The Breakdown - SBF Defense: "Blame Caroline! Also He's a Nerd."

Episode Date: October 5, 2023

NLW covers the first few days of the Sam Bankman-Fried trial, including the jury selection, opening statements, and first witnesses. Today's Sponsor: Kraken Kraken Pro is the one-stop destination for pro traders - https://k.xyz/TheBreakdownPod 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 Thursday, October 5th, and today we are talking all about the opening arguments in the early witnesses in the SBF trial. 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 Breakers Discord. You can find a link in the show notes or go to bit. com slash breakdown pod.

Hello, friends, happy Thursday. As I mentioned a couple days ago when we did a primer on this trial, I am very much hoping that the SBF coverage will not be every day throughout the course of the entire four to six weeks of the trial. In conversations with you guys, most of you wanted a comprehensive update every couple of days, and I think that that's right. Now, the challenge is, of course, that right now, especially within, having just started and hearing these early arguments, it is really by far in a way crowding out

every other story in the crypto space. So much so that I actually think that we're going to start to see some take out the trash type stories. In other words, stories that people have to get out there but they want buried, be released over the next couple days. For example, I think I just read that Ledger had some cut, something like 12% of their staff. That's exactly the type of story that you're going to get as everyone's paying attention over here to the crazy courtroom drama happening in Lower Manhattan. So given all that, today is an SBF trial day, and effectively we're going to do a play-by-play of the first couple days and then try to understand what it says about the case to come.

Now, technically things started on Tuesday with jury selection, but that actually wasn't finished by the time that court adjourned on Tuesday night. Because of that, Wednesday's hearing began with the final stage of jury selection. All in all, 12 jurors were selected, nine women and three men, along with six alternates. The jury features a range of white-collar and blue-collar workers with the majority. majority over 40 years old. One juror that some have noted is a 68-year-old retired investment banker who worked at Solomon Brothers. Some speculate that he might have the financial knowledge to help understand and interpret some of the more complicated parts of the case for his fellow jurors.

Now, when it comes to what people thought of the jury selection, former convict, pharmaceutical entrepreneur and now AI entrepreneur Martin Scarelli, has taken a deeply personal interest in this case for reasons that he has said he's not going to divulge. But what he's said about the jury selection is this. SBF jury analysis? Disaster. He then goes through person by person, making comments like, the social worker will convict, the not-for-profit fundraiser will convict. Corrections officer is going to convict. You have to be kidding me. In fact, all in all, Martin thinks that there is only one juror, that former banker, who might be able to convince the rest of the jury that Sam might be innocent. But of course, that would rely on the defense's argument

actually carrying any weight. So, from jury selection, the hearing moved on to opening statements. Each party laid out a summary of their cases and foreshadowed the evidence that they would present during the trial beginning with the prosecution. Assistant U.S. Attorney Thane Ren began by stating that Sam's wealth in the FtX Empire was a house of cards which was built on lies. Underneath the facade of wealth power and influence, the prosecutor said, quote, he was committing a massive fraud, taking billions of dollars from thousands of victims. He had started FTX. He told customers it was safe, but he was taking their money and spending it. Wren claimed that Sam spent it on himself as well as on political contributions, leaving his customers with billions in losses. The prosecutor went on explaining the business of a crypto exchange, noting that they are, quote, supposed to make money by taking a fee, not by taking the customer's money.

Ren asserted that Sam used his trip to Congress in early 2022 to publicly claim that FTX was trustworthy, that it did not mishandle customer funds. Moving on to Sam's affiliated trading firm Alameda Research, the prosecutor characterized it as a business which had some big wins as well as some major losses. Wren explained that Sam handed control of Alameda to his, quote, on and off girlfriend. Obviously referring to Alameda's CEO Carolyn Ellison, who will be a key witness in the case. And yet, despite handing the reins to Carolyn nominally, the prosecutor claimed, quote, he was using her as a front. In reality, he was still calling the shots.

Wren went on, Alameda had secret access to FTX assets. Once Alameda had it, the defendant could spend it as he pleased. Wren explained that there were two methods for Alameda to access customer funds. Quote, first, customers sometimes to put, deposit dollars on FTX. The company would tell them it was in their accounts, but it never made it to FTX. He set up a bank account linked to Alameda. He lied to the bank to set up an Alameda bank account. Then he lied to the customers. He took billions of dollars without their consent or approval. The customers had no way to know. The second way, Ren said, was, quote, he took customers

crypto, accounts that hold crypto are called digital wallets. He gave Alameda the ability to withdraw. He made sure it was written right into the code. From there, the prosecutor laid out a rough summary of excuses which are likely to be presented by Sam. That there was money left in FTX when it declared bankruptcy, that more customers would have returned, that lending customer assets was a legitimate part of operating an exchange. And yet the prosecution case will center on the lies and the secrecy behind the transactions. Ren said, he stole millions of dollars of stock by lying. He lied to Alameda's lenders by sending them false documents. You will hear how he spent it. He poured money other people's money into investments to make himself richer. He paid political

donations in D.C. He gave stolen money to a nonprofit his brother controlled. He spent money in all sorts of ways on himself. So what happened? Well, when Alameda began losing too much money, the prosecutor claimed, the defendant doubled down. He pulled more customer money out of FTCs to pay off Alameda's loans. He directed the creation of false financial statements. He told Congress, again, that FTX was not using customer money. He tweeted that. He was lying. He only shared with his closest friends and his girlfriend. He told him the hole was big, but he kept lying to get more deposits. In early November, once the Alameda balance sheet was leaked, quote, the defendant tweeted FTCX is fine. Assets are fine. Statements about FTCS keeping customer money safe were lies. Only the

inner circle knew the truth. As customers rushed to withdraw their funds, Ren said, all that was left in FTX was what amounted to an IOU from Alameda. Closing out, Ren said, the hole was too big, so the defendant blamed a downturn in the crypto market, but he had committed fraud. That is what the evidence in this trial will show. You will hear from his inner circle. His girlfriend will tell you how they stole money together. He bought himself wealth, power, and influence. You will see it, and you will see there is only one verdict, Sam Bankman-Fried, is guilty. Autism Capital sum this up quite succinctly, I do think. Tweeting,

The TLDR of the opening statement by the prosecutor in the SBF trial is basically, this dude is a liar and is full of... And did we mention he is a liar? And yet still, for many people who are observing this, nothing was really unexpected. Trader Crypto Paradigm rights, everything the prosecutors are saying, we know. The opening statement for the defense is going to tell us more about their angle

and how they are going to portray Sam. The mostly stable genius who made a mistake? Blame his employees? I don't know, but it's about to get spicy. Now, before we enjoy that spice, let's talk about today's sponsor, Cracken. Cracken Pro puts the power of their leading crypto trading platform right in your pocket. Optimized for mobile, the Crackin Pro app delivers robust charting tools, extensive order options, and more all with a sleek responsive design.

Easily monitor prices, set alerts, and check your portfolio all in the go. The Crackin Pro app is highly rated by users, and to see, why, visit crackin.com slash the breakdown and join the next era of top traders. Disclammer, this is not financial advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc., PVI, PVI, DBA, Crakken. Thanks once again to Cracken for supporting the breakdown. So next up, it was time for the defense to present their case. Sam's attorney, Mark Cohen, opened by claiming that, quote, Sam didn't defraud anyone. He acted in good faith. There was no theft. Sam believed. Sam believed

that loans to Alameda were permitted. They were open and known within both companies. Sam did not steal from anyone. Cohen then asked the jury to judge Sam, quote, based on real life experiences, and that he would explain, quote, what really happened. Cohen then planted the seed that crypto is risky. Price swings are unpredictable, and companies involved in the industry can rise and fall rapidly. He pushed back on the prosecution's characterization of Sam. They'd have you think he's a cartoon villain, Cohen said. Sam worked hard. He was a math nerd who didn't drink or party. He worked for a traditional firm on Wall Street. Cohen described Alameda as successful and claimed that it earned billions in profits. Loans made to Alameda, according to the defense, were the lender's business, implying that they

did not need to be disclosed to customers. Cohen compared FtX to the New York Stock Exchange. He said the business tried to be innovative and acknowledged that it offered margin loans as part of its core product. Cohen claimed that the prosecution was, quote, taking things out of context. He said that working out a startup is like building a plane as you're flying it. He said that given FtX was a company of 300 employees, they couldn't all be monitored by Sam. Cohen attempted to explain away Sam's conduct as the reasonable actions of a startup CEO building a rapidly growing business. FtX sought to raise funds from investors. Nothing wrong with that. FtX had huge potential. Sure, it had business relationships with Alameda. These were reasonable. Alameda had an account

on FtX. Nothing wrong with that. Alameda took big margin loans from FtX. Nothing wrong with that. Alameda was a market maker. Nothing wrong with that. The defense then moved into the detail, discussing the banking relationship that will be a critical part of the case. Cohen said that, FTX at first didn't have a bank account to accept dollars, which in the crypto world are called Fiat, so they used an Alameda account. Customers were told to wire the funds to Silvergate Bank in the name of Alameda. At FTX, it was labeled as the Fiat entry. It was like PayPal or a credit card, but without risk management, it was not reconciled. Sam thought it could be lent out. It was reasonable. Now, on this particular note, the observing community had an absolute field day.

Parrot Capital tweeted, apparently embezzlement of customer funds and exemption from auto-liquidation protocols are considered reasonable between FTX and Alameda research. Sean Tuffy said, You gotta admit, it's a pretty bold move for a defense attorney to use an example of wire fraud in his opening statement at a fraud case. Still, the first limb of the defense strategy is that Sam lacked criminal intent. Cohen said, given Sam's good faith belief, could there be a theft? There wasn't. It was not some fraudulent scheme. From there, the defense moved to the second limb of their strategy, blaming Carolyn Ellison.

Sam handed over control of Alameda research to Caroline in October of 2021, along with Sam Tribucco. She became the sole CEO in August 22 just prior to the collapse of FTX. The defense acknowledged only that SBF, quote, stayed involved. Cohen said, but what if the prices went down? Sam spoke to Ms. Ellison and urged her to put on a hedge. She didn't do so. He explained that, quote, in 2022 from May to November, they flew into the perfect storm. Market shocks, Bitcoin dropped by 70%, many firms failed.

Alameda was hurt. Cohen then went on to describe those final weeks as Alameda scrambled to meet margin calls. He said, Alameda paid the lenders back, so how are they victims of fraud? He didn't create false documents. Remember that Fiat account? It now had $8 to $10 billion in it. Sam reasonably believed that Alameda had stopped taking deposits meant for FTX. Now, this part will be crucial for prosecutors to pin down exactly what Sam knew about the FTCS account labeled Fiat at. In reality, the account represented the negative balance owed by Alameda to FTCX, a running total of the shortfall of customer funds.

Cohen, in his opening statement, appears to be claiming that Sam thought this was a positive balance of reserve funds, which could be used to service withdrawals. The defense went into that final week at FTX. Things were tight. Ms. Ellison had not put on the hedges. But Sam believed the companies were good. He spoke to outside investors. The CEO of Binance put out a tweet attacking Alameda. This triggered a run on the bank at FTX.

Cohen then tried to describe Sam in an almost heroic tenor. Suddenly billions in withdrawal. Sam didn't run. Plain was going into the very eye of the storm. He asked the jury to consider Sam's state of mind and consider mistaken failure rather than malice. Cohen then turned to a set of honest explanations for behavior that the defense will try to convince the jury is outrageous. And to close, he honed in on the reliability of the prosecution witnesses.

He said, this case turns on three witnesses. Ms. Ellison, Mr. Wang, and Mr. Singh. Each has pleaded guilty. Took them a while to get to that. Now, here in the real world, they have to testify in favor of the government. Now, one thing that is worth noting is that Sam's legal team was explicitly prohibited from bringing up any arguments about reliance on the advice of legal counsel during their opening statements. That argument hasn't been entirely struck out, and observers expect that to come up extensively during

the trial as an additional pillar of the defense. Now, by and large, observers were not impressed with Sam's defense's opening statement. Data analyst Will Dakota said, hilarious defense strategy. Prosecutor, did he steal the money? Defense? Look at him. He's a nerd.

Prosecutor, we were asking about the money. Defense, total square, lives under the office desk in a beanbag. But then Will points out, quote, It's actually a form of framing. They're going to try and paint him in a light that seems like a sympathetic victim of circumstance. Kyle Gibson was even more succinct saying, Did he forget the part where he was supposed to come up with a defense for Sam? Scarelli summed everything up like this.

On the defense, he said, Cohen took a mild manner nonchalant approach with defending SBF. He frequently said, nothing wrong with that. It was less convincing than the government's argument. All of the money is gone, and he was supposed to safeguard the assets. The explanation hinges on margin loans which are hard to understand. stand. The jury will not dive into that. They'll likely be confused and seek the big picture, and that's a small opening for SPF. On the prosecution, Screlly wrote,

only interesting thing is that they say they will show Caroline was just a front and SBF was still calling the shots. Defense says he told her to hedge, which they almost certainly have in writing. How will they show that he was still calling the shots? We'll find out soon. I think that would be crushing to Sam's credibility to the jury, since he made a big deal of stepping away from Alameda to everyone. If he secretly didn't, he's fried. Now, the first witness called was an FTX customer named Mark Antoine Giuliar. He's a French cocoa broker based in London. He was presented to discuss the experience of a sophisticated retail customer on FTX. Crucially to the prosecutor's case, that he believed FTC made money by charging fees, that he believed his money was not being lent

out, and that he owned the balance in his account. But it was the next witness which would command the rest of the day, and much of Thursday as well. That witness was Adam Udidiya. Adam lived with Sam while they attended MIT together and considered him a close friend. He later came to work at Alameda and FTX and was one of the 10 residents of the luxury penthouse along with Sam and other senior executives. The jury was told Adam was testifying under an immunity order, protecting him from prosecution. He explained that he was, quote, concerned that as a developer at FTCS, I may have unwittingly written code that contributed to a crime. Adam said that he resigned from FtX on the week of the bankruptcy after getting a phone call from a fellow developer. He said he learned that, quote, Alameda used FTCS depositors money to

pay back Alameda's loans. Because Adam was the first FtX person with a lot of knowledge to testify, there is a lot of establishing going on. And today, at least at the time of this recording, there were two really interesting subparts from Adam's testimony that seemed like they're going to be particularly relevant. Overpriced JPEG's host, Carly Riley, wrote, Wow, very interesting testimony from Sam's college friend, Adam Yadidia. Adam testified that in June 2022,

he expressed concern to Sam about the financial state of FTX and Alameda, essentially asking if they were okay. Sam said, we were bulletproof last year, but we're not this year. Then Adam asked how long it would take to be bulletproof again, and Sam said six months to three years. As Carly points out, this means SBF knew the company was in financial trouble at least five months before the collapse in November. Now, this is the only part where I will insert personal detail into the story.

This was not the broad impression that we had as employees of FTX generally. Right up to literally a couple weeks before the whole thing collapsed, Sam was telling employees during all hands calls that we had two plus billion dollars of cash in the bank. There had been a late summer early fall bonus round that didn't give the impression that there was any particular trouble, and I personally was working on another Super Bowl ad, which you have to think would have been probably the first thing to go should the company have actually been in any financial trouble. Point being, I think the fact that Adam found out that financial trouble was brewing months earlier will be a fact that surprises a lot of ex-F

ers. Now, Carly also tweeted this. Another interesting tidbit from today's SBF trial, and it doesn't look good for Sam. In their opening statement yesterday, the defense said that it was an open and public fact that at one point, FTX customer deposits went to a bank account controlled by Alameda. To demonstrate this, the defense said that Alameda was even named in the wire instructions customer would use to wire money to their FTX accounts. But today, prosecutors pulled up the old website wire instructions and showed that customers were told to wire money to an account called North Dimension Inc. This was an account controlled by Alameda, but it didn't say Alameda anywhere.

Perhaps there was another instance of the wire instructions mentioning Alameda, but so far, it looks like the defense was wrong or trying to mislead. Autism Capital called this out as well, saying, A lot of Adam Yudidia's testimony centers around North Dimension, a fake storefront Sam and FTX used to launder money with Alameda. They then point to a thread that they had written with more details of this North Dimension story. Now, in terms of subjective takes,

the only one I've really seen comes from Tiffany Fong, who you'll remember was the first to get an interview with Sam after the whole thing collapsed, and who has been in the courthouse for the last couple of days. A couple hours before this recording, she simply wrote, SVF's lawyer is bombing. Now it appears that on the rest of the docket for today, we have Matt Huang, and then even more interestingly, Gary Wang, the CTO and co-founder of FTX. But of course, we will have to save what they say and how that testimony goes for a future update.

For now, that is going to do it for today's episode. Thanks one more time to Cracken for sponsoring the show. And until next time, guys, be safe and take care of each other. Peace.