Molly White's Citation Needed - The FTX trial, day eleven: Off the record

Episode Date: November 30, 2023

Sam Bankman-Fried's direct messages to a journalist about "unethical shit" were admitted as evidence, much to the dismay of his legal team. Originally published on October 19, 2023.

I'm Molly White, and you're listening to the audio feed of the citation-needed newsletter. You can see the text version of the newsletter online at newsletter.mollywhite.net. The FTX trial day 11. Off the record. Sam Bankman-Fried's direct messages to a journalist about unethical shit were admitted as evidence, much to the dismay of his legal team. This issue was originally published on October 19, 2020. When you're on trial for defrauding the customers of your cryptocurrency exchange, you probably don't want the jury to see evidence of you only days after its collapse,

agreeing that, quote, the ethics stuff you are so known for was, quote, mostly affront, or admitting that statements that you had made about customer assets were highly misleading, even if technically correct, or saying things like fuck regulators. That's why Sam Bankman-Fried's attorneys fought like hell on Wednesday to exclude from evidence the Twitter direct messages he'd sent to Vox journalist Kelsey Piper. In one conversation, Sam Bankman-Freed says, man, all the dumb shit I said, it's not true, not really. Everyone goes around pretending that perception reflects reality. It doesn't. Some of these decades' greatest heroes will never be known, and some of its most beloved, people are basically shams.

In a later message, Kelsey Piper asked him, So the ethics stuff, mostly a front. People will like you if you win and hate you if you lose, and that's how it all really works. Bankman Freed responded, yeah. I mean, that's not all of it, but it's a lot. The worst quadrant is sketchy and lose. The best is win and question mark.

Clean and lose is bad, but not terrible. In another screenshot, Kelsey Piper said, You said a lot of stuff about how you wanted to make regulations, just good ones. Was that pretty much just PR, too? Bankman Freed responded, There's no one really out there making sure good things happen and bad things don't. Usually there's only one toggle. Do more or do less. Yeah, just PR.

Fuck regulators. They make everything worse. They don't protect customers at all. And finally, in another screenshot, Piper said, you tweeted out some stuff like, we never invest your deposits. That was BS, right? Bankman Freed responded, it was factually accurate. Piper said, huh, but like their deposits were totally not there? Or do you just mean technically it was Alameda?

He responded, FTX, correct. Let's back up a little bit. On November 11, 2022, Bankman Freed stepped down as the leader of FTCS and related companies, turning them over to the control of a team who would lead them through bankruptcy. That was perhaps the last rational decision he would make for a while. Over the following month, he embarked on a vigorous media blitz, talking to just about anyone he could convince to listen, and there were a lot of takers.

Of course, he appeared for high-profile interviews, such as with Andrew Ross Sorkin at the New York Times Steelbook Summit or with George Stephanopoulos on Good Morning America. But he would talk to anyone. I'll even talk to me. Are you worried you might be detained if you stepped foot into the U.S.? I don't believe I would be, but I haven't done a deep dive into that at some point. That's something I have to think harder about.

He was arrested hours later. One of the most explosive conversations was one he later said he didn't expect would be made public. Kelsey Piper, a Vox journalist who'd interviewed Bankman Fried before, decided to take a shot at asking him a few questions. To her surprise, he replied. The following day, she published an article titled Sam Bankman Fried tries to explain himself, which largely consisted of screenshots from their chat the previous night. Shortly after she published the article, she received some more DMs. Bankman Freed messaged her,

Ah, fuck, sorry. Didn't mean those to all be on record. Uh, any chance you could take it down? That's not how off the record works, and she did not take down the article. By then it was too late anyway. The article had quickly blown up, and people who were wondering if maybe FTCS's collapse had an innocent, if tragic, explanation, now began to realize that Bankman Freed might have been lying to them all along.

Those chats are now evidence in his criminal case, but it didn't come without a struggle. At a lunchtime sidebar, Bankman Freed's defense team objected to them stridently, arguing that they were hearsay, were improperly prejudicial, and that the statements within them were made after the alleged criminal activity had occurred. Cohen said, we think that the probative value is substantially outweighed by the prejudicial effect, because these communications he is making with someone who he knew for a decade, who he considered a friend. And these are just off-the-cuff musings about past events

that we think were devoid of context that could be substantially misconstrued by the jury. It's worth noting that although Bankman Freed referred to Piper as a, quote, long-time friend, shortly after she published her article, Piper had a different view of the relationship. A spokesperson for Vox said that, besides their interview a few months earlier, they had only interacted directly a few times several years before that,

quote, through overlapping social and professional networks. Bankman Freed's defense team was particularly concerned about the part in which Bankman Freed spoke about, quote, unethical shit, which they thought was inflammatory and likely to have a prejudicial effect. In one screenshot, Piper asked, So you kind of don't believe in, like, quote, doing unethical shit, end quote, as anything other than a judgment we bestow upon the losers? Bankman Fried responded, a month ago, CZ was a walking example of, quote, don't do unethical

shit or your money is worthless. Now he's a hero. Is it because he's virtuous, or because he had the bigger balance sheet, and so he won? Piper responded, well, I can see why you didn't give that answer in interviews, to which Bankmanfried replied, he. CZ refers to Changpeng Xiao, the CEO of Binance, which was FtX's largest competitor. Bankman Fried's defense team also worried about a portion in which he wrote that Nishad Singh was feeling, quote, ashamed and guilty.

Mark Cohen said, it's not in the sense of legal guilt. it's in the sense, I guess, of some sort of personal feelings of guilt. And because you have the word guilt, guilty in this tweet, it's very prejudicial, and it is, again, not very probative of the defendant's state of mind. The judge helpfully pointed out that if anything was going to bias the jury with respect to Nishad Singh's guilt, it would probably be the fact that he's pleaded guilty to six felony charges. The defense tried to argue that the government might try to use the part where Bankman-Freed said, regulators to try to support an argument that, quote, his efforts at engaging with regulators

prior to all this was all a sham, which it wasn't. Messages such as these, said the judge, seem like they'd be pretty useful context there. The government rebutted the defense's claims, arguing that the fact that the statements were made after the alleged crimes was not material. Courts routinely admit post-arrest statements, which are after the fact, where a defendant is making admissions, argued assistant U.S. Attorney Danielle Sassoon. She went on to argue. The fact here that, as defense counsel said, he's talking to someone he trusted and what he thought was a private context is highly probative that what he's saying here is truthful. The government has offered evidence of the defendant's public representations. This shows the

falsity of many of those representations. The fact that it's prejudicial is because it's inculpatory, but that does not make it unfairly prejudicial. Ultimately, the judge overruled all of the defense's objections to the messages, which were put into evidence and shown to the jury. Although testimony from an accounting professor threatened to be dry or difficult to follow, Notre Dame Professor Peter Easton accompanied his explanations with easy-to-follow charts that illustrated the flow of money between FTX and Alameda Research bank accounts, individual people, and expenditures, including venture investments, donations, real estate purchases,

and various other things. In some cases, the evidence was clear. Payments, like a $292 million transfer to invest in modulo capital, had been made exclusively with customer funds. In other cases, payments were made with a mix of money, from trading accounts and from accounts that stored customer funds, but Easton identified dozens of cases in which substantial amounts of customer or investor money was directly used for purposes it shouldn't have been. In one payment, for example, at least $493 million of a $551 million investment in the Genesis Digital Assets crypto mining firm had to have been customer assets. The professor repeatedly outlined instances in which he traced funds and attributed their

sources to establish the misuse of FTCS customer funds and funds from investors, to make investments in Skybridge Capital, Dave Inc. and Anthropic, to complete a partnership with K5 Global, to buy out Binance's stake in FTX, to purchase a stake in Robin Hood, to fund political donations by Ryan Salem, Nishad Singh, and Alameda Research, to purchase real estate, and to repay Alameda's loans. In one example, Easton detailed how the $16.4 million purchase of a Bahamian property for Sam Bankman Fried's parents came directly from investor funds. Awkward. The defense's rebuttal to this line of testimony, as well as to later testimony from FBI forensic accountant Paige Owens, seemed to be that dollars are fungible, and so it was impossible, truly,

to know where a given dollar pulled among other dollars in a bank account really went in the end. This line of argument makes sense in some circumstances. For example, say my mom gave me $5 to spend on lunch at school when I was a kid, and I put it in my pocket with another $5 I'd earned by doing an odd job for a neighbor. If I later came home from school, having spent $5 on lunch and $1 on a candy bar, it would be weird for my mom to get mad at me for having spent the money she gave me for lunch on candy. The problem is that this argument only works if I already had enough money in my pocket to spend on the other thing. If my pockets were empty and she gave me $5, and I came home hungry and high on sugar

because I'd bought up $1 candy bar, but no lunch because I only had $4 left, her anger would be much more justified. In Alameda's case, it was arguably even worse. Not only were they taking customer and investor money to spend on things other than what they'd promised, without having sufficient other money in the bank, in many cases they were doing that spending while they also owed money to people. They had negative money in the bank, and they were still blowing money that they shouldn't have even been touching on political donations, real estate, or long-term venture investments.

However, during both Easton's testimony and the later testimony of Paige Owens, the defense found some opportunities to introduce some doubt. In Easton's testimony, they seemed to identify an error in one of his exhibits, where he'd improperly included some customer deposits kept at FTX in a graph that was only supposed to show Alameda's liabilities. They also suggested that his analysis might have been incomplete, as it didn't incorporate assets Alameda held on other exchanges, had tied up as collateral for loans or had put into venture investments.

In Owen's case, they questioned her use of last-in, first-out accounting, suggesting that a first-in-first-out approach could produce different results. They also revisited one of her exhibits, showing that she might have missed a deposit that ostensibly could have funded one of the political donations by Ryan Salem instead of customer funds. Other witnesses today gave relatively little in the way of testimony, but were used to attest that various documents and recordings were authentic. More on that in a minute. Among them was Elieora Katz, FtXUS's in-house lobbyist, who was used to introduce to the record written testimony by Bankman Freed in front of both branches of Congress, video clips of his oral testimony to Congress, blog posts about his regulatory recommendation, and various tweets pertaining to crypto regulation,

although throughout she repeatedly emphasized that she did not work at FTX while most of the evidence she testified to was being created. One clip seemed to show Bankman Freed rather blatantly lying under oath to Congress in December 2021 that there was complete transparency and a robust, consistent risk framework applied on FTX.

We've been operating for a number of of years with billions of dollars of open interest we've never had customer losses clawbacks or anything like that even going through periods of large movements in both directions we store collateral from our users in a way which is not always done in the traditional financial ecosystem to backstop positions and the last thing that I'll say is if you look at what precipitated some of the 2008 financial crisis you saw a number of bilateral bespoke non-reported transactions happening between financial counterparties, which then got repackaged and re-leveraged again and again and again, such that no one knew how much risk was in that system until it all fell

apart. If you compare that to what happens on FTCS or other major cryptocurrency venues today, there is complete transparency about the full open interest, there is complete transparency out the positions that are held. There is a robust, consistent risk framework applied. The prosecution also introduced metadata, associated. with the various Google Docs and Google Sheets that have been used as evidence throughout the case, which they will presumably use to establish that specific individuals created, edited, or viewed the documents. Behind the scenes. We got a real taste of Judge Kaplan's frustration on Wednesday,

when the judge instructed both the prosecution and the defense to stay behind during the afternoon break. Several witnesses had been brought to testify to the authenticity of defense, documents because the two sides couldn't agree to stipulate to them. Quote, where did he fly in from? asked the judge about a Google Records custodian brought to testify about metadata, but who was not well-versed in interpreting it. Texas, replied the prosecution. This is a joke, said the judge.

We had a witness this morning who knew absolutely nothing and spent the time saying, I had nothing to do with any of that, read documents that are public records. and this afternoon we fly somebody in from Texas to put in documents about what he knows nothing or next to nothing that are obviously stipulatable. We have 18 people devoting time here to this case, and it's really a crime, that part of it. He concluded, lawyers are supposed to do a little better than this. I am talking to both sides. Going forward. Tomorrow is the last day in court this week, and it should be a short one. Former FTX attorney, Ken Sun, will testify, as will third point managing director Bob Borrejardy.

After tomorrow, the next day of trial isn't scheduled until the following Thursday, the 26th. I will probably still publish during that break, but with no trial, there won't be daily coverage like I've been doing. We could see the beginning of the defense's case as soon as the 26th, assuming they put one on, which they likely will. Thanks for listening to this issue of the citation needed newsletter. To learn how to support my work, visit mollywhite.net slash support. If you would like to read the text versions of these episodes, sign up to receive the newsletter in your email, or support my work on a recurring basis, go to newsletter.mollywhite.net.