On February 7, 2024, the court in the Southern District of New York released the opinion of Judge Lewis Kaplan in United States v. Samuel Bankman-Fried, 22-cv-673, which significantly limited the scope of defendant's proffered testimony relating to the involvement of counsel regarding certain matters at issue during defendant's criminal trial.
Case Background
In November 2023, defendant Samuel Bankman-Fried was convicted on seven counts including fraud, conspiracy and money laundering stemming from the highly publicized collapse of FTX, a cryptocurrency exchange, and Alameda Research, a cryptocurrency trading firm. The defendant was the founder and former CEO of both companies.
During trial, defendant disclaimed a formal "advice-of-counsel" defense, and the government moved in limine to preclude defendant from offering evidence that the presence and involvement of company attorneys during the making of certain decisions related to charged conduct demonstrated that defendant acted in good faith and lacked criminal intent. The court then precluded defendant from referring in his opening statement to the presence or involvement of counsel and required defendant to provide notice before offering any evidence or argument regarding the involvement of attorneys. Thereafter, defendant provided notice to the court that he intended to testify regarding the involvement of counsel concerning the following four topics:
- FTX and Alameda's implementation of document retention and auto-delete policies;
- The formation of certain entities and related bank accounts and processing agreements related to FTX and Alameda;
- Certain loans between Alameda and FTX executives; and
- The drafting of certain terms of intercompany agreements between FTX and its customers.
In seeking further specificity following its receipt of defendant's notice, the court took an offer of proof, which involved both direct and cross-examination of defendant, outside the presence of the jury. After the offer of proof, the court ruled that defendant could testify regarding the involvement of counsel in connection with the topic of document retention and auto-delete policies because "this testimony would not pose a substantial risk of confusion or unfair prejudice," but excluded testimony regarding the role of counsel as to the other three topics proffered by defendant, as "testimony on these topics would be minimally probative but would be likely to be substantially 'confusing and highly prejudicial.'"
The Court's Decision
Judge Kaplan explained that, because defendant had disclaimed an advice-of-counsel defense, the court need not consider whether defendant satisfied the elements of a formal advice-of-counsel defense.1 Rather, the court should evaluate whether the proffered testimony was admissible under Federal Rules of Evidence 401 and 403 (i.e. whether the proffered testimony's probative value is substantially outweighed by unfair prejudice, confusing the issues or misleading the jury). According to Judge Kaplan, because defendant sought to admit evidence of attorney involvement to support his good faith defense (and had disclaimed his advice-of-counsel defense), the requirements to establish an advice-of-counsel defense were inapplicable.
In previewing his Rule 403 analysis, Judge Kaplan explained that, while evidence of attorney involvement can be probative of a defendant's state of mind, it can also pose the substantial risk of misleading the jury, as a jury could be led to believe that a lawyer's presence during certain decision-making meetings means that the lawyer blessed (either implicitly or explicitly) the legality of all aspects of a particular decision. (Citations omitted). In situations such as this, where defendant has disclaimed an advice-of-counsel defense, such a misunderstanding by the jury would unfairly prejudice the government because it would essentially give the defendant the benefit of an advice-of-counsel defense without having to bear the burden of proving any of the required elements.
The court then engaged in a Rule 403 analysis of each of defendant's four proffered topics. The court admitted defendant's testimony with regard to document retention and auto-delete policies and reasoned that, even if the jury assumed that a lawyer sanctioned the companies' data retention and deletion policies, such an assumption would not unfairly prejudice the government because defendant's testimony did not suggest that defendant believed that his other, charged conduct was lawful.
The court excluded defendant's testimony regarding the second and third topics―the formation of entities and related bank accounts and processing agreements, and loans between executives―based on its reasoning that the proffered testimony offered little probative value as defendant admitted that he did not discuss the core issues relating to the criminal charges (i.e. the misuse of FTX customer deposits and funds) with counsel, therefore the attorneys' involvement was only tangential (at best) to the charged conduct. Thus, while the proffered testimony was of minimal probative value, the court concluded that it would have been highly misleading if defendant were permitted to suggest that the attorneys' involvement in collateral activities (i.e. the formation of certain entities and structuring of certain loans) gave defendant a reasonable belief that his charged conduct relating to the misappropriation of FTX client funds was lawful. Finally, the court excluded defendant's proffered testimony regarding the fourth topic of the drafting of certain terms of intercompany agreements between FTX and its customers because defendant testified on cross-examination during the offer of proof that he never discussed the charged conduct with counsel and therefore "could not have taken comfort in conversations he never had." Thus, the court ruled that any probative value would have been outweighed significantly by the risk of confusing the jury and unfairly prejudicing the government.
Key Takeways
- The court's decision thwarted defendant's attempt to avail himself of the benefit of a formal advice-of-counsel defense while simultaneously avoiding the burden of satisfying the requisite elements of that defense.
- Such decision highlights the risks defendants take when they disclaim a formal advice-of-counsel defense with the hope that they can still negate allegations of criminal intent through informal allusions to attorney involvement.
Footnotes
1. In order to establish an advice-of-counsel defense, a defendant must show that he or she: (i) made a complete disclosure to counsel concerning the matter at issue; (ii) sought advice as to the legality of his or her conduct; (iii) received advice that his or her conduct was legal; and (iv) relied on that advice in good faith. In addition, as a practical matter, defendant must also waive the attorney-client privilege in order to assert this defense.
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