The Breakdown - How SBF's Testimony Tried to Contradict Caroline, Nishad and Gary

Episode Date: October 31, 2023

A look at SBF's testimony with his lawyers and how he set to counter the story presented by his former FTX colleagues Nishad Singh, Caroline Ellison, and Gary Wang. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, October 30th, and today we are catching up on Sam Bangmanfried's second day of testimony. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the breakdown Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, we are back with another SBF trial show and listen, for the next few days, we are likely to be knee-deep in this stuff. Sam's testimony on Friday had a lot more details and we got a much bitter picture of how he is trying to contradict the witnesses that came before him,

which is where we're going to spend a ton of emphasis today. And even as I am recording, he is being cross-examined right now, and by all accounts, it is not going well. So what you can expect is probably for the next couple days, or at least today and tomorrow, there is going to be more SBF than probably any of us would really truly like. But then, God willing, we won't really have to talk about this as much anymore, at least until his second trial next spring. But that is the plan, that is the skinny. That is the important thing, and so that's what we will cover. Now, one additional note. Later in the week, I am heading off for a 10th anniversary trip that is happening Thursday through Monday. And so basically for the first time ever,

the breakdown will be going on a short hiatus. I will, however, be back on Tuesday the 7th. So let's get into the SPF trial. As I mentioned, on Friday, Sam Bagmanfried once again took the witness stand to deliver his version of events, and this time it was in front of the jury. You'll remember that the previous day had seen Sam present a range of controversial testimony, which sought to pin the blame on advice from lawyers. The evidence was given without the jury present to ensure it was admissible. It covered advice to use auto-deleting telegram messages as well as the preparation of assorted types of legal documents. For example, Sam's testimony on Thursday included mentioning that lawyers had prepared the documents related to the gigantic loans handed out to FDX executives.

The facts didn't support a formal advice of counsel defense, so the defense had attempted to present a more limited argument which only dealt with Sam's criminal intent. The judge opened Friday's hearing by cutting down this line of evidence, ruling that almost all of Sam's Thursday testimony was inadmissible. The judge said, There is a danger that the defendant using advice by lawyers in the past can suggest legality. The problem is it can be a misleading impression. It is one thing for a defendant to come in and say, I had a plan and told the lawyer everything, and the lawyer told me it was legal, so I had no criminal intent.

That's not what happened here. So when all was said and done, the judge allowed evidence regarding the auto-deleting messages to be introduced but would not allow any of the other topics covered on Thursday to be presented to the jury. With that dealt with, Sam's testimony got underway. Sam began by claiming that he did not defraud anyone and did not take customer funds. He then launched into a long explanation of how futures exchanges work, claiming that FTX primarily dealt with this kind of margin trading. Prosecution cut him off halfway through,

objecting that he was presenting a narrative rather than answering a specific question in a concise manner. This would be a common theme throughout Sam's testimony. He consistently gave lengthy verbose answers, risking losing clarity and impact with the jury. Both his lawyer and the judge instructed Sam to keep it brief throughout the testimony, a concept that he struggled mightily with. The defense asked Sam whether he made mistakes along the way. He answered, Yes, I made a number of small mistakes and a number of larger mistakes. By far the biggest mistake was we did not have a dedicated risk management team.

We didn't have a chief risk officer. Throughout his testimony, Sam would attempt to characterize his conduct as negligent rather than fraudulent and caused by a lax management style which led to, quote, significant oversights. Sam managed to express some remorse, stating that FTX turned out basically the opposite his words of the way he intended. He admitted a lot of people got hurt. customers, employees, and the company ended up in bankruptcy. Now, where the testimony started

beyond these vague generalities was Alameda Research. SPF noted that it was initially run out of a crowded Airbnb in Berkeley, but he claimed that the firm frequently had weeks with big wins, seeing returns of 50 to 100 percent on an annualized basis during those periods. Sam mentioned that shortly after Caroline Ellison joined the firm, there was a deep schism open between two factions within Alameda, leading to disgruntled early investors and employees leaving alongside most of the capital. He said that he apologized to Caroline for not telling her about the simmering problems earlier. Sam testified to the reason that Alameda Research had been given such a bland name, stating that, quote,

research was a generic word that filled out the company name and was better than the internal name, Wireless Mouse. Now, earlier in the trial, investors had given testimony that Sam had assured them that Alameda had no special privileges on FTX. In his testimony on Friday, Sam spoke to this topic, claiming that he thought that investors were only concerned about Alameda being able to view the order book and front-run trades. He offered them what he believed were.

truthful assurances that this was not the case. The defense then moved on to the substantive testimony which dealt with Alameda's lending. SBF said that Alameda was permitted to borrow from FtX in the same manner as any other customer with access to margin lending. When asked where the money borrowed by Alameda came from, Sam said, my understanding was that it was coming from basically margin traders. It was coming from collateral from other margin traders or from assets that were earning interest on the platform. Those were sent to FTX as security for borrowing other traders were doing and was being lent out to traders including Alameda that were borrowing. Sam added that Alameda had no restrictions on what they could do with borrowed funds. As long as risk was being managed and the

customer's assets were greater than their liabilities, he said that borrowed funds could be used with no restrictions. Now, this explanation was introduced earlier in the trial by FTCS general counsel, CANN's son. He testified that during the final days at FTX, Sam had instructed him to come up with some potential legal justifications for the multi-billion dollar hole in Alameda's balance sheet. Sun had said that borrowing collateral from other customers was technically allowed under the terms of service if they were margin customers, but that the massive size of the shortfall made this explanation completely implausible. Sam's testimony then moved on to the origin of the allow negative feature, which allowed Alameda to borrow well in excess of its pledge collateral. This allowed Alameda to

run a negative balance in its FTX account without being liquidated. Sam said that by 2020, the FTCS risk engine was struggling to keep up with the volume on the exchange. He testified that there was a situation where a relatively small account had been liquidated, but the risk engine was too slow in reading the database update. This would cause the position to be liquidated over and over and then reversed over and over. Sam said that these erroneous trades compounded from thousands of dollars to trillions of dollars and not too long. It was growing exponentially. Alameda was the liquidating agent for these trades, so these trillions of dollars in incorrect liquidations would cause Alameda's account to go negative. This risked liquidating Alameda and causing losses to be socialized across all users.

Sam said, if there were erroneous liquidations for Alameda that would have had disastrous consequences for users. In the aftermath of this event, Sam said that the trades were successfully unwound, but that, quote, it was still a really inconvenient event for everyone. involved. The exchange was basically unusable for an hour as we dealt with all of this, and it was scary. Sam testified that the problem was patched over by adding more servers dedicated to operating the risk engine, but that the platform couldn't risk Alameda being liquidated due to an error. He said that he instructed engineering executives Nasad Singh and Gary Wong to fix the problem, but gave no specific instructions on how it should be done. Sam claimed to have suggested an alert

or a delay or something of that form. Sam said, quote, I was told by them that they had implemented some feature of that sort, and added, at the time, I couldn't have told you the details or its name. name. I now believe I know what the feature was, Allow Negative. Sam told the jury that Gary and Nasad, quote, were both authorized to make decisions on behalf of the company without consulting me, although they would often consult with me about it. Sam claimed that he didn't have a good understanding that Allow Negative was functionally allowing Alameda to tap into customer assets. He said that, at the time, I wasn't entirely sure what was happening. What I believed was that either the funds were just being held in a bank account and not used or removed, or that they were

being sent to FTX in one way or another may be as stable coins. Sam said that only now, after listening to all testimonies, did he piece together that the feature had allowed Alameda to post orders with no collateral and hold a negative balance without being liquidated. Neshad's testimony had discussed allow negative in terms of it allowing Alameda to process liquidations without needing collateral. He said those trades were not viewed as risky as they executed immediately into the existing order book. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question,

what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVI, BVI, BVA, Krakken. Now, one big issue with that testimony, FTX did have massive outages in 2020 during market

volatility, so it's reasonable perhaps to think they could have been caused by a malfunctioning liquidation engine. Problem is that Sam's timeline contradicts both Gary and Nashad's testimony. During their time on the witness stand, a GitHub page was entered into evidence showing the original implementation of a loud negative. The page showed the feature was originally coded on July 21st, 2019. Gary had even testified to a series of instructions from Sam, which had increased the negative balance allowed for Alameda from hundreds of millions to one billion and eventually to $65 billion. A number that Gary said was chosen to be, quote, quote, so high it would never be hit. Sam's testimony then turned to Carolyn Ellison, who had taken over

as co-CEO of Alameda research after Sam stepped down in October 2021. We got a few brief references, by the way to Sam Tribuco, the other co-CEO of Alameda, who has been conspicuously absent from this trial and has somehow avoided criminal charges. Sam said that shortly after being named as co-CEO, Tribuco started, quote, drifting away towards what I understood to be effectively early retirement. Sam was complimentary of Carolyn's management ability and said she was, quote, a good trader and very good at doing research for trades, writing mathematical models. Sam acknowledged that he stayed involved with Alameda, stating that, quote, I was an owner, I was the largest owner of the company, I cared about how well it did.

And especially with Tribuco stepping back, it was an overwhelming job for any one person. And I felt that Caroline was doing quite well in many areas, but that there were some areas that it was important that she have help and support and was concerned about how things would go otherwise. Now, during her testimony, Carolyn had said that Sam's utilitarian belief system didn't have room for moral restrictions like not lying and not stealing. Sam didn't really address this, only vaguely mentioning that Caroline would often initiate philosophical conversations. He said, quote, generally she would stake out a position on some philosophical topic, usually a contrarian one, and we would debate it. Now we'll go through some more of the

contradictions between his testimony and Caroline's testimony. Caroline, for example, said that Sam's scruffy appearance was a carefully crafted image. Sam rejected that idea, saying that he wore t-shirts and shorts because they were comfortable and kept his hair long because, quote, I was kind of lazy and busy. He said that becoming the face of FTX had been an accident since he was, quote, somewhat introverted. At one point, the defense presented a photo of Sam at the Super Bowl posing with Katie Perry, Kate Hudson, and Michael Keeves of K5 Ventures. Caroline had previously testified that Sam was excited about the celebrity networking opportunities presented by Keeves and had eagerly pursued the opportunity. To hear Sam tell

the story, he had been randomly wandering the Super Bowl stadium and came across Keeves and his celebrity friends who invited him out for dinner. When it came to those massive loans, Sam testified that he believed he was able to borrow funds from Alameda legally. He said, I owned Alameda, I was the primary owner of it, and had a few billion dollars to my understanding of arbitrage-based profit over the past few years and far more than that in operating capital. So I saw no reason that I couldn't borrow funds from it. On political donations, Sam denied directing Nasad or FTX Digital Market CEO Ryan Salem to make political donations. However, he did acknowledge that the source of funds for the donations had been loans from Alameda.

Now, one of the telling stories from Nishad's testimony was when Nishad recalled instructions from Sam asking him to manipulate FtX accounts in 2021 to ensure that the firm reached $1 billion in revenue. Nishad had explained that he found an intercompany transaction related to token staking, which could make up the roughly $50 million in revenue to hit Sam's target. In Sam's version of events, there had been a slight difference in revenue calculations between himself and FTX had a product, Romnik Aurora. Sam said that Romnik had assigned Nishad the task of checking whether there were

any sources of revenue that were missing from his calculation, which would get it over $1 billion. Sam downplayed the $1 billion, saying he just wanted to hit it because it's just a round number. Now, of course, while Sam distanced himself from that decision, Nishad's testimony had been quite specific about Sam's instructions. Nishad claimed that when he presented the additional revenues to Sam, he had been directed to backdate them to make them appear to have been generated throughout the year. So we're seeing this pattern of contradictions from Caroline's testimony and from Nashads, but what about from Gary's? Well, one of the issues that came up during Gary's testimony was the FTX insurance fund, which Gary claimed was entirely made up. Gary's testimony

had broken down how FTX came up with the publicly stated $100 million figure. He explained the number was simply a multiple of daily trading volume and didn't represent any actual funds held in reserve. Gary added that the fund was primarily made up of FTT tokens, which was of course the exchange token for FTCS, which plummeted in value as the firm collapsed. By Sam's telling, the fund was only meant to represent, quote, that we were pledging to our customers that if there were any losses from a customer's account, before socializing any losses to other users before clawing back funds, FTX would spend at least $5.4 million U.S. dollars and 5.2 million FTT tokens in covering that amount. Now, one interesting new set of details that has made some media coverage subsequently

was Sam's testimony around his interactions with the crypto industry in the middle of 2022. At that time, Sam had been painted as the J.P. Morgan of the crypto industry, signing term sheets worth hundreds of millions of dollars to acquire bankrupt crypto lenders, blockfi, and Voyager. In Sam's testimony, he expanded that. He expanded that he had also been in discussions with Genesis and Celsius. Caroline had said that Genesis had called in loans from Alameda, which gave rise to the infamous testimony about the preparation of seven alternate balance sheets. Sam said that he spoke with the Genesis CEO during that period and that, quote, we touched on Alameda's borrowing from Genesis, though it was not the primary topic.

The primary topic was Genesis talking about potentially raising equity capital. refuting Caroline's version of the story about the seven balance sheets, which had been prepared to satisfy concerns at Genesis, Sam said, quote, I recall her saying that she was tentatively planning on sending something like this out, and that she had thought of a few different ways of constructing it. I don't remember any detail being discussed about that, and I remember looking over it and saying that it seemed reasonable to me. The balance sheets were presented from evidence, and Sam made it appear as if he had only ever viewed the final seventh balance sheet.

However, Caroline had previously testified that she had detailed conversations with Sam about the balance sheets and how best to hide the problems that it was. Alameda from Genesis, iterating on the document at Sam's direction. And that was really the beginning of Sam throwing Caroline completely under the bus. Turning to the crypto crash of May 22, Sam said that Alameda's net asset value had plummeted from $40 billion to $10 billion. He claimed that he frequently asked Carolyn to hedge Alameda's exposure and that he renewed that direction in May. He said that Alameda did not put on those hedges by June, even though he had suggested a $2 billion hedge. Sam told the

court that Caroline had discussed her concerns that Alameda had nearly gone bankrupt during that period. Sam canceled the flight to Washington to stay in the Bahamas and deal with the situation. He said that Nishad had told him there was a bug in the database which had caused Alameda's liabilities to be understated by $8 billion. Sam discussed the proposed shutdown of Alameda. Other witnesses had said it would be impossible due to the billions of dollars in outstanding liabilities owed to FTX. Sam acknowledged that he drafted a blog post about shutting down Alameda, a document which was reviewed by Gary and Nashad, but Sam downplayed their reactions, stating that, quote, they ultimately came back and said they didn't think it was a good idea.

When asked whether they elaborated on why it would be a bad idea, Sam said, quote, I at the time did not feel confident that I had gotten a clear reason why. I do believe that they said something about it being difficult to shut down Alameda. And here you see another really common thread from this testimony, which is Sam arguing that he really didn't pay much attention to what was going on, and they didn't have nearly the recollection that these other witnesses seemed to have about his direction and clear instructions in cases of fairly significant importance. Another example of that came around the context of the very end.

end of the company starting in the fall of 2022. During Nashad's testimony, he detailed a discussion with Sam in September 2022, where he confronted Sam on the balcony of their shared penthouse. Nashad had said that Sam had acknowledged, quote, the borrowers we can't repay. To Nashad's telling, Sam had said that this problem of a massive shortfall had been, quote, taxing me some five to 10% of my productivity for this year. Sam's recollection of the conversation was much more vague, stating that, quote, I don't remember it being specified more clearly than what I'm about to say, that liabilities had gotten far larger than they used to be, or that we think. thought they were. Nishad said he didn't know what to do and wanted my thoughts on the scale of liabilities.

I think he may have thrown out a number of $8 billion or so. Sam claimed that he told Nishad that he was, quote, also concerned about Alameda's liabilities and that they were larger than I would have wanted them to be as well. He added that he thought, quote, Alameda's net asset value was around a positive $10 billion and that it was still making money trading. He said that he wasn't concerned about making up for the shortfall, stating that he would add assets to Alameda's balance sheet from an entity known as Paper Bird. Paper Bird was a Shell Corporation set up to hold Sam's FTC's equity. He said, quote, I was more than happy to pledge everything I had. Sam also discussed a conversation with developer Adam Yadidia. Yadidia had very specifically testified that he had a conversation with

Sam near the paddle tennis courts about a hole in Alameda's balance sheet in the summer of 2022. According to Yadidia, Sam had said that, quote, we were bulletproof last year but were not bulletproof this year. Sam didn't remember where this conversation took place despite being in the courtroom for Yadidia's testimony. According to Sam, Yadidia wasn't inquiring about the gigantic hole in Alameda's balance sheet, but was simply asking what Alameda's risk profile looked like after the market crash. So to wrap things up, Sam's lawyers asked questions for the entire day Friday and expected a few hours of additional direct testimony on Monday morning. That, of course, would be followed by the prosecution's cross-examination, which the prosecution said would be quote-unquote substantial.

Still, even with that, prosecutors expected to be finished by Tuesday, and the trial is expected to conclude with closing statements on either Friday or early next week. The jury will then retire to consider their verdict, which will take as long as it takes. Overall, Sam's prepared testimony seemed to be putting forward the defense that Sam started all the way back in his media tour last December, that he was not a fraud, but just a failed entrepreneur, struggling to manage a rapidly growing business. During his testimony, he repeatedly contradicted testimony from the other senior FTX executives who have already pled guilty. Sam claimed to a misunderstood warnings about the whole in Alameda's accounting and generally

presented his deputies as taking actions without his direction, which led to the collapse of FTX. Now, while it was expected that Sam would refute the testimony of other witnesses, one of the most striking things about Friday's testimony was how often Sam misrepresented facts in low-stake situations. On numerous occasions, for example, the testimony about how Alameda got its name, Sam gave a version of the story which would be easily contradicted by evidence. These are exactly the sorts of issues that could deeply harm his credibility with the jury, and based on the early reporting that I'm seeing, the prosecution seemed to notice this as well. Laura Shin of Unchained characterized Sam's testimony, saying,

over and over again it felt like all of these things had been done by other people and he would discover them after they had been done. He said he never really knew how they had come about. Citizen journalist Tiffany Fong said, I initially thought Sam's testimony was starting off pretty strong, explaining the origin of some of the special privileges to demonstrate they weren't initially put in place for nefarious purposes, overall demonstrating a bit of remorse, a little bit of humanity. I did personally feel, though, that when he began giving his retelling of these key pivotal moments and conversations, it began to fall apart. Everyone else's testimony sounded very credible and lined up with each other. Sam's attacking the credibility of each of

these testimonies turned it into a he-said-she-said, where there's two different narratives here, and one of you has to be lying. Tiffany continued, I feel the jury is a little bit more likely to believe the prosecution's witnesses over Sam, who has the most incentive to claim he doesn't have responsibility and place blame on others. I think from the jury's perspectives, if they think Sam is lying about one of these retellings, they're likely to assume he was lying about all of them. So unfortunately, we're going to stop this story here at this very in-between moment. Obviously, the big thing is the prosecution's cross, which has happened. literally as I'm recording this, so come back tomorrow, and I will have all of the gnarly details of

that. For now, I thank you once again to my sponsor for today, Cracken. Go to crackin.com slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other. Peace.