsoft willing to indemnify customers against potential lawsuits arising from the use of GAI? The answer is two-fold. First, AI companies want to instill greater confidence that customers can use their GAI tools without the risk of infringement claims. This is because, if customers are worried about becoming victims of infringement claims and risk legal liability –they are less likely to use the AI products at all. Indemnification offers users security so that they can use AI tools “risk-free.”

The second key reason for indemnities is large tech companies like Microsoft want to control the outcome of litigation surrounding AI and copyright infringement –as this is a new and developing area of case law. “Indemnities of this nature invariably include the conduct of claim provisions whereby the providers will step into the shoes of the user and run the defense (or settlement) of the claim in return for granting the indemnity to the user.”

With indemnification, AI companies can control how legal disputes are litigated in the courts. Microsoft attorneys, for example, would dictate legal strategies to protect against IP and copyright infringement claims and control the defense’s narrative, potentially leading to favorable outcomes in court that will set legal precedent. In light of President Biden’s new AI Executive Order, (which we will get into next week) large tech companies want to be at the forefront of decision making.

Other Companies Using Indemnification to Protect Consumers 

Microsoft isn’t the only companying offering this kind of protection for consumers. Back in 2021, Adobe announced a similar indemnification to protect customers who use Adobe’s AI-assisted design tools and were worried “about inadvertently infringing copyright.” Additionally, in October, Google announced that it would also indemnify users “of its generative AI products if they are hit with claims of intellectual property infringement.”

As GAI continues to develop at a rapid pace, it’s important that customers feel secure in using third-party AI tools without risking liability if the LLM output produces copyrighted information. Indemnification is a way for companies like Microsoft, Google, and Adobe to reassure users that they are secure in using their AI tools by being protected from infringement claims. This is an important step in the legal industry as firms cautiously continue to integrate AI into their everyday practice. 

Want to incorporate GAI into your Legal Practice? 

Interested in integrating GAI and LLMs into your legal practice? Want to learn more about lawsuits involving IP and copyright infringement? Head over to trellis.law. Trellis API simplifies legal research and brings structure and organization to trial court data. Implement Trellis directly into your legal research workflow and sift through thousands of cases that deal with IP and Copyright law, filtering down to cases specifically addressing AI.  

Sources:

https://www.natlawreview.com/article/microsoft-indemnity-users-copilot-ai-software-leveraging-indemnity-help-manage

https://blogs.microsoft.com/blog/2023/03/16/introducing-microsoft-365-copilot-your-copilot-for-work/

https://blogs.microsoft.com/on-the-issues/2023/09/07/copilot-copyright-commitment-ai-legal-concerns/#:~:text=The%20Copilot%20Copyright%20Commitment%20extends,services%20and%20Bing%20Chat%20Enterprise.

https://www.farrer.co.uk/news-and-insights/exploring-ai-indemnities-their-purpose-and-impact/

https://www.legaldive.com/news/microsoft-copilot-user-copyright-legal-indemnification-ip-law/693163/

https://www.legaldive.com/news/google-indemnify-generativeai-users-against-infringement-copyright-IP genAI/696593/#:~:text=Both%20Google%20and%20Microsoft%20are,its%20AI%2Dassisted%20design%20tools.

https://www.reuters.com/technology/microsoft-defend-customers-ai-copyright-challenges-2023-09-07/