Judge Signals Jail Time if Bankman-Fried’s Internet Access Is Not Curbed

Since his arrest two months ago, Samuel Bankman-Fried, the disgraced cryptocurrency executive, has been physically confined to the Palo Alto home of his parents, under the force of a $250 million bail package.

But he has roamed largely unfettered in the wilderness of the internet: conducting interviews, posting narratives, making calls on encrypted apps and using a virtual private network, a web tool that allows users to conceal data and visit websites without detection.

Those unrestrained days may soon be over.

On Thursday, a federal judge overseeing Mr. Bankman-Fried’s multibillion-dollar fraud case signaled a willingness to jail him for his persistent testing of his confinement’s boundaries, going beyond what prosecutors had asked.

“Why am I being asked to turn him loose in this garden of electronic devices?” the judge, Lewis A. Kaplan, asked prosecutors, describing the well-wired home of Mr. Bankman-Fried’s parents, both professors at Stanford Law School.

No new conditions were set during Thursday’s hearing, the latest of several hearings, held in federal court in Manhattan, to consider more restrictive bail terms. Judge Kaplan asked both sides to prepare concrete proposals that would limit and monitor Mr. Bankman-Fried’s access to the internet without inhibiting his ability to participate in his defense.

Federal prosecutors in Manhattan have charged Mr. Bankman-Fried with orchestrating widespread fraud at FTX, the cryptocurrency exchange he founded, accusing him of misappropriating billions of dollars of customers’ money. Prosecutors said he used the funds to finance lavish real estate purchases, political contributions and investments in other companies.

After he was charged in December, Mr. Bankman-Fried was released on bail with the requirement that he wear an ankle monitor and stay confined to his parents’ house.

What to Know About the Collapse of FTX

What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.

Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.

How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.

What led to FTX's collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.

Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.

But nearly from the outset of his house arrest, Mr. Bankman-Fried has published blog posts on Substack and entertained visitors, including several journalists, at his parents’ home. Late last month, federal prosecutors accused him of using the encrypted messaging app Signal to communicate with a possible witness.

Prosecutors asked Judge Kaplan to bar Mr. Bankman-Fried from using encrypted apps and to limit his ability to communicate with current and former FTX employees. Thursday’s hearing was the second time in a little over a week that Mr. Bankman-Fried had to fly to New York from California at his own expense to a hearing about his bail terms.

On Feb. 1, Judge Kaplan ordered him to stop using encrypted apps while he weighed the issues. Eventually, though, prosecutors reached a deal with Mr. Bankman-Fried’s lawyers that would have prohibited him from using some apps, while explicitly permitting others.

But at a hearing last week, Judge Kaplan said he wasn’t convinced that those arrangements would fully prevent Mr. Bankman-Fried from secretly communicating with the outside world.

Then, on Monday, prosecutors said in a court filing that Mr. Bankman-Fried had twice used a virtual private network, or VPN, to gain access to the internet. His lawyer said he had used the VPN to watch National Football League playoff games, including the Super Bowl, through an international streaming subscription that he bought when he lived in the Bahamas.

At Thursday’s hearing, Judge Kaplan seemed skeptical about this explanation, noting that Mr. Bankman-Fried was living in “California, which is in the United States,” and could watch the Super Bowl on television.

But Judge Kaplan reserved his most pointed questions of the afternoon for the government. He interrupted a prosecutor, Nicolas Roos, as he laid out ideas that would broadly limit and monitor Mr. Bankman-Fried’s access to the internet and communications technology.

“There is a solution,” the judge said. “But it’s not one anyone has proposed yet.”

Mr. Roos gave a hesitating response before Judge Kaplan continued, saying that according to the government’s own account, Mr. Bankman-Fried had done things that suggested he “either committed or attempted to commit a federal felony while on release.”

The Aftermath of FTX’s Downfall

The spectacular collapse of the crypto exchange in November has left the industry stunned.

Judge Kaplan said that even if he granted the government’s suggestion to monitor Mr. Bankman-Fried’s cellphone and computer, that would not prevent him from using other computers and phones that were not monitored in his parents’ home.

Judge Kaplan noted that the hearing was not called to consider bail revocation, “but it could get there, conceivably.”

A lawyer for Mr. Bankman-Fried, Mark S. Cohen, called the government’s proposal “draconian,” noting that it would prevent his client from doing research or viewing evidence. He also denied that Mr. Bankman-Fried had committed any wrongdoing or attempted to tamper with witnesses.

He also said his client would argue that using a VPN did not violate the terms of his release, because it was not an encrypted messaging service.

Mr. Bankman-Fried’s initial bail package required him to post a $250 million bond. But he didn’t actually have to pay any money: The bond was secured by his parents’ $4 million home as well as a much smaller amount of collateral posted by two colleagues of his parents — Larry Kramer, a former dean of Stanford’s law school, and Andreas Paepcke, a Stanford research scientist.

The identities of Mr. Kramer and Mr. Paepcke had been kept under wraps until Wednesday, when Judge Kaplan unsealed their names at the request of a dozen news organizations, including The New York Times.

In theory, Mr. Kramer, Mr. Paepcke and Mr. Bankman-Fried’s parents would be liable for the funds they pledged if Mr. Bankman-Fried were to flee.

At the close of Thursday’s hearing, Judge Kaplan asked both sides to pull together ideas for more restrictive conditions. He also suggested that he might bring on a technology consultant as a kind of legal clerk, at the defense’s expense.

Mr. Cohen said the defense lawyers were supportive of more restrictions.

“We understand from your comments today that there is no margin for error,” he said. Any more violations, he said, and “we will be in a very different proceeding.”

Matthew Goldstein contributed reporting.

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