“The uncomfortable answer for a law professor to acknowledge is that the American legal system catastrophically failed from the initiation of the bankruptcy through the criminal trial of FTX CEO Sam Bankman-Fried. Looked at in its totality, the entire legal process was not about protecting assets and deterring misconduct by prosecuting illegal conduct. It was about blame-shifting, optics, politics, legal error, and the personal ambition of prosecutors and regulators.”]

The American Legal System Indicted: The Troubling Story of the FTX Bankruptcy and Prosecution of Sam Bankman-Fried

Prof. John Donohue, Stanford Law School, National Bureau of Economic Research (NBER)

May 13, 2026
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6815418

https://drive.google.com/file/d/1Hp5F-N4CMyEPDqjT722T6CVUWQUPlk8i/view

History will not be kind to the prosecutors, bankruptcy administrators, and federal judge who turned what might have been a routine corporate restructuring into a 25-year prison sentence and the destruction of billions of dollars of wealth— and in doing so, harmed more people and distorted more truth than any supposed crime they claimed to be punishing.

Let us begin with the most inconvenient fact in the entire FTX saga: the customers got paid back, in full, with interest. The bankruptcy estate of FTX – despite some gargantuan errors – ultimately recovered enough value to make whole every customer who had funds frozen on the exchange at the time of its collapse.^[i] Without those bankruptcy administration errors the returns to the customers would have been even greater, and the return to outside investors massive. In what universe is that the outcome of a catastrophic fraud, for which we send a man to prison for 25 years?

The uncomfortable answer for a law professor to acknowledge is that the American legal system catastrophically failed from the initiation of the bankruptcy through the criminal trial of FTX CEO Sam Bankman-Fried. Looked at in its totality, the entire legal process was not about protecting assets and deterring misconduct by prosecuting illegal conduct. It was about blame-shifting, optics, politics, legal error, and the personal ambition of prosecutors and regulators.

The Misguided Bankruptcy Process

Consider what we now know about the investments Bankman-Fried made during FTX’s peak years. His early stake in Anthropic — acquired for $500 million — would today be worth as much as $80 billion, representing a 160-fold return, as Anthropic’s valuation has soared toward $1 trillion. His $200,000 check to Cursor, an AI coding startup, is now worth $3 billion, a staggering 15,000-fold return, after SpaceX announced a deal to potentially acquire the company at a $60 billion valuation. His indirect exposure to SpaceX through the venture firm K5 Global could be worth $15 billion on its own, as SpaceX eyes the largest IPO in history. His Robinhood stake adds another $5 billion at current market prices. The Solana tokens he accumulated early — another $5 billion.^[ii]

Had FTX never filed for bankruptcy, those positions alone would today be worth over $100 billion. The company itself — which launched in 2019, quickly became one of the world’s largest crypto exchanges, and was growing at a ferocious pace — might well rank among the most valuable financial institutions in America, with many-fold returns to outside investors. Customers who were desperate to get access to their funds in November 2022 likely would have gotten it within a matter of weeks. Sam Bankman-Fried, rather than sitting in a federal prison in Lompoc, California, would likely be one of the richest individuals on the planet.

Instead, Sullivan & Cromwell — the bankruptcy law firm that had, somewhat remarkably, also represented FTX before its collapse — and the bankruptcy trustee were handed the keys to the kingdom and promptly began liquidating one of the most valuable venture portfolios in Silicon Valley history. The Anthropic stake-- which John Ray, the bankruptcy trustee, famously derided as “Vaporware”--was sold for $1.3 billion. The Cursor stake went for its original 2022 pre-seed price. The Solana tokens were offloaded at steep discounts because of vesting schedules. What the self-lauding bankruptcy officials were unloading for pennies on the dollar is now worth tens of billions.^[iii] And rather than seeking to reboot the exchange, as they claimed they were seeking to do, they deliberately sabotaged every credible offer to buy it.^[iv]

Bankruptcy as Weapon, Not Shield

The purpose of bankruptcy law is to protect companies and their stakeholders from the kind of panicked, disorderly collapse that destroys value for everyone. It is supposed to be a stabilizing mechanism — a way to restructure obligations, calm markets, and preserve going-concern value while obligations are sorted out. What happened at FTX was something closer to the opposite. The bankruptcy process itself became the single greatest destroyer of value in the entire episode, as Sullivan & Cromwell and their hand-picked trustee seemed to be more interested in destroying Bankman-Fried than in protecting the assets of the FTX estate.

The liquidity crisis that triggered FTX’s collapse in November 2022 was precipitated not by insolvency in any traditional sense, but by a bank run deliberately engineered by a competitor. Binance’s CEO publicly announced he was liquidating his FTT token holdings — a move transparently designed to destabilize FTX by triggering mass withdrawals. It worked. But a liquidity crisis is not the same as an insolvency crisis, and bankruptcy administrators treated them as one and the same. Had the firm been given time — the kind of time that every major financial institution in trouble has historically been afforded — the underlying asset values would have made the picture far clearer.

The assets were there. They were worth a fortune. They just weren’t liquid on a 72-hour timeline during a market panic. The bankruptcy filing transformed a temporary liquidity crunch into a permanent catastrophe — and the fire sale that followed destroyed the very value that could have made customers whole and investors very rich without any legal proceedings whatsoever. Instead, the only people who got rich were S&C, Ray, and other law firms and accounting firms who, it is now projected, will pay themselves close to $2 billion by the time they are done,^[v] and the buyers to whom the Debtors sold large chunks of FTX’s spectacularly valuable investment portfolio at firesale prices.

The Contract the Prosecution Tried to Hide

Here is where the case against Bankman-Fried collapses most completely — not as a matter of opinion, but as a matter of contract law. And it is here that the conduct of Judge Lewis Kaplan deserves the harshest scrutiny.

FTX was a margin exchange. This is a crucial distinction that prosecutors spent the trial deliberately obscuring. A margin exchange is categorically different from a traditional brokerage like Vanguard or Fidelity, where customer assets sit segregated and untouched. The entire commercial purpose of a margin exchange is to allow customers to finance a portion of their purchases with assets borrowed from other customers. That is what margin trading means. FTX’s terms of service explicitly authorized such loans for customers who opted into its margin trading program — and a substantial majority of the funds deposited on FTX came from customers who had done exactly that.^[vi]

Those margin account customers agreed to Section 16.4 of FTX’s terms of service. That provision stated, in unambiguous terms, that under certain market conditions it may become impossible to liquidate a position, that a customer may lose all of their assets or incur a negative balance, and — critically — that even without personal losses, a customer’s account balance “may be subject to clawback due to losses suffered by other Users.” As Yale Law Professor Ian Ayres and I pointed out in a detailed legal analysis,^[vii] that final clawback provision only makes legal sense if the assets of margin users could be loaned to other account holders, including Alameda. You cannot be made subject to losses suffered by others unless those others were, with your contractual knowledge and consent, using pooled funds.

FTX’s terms of service were expressly governed by English law. The defense retained Lawrence Akka, an expert in UK law, who was prepared to testify that under the governing legal framework, the loans from FTX to Alameda — and the uses Alameda made of those funds — were permissible. His testimony was specific and substantive: FTX was obliged to honor customer withdrawals but was not legally constrained to use customer funds for any particular purpose in the interim.^[viii] Akka was prepared to testify that this interpretation is the mainstream understanding of how debt instruments function under English commercial law. (It is also how they function under American law.) When a customer deposits money at a bank, the bank does not hold those specific dollars in a vault — it lends them, invests them, and uses them, while remaining obligated to return equivalent value on demand. FTX’s margin program operated on a structurally similar logic, with contractual disclosures to match.

Judge Kaplan refused to allow Akka to testify. His stated justification was that he, the judge, was competent to instruct the jury on foreign law himself.^[ix] Yet when the charge conference arrived, Kaplan announced he would instruct the jury under US law instead, because, he said, the defense had failed to introduce evidence concerning UK law-- a breathtaking claim given that he was the one who barred the defense’s expert witness from providing that evidence.

But he then gave the jury no substantive instructions under any law on what most legal experts would regard as the central legal question in the entire case — whether the terms of service authorized the loans from FTX to Alameda.Instead, Kaplan told the jury that this was “a criminal wire fraud case — it is not a civil case for breach of contract,” and dismissed the terms of service as an “idle communication.”^[x] The implication — that contract terms are legally irrelevant to whether a crime was committed — is not just wrong, it is backwards. Contracts are precisely the mechanism by which society distinguishes lawful transactions from criminal ones. As Ayres noted, when I drive an Avis rental car off the lot, I am not stealing it, because my contract authorizes me to do so. When a margin exchange lends customer deposits to another entity, as its terms of service explicitly permit, it is not stealing them either. The judge’s refusal to instruct the jury invited them to determine whether billions of dollars had been stolen without ever addressing the one question that mattered most: what did the customers actually agree to?

Akka’s excluded testimony does not rule out the possibility that FTX breached a civil duty by allowing excessive lending to Alameda — but it does directly refute the idea that the borrowing constituted theft under criminal law. Civil liability and criminal culpability are not the same thing. In a system that purports to require proof beyond reasonable doubt, that distinction is everything.

I would invite anyone interested in this case to review Barbara Fried’s detailed Substack post^[xi] on this issue. Fried is a distinguished Stanford law professor and, yes, Bankman-Fried’s mother, but her legal analysis stands entirely on its own merits. She asks, pointedly, once Judge Kaplan invited the jury “to conclude that the terms of the contract were irrelevant,” what were the jurors supposed to use instead to evaluate the propriety of the loans instead? General principles of law? Customs of the trade? Their own instincts about what the parties ought to have agreed to? The answer, of course, is that they used what the prosecution fed them across dozens of references throughout the trial: the simple, emotionally resonant, and false claim that Sam Bankman-Fried stole from his customers.

Perhaps the most telling detail in this entire procedural saga: the prosecution filed a pretrial motion seeking to bar admission of Section 16.4 of the Terms of Service altogether.^[xii] That pretrial motion is an implicit concession that the terms-of-service defense threatened their prosecution — and yet the jury never heard a proper legal instruction on it. When the government works that hard to keep a contract out of a fraud trial, it is worth asking why.

Criminal Intent: A Standard That Was Never Met

The criminal case against Bankman-Fried rested on proving that he knowingly, intentionally defrauded customers. But the actual evidence presented at trial painted a far murkier picture: a founder operating in an industry with almost no regulatory framework, making judgment calls about risk management and intercompany lending that were, at a minimum, legally ambiguous.

Even setting aside the terms-of-service argument, the intent question remains deeply problematic for the prosecution’s theory. Bankman-Fried continued operating publicly, giving interviews, engaging with regulators, and actively advocating for cryptocurrency oversight right up until FTX’s collapse. He did not flee. He did not move money to offshore accounts. He did not cover his tracks in the way that people who know they are committing crimes tend to do. These are not the behaviors of a man who believed he was stealing $8 billion. They are the behaviors of a man who believed that his business arrangements were legitimate, knew they had been endorsed by highly esteemed legal counsel, and believed (correctly) that the value of the investment portfolio held by Alameda and himself personally would more than cover his obligations.

If Alameda’s borrowing arrangements, however imprudent in hindsight, were contractually authorized and the collapse of FTX was a market event rather than a fraud, then the entire thrust of the prosecution and media campaign against Bankman-Fried is misguided.^[xiii] It is time for the broader legal community to engage seriously with the colossal failure of the legal system in this case from the moment of financial crisis, through the most expensive bankruptcy process in history, riddled with incompetence, financial and legal conflicts of interest, and worse; to the wilful exclusion of exculpatory evidence by the prosecution and the trial court; and finally to the barbaric 25-year sentence imposed on a first-time nonviolent offender in a case in which all the victims have been repaid. And then there is the most tragic failure of all: the very high likelihood that Sam Bankman-Fried is actually innocent, and that our legal system has destroyed one of the most gifted and--from all evidence--honorable and selfless people of his generation. That error, at least, it is not too late to correct, at least partially, by reversing his conviction and granting him a new trial or dismissing the charges outright, and giving him back his future. I would predict-- and so would every prediction market in the world-- that it will be a spectacular future, and the world will be the beneficiary of it.

^[i]Ian Ayres and John Donohue, “FTX Was Never Really Bankrupt,” Project Syndicate, Jan. 26, 2024, https://www.project-syndicate.org/commentary/ftx-never-really-bankrupt-can-make-creditors-and-customers-whole-by-ian-ayres-and-john-donohue-2024-01.

^[ii]Nina Bambysheva, “Sam Bankman-Fried’s Venture Bets Would Have Made Him $100 Billion Richer Had He Stayed Out of Prison,” Forbes, May 5, 2026, https://www.forbes.com/sites/ninabambysheva/.

^[iii]Ibid. See also Ayres and Donohue, “FTX Was Never Really Bankrupt,” supra note 1 (noting that “lawyers and financial advisers billed in excess of $400 million by the end of 2023”).

^[iv] https://www.cryptopolitan.com/bankruptcy-lawyers-tank-ftx-reboot/

^[v] Kyle Schmidt, Summary of Q4 2025 report from the Debtors.

^[vi]Ian Ayres, “A Miscarriage of Justice?,” Balkinization, May 2026, https://balkin.blogspot.com/2026/05/a-miscarriage-of-justice.html.

^[vii]John J. Donohue and Ian Ayres, “A Tale of Two Financial Collapses,” Stanford Public Law Working Paper, Oct. 11, 2025, https://ssrn.com/abstract=5676142. See also Ayres, “A Miscarriage of Justice?,” supra note 4.

^[viii]Ayres, “A Miscarriage of Justice?” supra note 4, quoting the proposed testimony of Lawrence Akka: “FTX was obliged to honour customer withdrawals (i.e. to repay the debt of fiat currency that it owed), but was not constrained to use fiat currency for any particular purpose in the interim.”

^[ix]Nikhilesh De, “SBF Trial: What Did FTX’s Terms of Service Say About Customer Funds?,” CoinDesk, Oct. 16, 2023, https://www.coindesk.com/policy/2023/10/16/sbf-trial-what-did-ftxs-terms-of-service-say-about-customer-funds.

^[x]Barbara Fried, “Plain Error,” Substack, https://barbarafried1110.substack.com/p/plain-error, quoting trial transcript at pp. 2853–54 and 3155.

^[xi]Barbara Fried, “Plain Error,” supra note 10.

^[xii]Ayres, “A Miscarriage of Justice?” supra note 4 (“the fact that the prosecution sought to bar admission of Section 16.4 of the Terms of Service in a pretrial motion might be taken to indicate that they, too, believed that interpretation was at least plausible”).

^[xiii]Ayres and Donohue, “FTX Was Never Really Bankrupt,” supra note 1; Donohue and Ayres, “A Tale of Two Financial Collapses,” supra note 5.

.

Thursday, May 07, 2026

A Miscarriage of Justice?

Ian Ayres

Barbara Fried’s recent post on Substack, to my mind, lays out a devastating critique of the prosecution’s misappropriation theory of criminal liability in the trial of her son, Sam Bankman-Fried. If you think the evidence is open and shut that SBF stole client money, you should think again. Margin accounts like those offered by FTX are very different from traditional (spot) brokerage accounts at, say, Vanguard or Fidelity. As John Donohue and I emphasized in a comment we posted to SSRN:

“The whole purpose of a margin exchange is to permit customers to finance a portion of their purchases on the exchange with assets borrowed from other customers. FTX’s terms of service authorized such loans with regard to its margin account customers who opted for FTX margin accounts. A substantial majority of the funds deposited on FTX came from customers who opted into the margin trading program. To do so, they had to agree to Section 16.4 of the terms of service, which governed margin traders. The provision clearly stated that:

‘Under certain market conditions, it may become difficult or impossible to liquidate a position [and] there is no assurance or guarantee that any such program activities will be sufficient or effective in liquidating your position. As a result, you may lose all of your Assets or incur a negative balance in your Account. In addition, even if you have not suffered any liquidations or losses, your Account balance may be subject to clawback due to losses suffered by other Users.’”

Donohue and I emphasized this provision because FTX didn’t misappropriate client funds if the margin account holders gave FTX permission to loan their funds to other clients, including Alameda. The final clawback provision is especially relevant because it warns margin clients that they may be subject to risk of loss due to losses suffered by other users, which only makes sense if the assets of margin users could be loaned to other account holders.

So what is the best interpretation of Section 16.4? John and I pointed out:

“The terms of service were expressly governed by English law. But the judge refused to admit expert testimony about what was permissible under FTX’s terms of service. A defendant’s expert, Lawrence Akka, was prepared to testify that under UK law, the loans to Alameda—and the uses that Alameda made of the funds—were permissible. To quote Akka: “FTX was obliged to honour customer withdrawals (i.e. to repay the debt of fiat currency that it owed), but was not constrained to use fiat currency for any particular purpose in the interim.” This doesn’t rule out the possibility that FTX breached its civil duty to its margin customers by allowing for excessive lending to Alameda—albeit now satisfied by the full payments in bankruptcy—but it does refute the idea that any borrowing of customer funds was blatant theft under criminal law.”

As Fried points out, the fact that the prosecution sought to bar admission of Section 16.4 of the Terms of Service in a pretrial motion might be taken to indicate that they, too, believed that interpretation was at least plausible.

Kaplan justified his ruling blocking Lawrence Akka from testifying about the meaning of the Terms of Service under UK law by stating that he (Kaplan) was competent to instruct the jury on foreign law himself. Fried’s Substack post details what happened next:

“At the charge conference Kaplan announced he was going to instruct the jury [on the meaning of the Terms of Service] under US law instead. . . . His stated reason was that the defense had failed to introduce any evidence concerning UK law [!]

But then he gave the jury no instructions [under US or any other law] on the most important legal issue in determining whether the funds in question were misappropriated (stolen): whether the Terms of Service authorized the loans from FTX to Alameda. . . .”

Instead, as Fried states, he “invit[ed the jury] to conclude that the terms of the contract were irrelevant because this ‘is a criminal wire fraud case. It is not a civil case for breach of contract.’” (Transcript, p. 3155) The fact that the crime was charged under a federal wire fraud statute has no relevance to whether an underlying crime was committed. It merely states the method of communication used in its alleged commission. The contract at issue here, on the other hand, has everything to do with whether a crime was committed. Contracts can authorize one party to use another party’s assets and thereby change what would otherwise be criminal conversion into a commonplace, perfectly lawful transaction. When I drive Avis’s car off the rental lot, I am not stealing it, because my contract with Avis authorizes me to do so. The jury’s instruction should have allowed the jury to conclude that the terms of service authorized FTX to lend the funds of margin account holders to Alameda. Indeed, the judge might have reached such a determination as a matter of law.

In seeking to justify his decision not to instruct the jury on the legal import of the express provisions of the terms of service, the judge dismissed them as an “idle communication.” (Transcript, 2853-54) Fried appropriately concludes:

“In a single sentence, Kaplan negated the legal relevance of contract terms, inviting the jury to supply the terms of a private contract from—what? general principles of law? customs of the trade? their own beliefs about what these parties ought to have agreed to?”

There are still important questions about whether SBF might be criminally liable for representations that FTX and he made at various points in time. (In an earlier post, Fried questioned whether the alleged misrepresentations could plausibly support a criminal conviction, let alone a 25-year prison term.) But in my view, she lays out a devastatingly persuasive case that the prosecution should not have been allowed to argue to the jury, dozens of times during the trial, that the defendant stole billions of dollars of client funds – at least without much more careful attention to whether the terms of service allowed those funds to be lent.

Before ending, I should mention there are ad hominem reasons why you might discount the foregoing. As I have disclosed before, I am a friend and coauthor of both Barbara Fried and Joe Bankman, the parents of Sam Bankman-Fried.

Posted 8:14 AM by Ian Ayres [link]