The Breakdown - SBF Gets Absolutely Buried in Cross-Examination

Episode Date: November 1, 2023

If the goal of the US prosecutor was to make Sam Bankman-Fried look like a liar, liar, pants on fire, boy were they successful. 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 Tuesday, October 31st. Happy Halloween. Today, we are talking about Sam Bankman-Freed on cross-examination. 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.ly slash breakdown pod. Hello, everyone. First, let me say, before we get into more SBF, a big happy 15th birthday to the

Bitcoin white paper. Crazy to think that that was 15 years ago, a decade and a half of Bitcoin, here is to many, many more. All right, well, we are firmly down in the muck with SBF. And if yesterday's show was all about Friday's prepared testimony and direct examination, and specifically how Sam contradicted the previous testimony of Caroline, Gary, and Neshad, Monday's testimony, and today's show is all about the cross-examination. Just to level set a little bit for how that went, here's how Laura Shin described it. Hey, everyone, we just got out of the courthouse, and I think it's pretty fair to say that at this moment, it just feels like it's over for Sam Bickman-Fried.

Honestly, if before lunch, it felt like we were witnessing a murder, then after we were we were witnessing somebody just stab a dead body over and over and over and over and over again. Basically, Danielle Sassoon again trotted out multiple statements that Sam Pinkfraid made and multiple statements where he contradicted those statements, you know, was often evasive. She just caught him in so many things. All right, so let's dig into this. Technically, yesterday began with the end of the direct examination. There were a few things covered.

One was this hedging defense that somehow everything would have been fine, if Caroline Ellison had just hedged, like Sam told her to. SBF said that he had numerous conversations about hedging with the then-CEO of Alameda, saying that he had directed Caroline to hedge once in late June or early July, and then following up throughout September. Sam told the court that Alameda's net asset value had already fallen from $40 billion to $10 billion, and that he was, quote, worried that Alameda might become insolvent. Sam discussed Caroline's teary-eyed response, where she agreed that Alameda should have hedged and that maybe they shouldn't have had so many venture investments. He said that she had

offered to step down as CEO, but that he wasn't trying to push her out, and that his, quote, biggest concern was that if Alameda remained unhaged, that it might go bankrupt. And so I thought that the focus should be on urgently putting on the hedges that would protect against that. Sam explained that Alameda had put on hedges in September, but they weren't as large as he would have wanted. Thus, he directed Caroline to increase the hedges. I will take a pause here and note two things. First of all, on the one hand, Sam has tried to testify that he didn't know what was going on at Alameda and didn't have any control. And yet here, he's talking about how many times he has directed the CEO to take a very specific action.

Kind of feels like one of those you can't have it both ways and either you were the de facto CEO or you weren't kind of situations. Second, and something that I'm sure will come up with the jury, hedging in Alameda's performance doesn't have any real bearing on whether or not Sam committed fraud by knowingly using FTX customer funds for his hedge fund slash financial playground. It is a distraction and really has more to do with what might have happened if we had never found out. Now, speaking of what Sam did or didn't know, he also tried to suggest that he didn't really have any idea what was going on until October. He claimed that in October 2022, he had been given direct access to the FTX database, which was previously only accessible by developers. He said that he used this access to build a full view of Alameda's accounts.

During that investigation, Sam claims that he learned about the hidden accounts, including Sayun 88, which has been sometimes referred to as our Korean friend during reporting. That account was used to wall off Alameda's liabilities to FTCS in an account that didn't accrue interest. Now again, this contradicts everything that we've heard from every other witness, but alas, that's what Sam testified. The defense moved on to the final week of FTX, beginning with the release of the Alameda balance sheet in a coin-desk article. Sam acknowledged that he discussed Caroline sending a tweet which would refute the claims. That tweet said, quote, that specific balance sheet is for a subset of our corporate entities. We have 10 billion of assets that aren't reflected there. Sam claimed that he believed this to be true at the time.

He explained that it was true primarily because assets held in an entity known as Paperbird were not included in the Alameda balance sheet. Paperbird was a holding company owned by Sam and FTX CTO Gary Wong and primarily held shares in FTX. Now again, another revealing part of this testimony, and remember, this is direct examination. This is Sam being questioned by his own lawyers. Is Sam seeming to think that any entity that he was connected to could just move assets freely back and forth between them? He's literally explaining here that a holding company, a Shell Corporation created entirely to hold Sam's equity in FTX, counted as an asset for Alameda. While Sam seems to think that that's a good defense, to me, kind of just makes the point clear that he never saw any barriers or differentiation between

any project that he was the head of, or any entity that he had ownership over. In other words, if Sam thought he could just move assets from the Shell Company Paperbird onto the Alameda balance sheet to shore it up to external eyes, is the jury really supposed to believe that he wouldn't do the same thing with FTX customer deposits? Now, when it comes to the final days and hours of FTX, Sam basically reinforced over and over that he believed that they had enough resources to take care of everything, and that it was all CZ's fault for triggering a loss of confidence, and as he wanted to characterize it, a run on the bank. He also tried to so doubt when it came to Nishad Singh, as Sam recalled Nishad messaging him

about trading his personal account to clear his debts. There were over 500 million in loans for investments and donations that had been papered in Nishad's name, along with 80 million for personal expenditure. Sam said that Nishad was, quote, actively suicidal at the time and was being overseen by a therapist. The two of them discussed Sam taking the blame, with Nishad concerned that FtX employees would think it was all his fault. Sam wrote, make sense, I don't hate the idea of them being pissed at me. At this stage, the testimony broke down into a long objection about whether Sam could testify to telling Nasha that he didn't think they did anything wrong.

The evidence was ultimately disallowed. The testimony concluded with the discussion of the 11th hour plans to raise funds. Sam spoke to his attempts to raise funds from Apollo Global Management. He detailed his discussion with FTX General Counsel Kan's son, but told a very different version of the story. Sam claimed, quote, I didn't disagree with anything that Kan had said, and you know, wouldn't say anything that was contrary to it. That said, Sam claimed to believe there were additional buckets of assets held within FTX,

which would cover Alameda's borrowing. Primarily, he seemed to be referring to using assets that customers had staked on the exchange to backfill Alameda's shortfall. Sam said, we then briefly discussed the size of those buckets and how they compared to Alameda's borrowing. Now, of course, Sons' testimony had been very clear that he told Sam that the size of those buckets was dwarfed by the size of Alameda's borrowing. From there, we got into the cross-examination.

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, DBA, Crakin. The cross was led by Assistant U.S. Attorney Danielle Sassoon, and she began the prosecution's cross-examination by establishing that Sam held majority ownership over both FTX and Alameda. She attempted to get an answer on whether Sam was involved in Alameda's trading by 2022.

He responded, depends on how you define trading. He added that, I would say I was not involved for the most part. I would not say I was not involved in any way at all. Now, of course, the line of questioning was designed to trap Sam in a lie, which would be a running theme throughout the cross-examination. Sassoon presented evidence that Sam had told Caroline and Sam Tribucco, then co-CEOs for Alameda, to purchase Oxy and MAPS tokens. Sam had written to them, guessing we should twop longer one to two million of each over the next day or two.

Sam rejected this position claiming this was not a direction to trade. From there, however, Sassoon did get Sam to admit that he had directed Alameda to buy Japanese government bonds and place hedges, which Sam agreed was a form of trading. Sassoon then moved on to Sam's press tour. Sam agreed that he had tried to speak truthfully and precisely about the collapse of FtX. The vast bulk of Sam's answers were simply responding yes or no to the prosecutor. His lawyers had no doubt warned him to keep his answers brief to avoid a repeat of last Thursday's disastrous cross-examination. That was, of course, when Sam had testified without the jury present

and continuously gave lengthy answers which provided additional fuel to the prosecution. Sam agreed that he had tried to be careful about what he said in public and had even cleared some of his comments with his public relations team. It was at this stage that Sam's recollection began to fail him and he became unable to recall what he said during various interviews, which would again be another theme of the cross-examination. Specifically, Sassoon turned to a Twitter spaces held during Sam's media tour and asked Sam whether he had said that he was not involved with Alameda's trading and had not been for years at that point.

Sassoon proposed to play a recording of the Twitter spaces for the court to hear and to aid with Sam's suddenly faulty memory. The defense objected, claiming that the two sides had previously had a gentlemanly agreement to share exhibits to be used in cross-examination the night before. Sassoon said that the defense had not asked for these exhibits and there was nothing in court rules preventing her from playing the recording. The tape was played with Sam, of course, stating that he was not involved with Alameda. his trading. Sassoon offered another exhibit showing that Sam had made public statements that he had stepped away

from involvement in Alameda's trading due to conflicts of interest. In an article published by the Financial Times last December, Sam had said that this was, quote, related to his role as guardian of customer assets. Sam, of course, could not recall making these statements. Sassoon moved on to statements about how Sam had pitched FTX. Sam acknowledged that he had promoted FTX to investors on the basis that its automated liquidation protocol set it apart from other exchanges. Sassoon questioned Sam about statements he made to Congress, describing FTCS as a safe crypto exchange. Sam acknowledged general statements of that nature, but said he could not recall specifically. After establishing that Sam communicated with potential customers using his Twitter account, Sassoon asked Sam if he made representations about how

customer assets would be treated on FTCS. Sam agreed with the premise, but again, couldn't recall specifics. She asked whether Sam had promoted FTCS as a safe exchange. He responded that this might have been the case with FTX US, but he wasn't sure about FtX International. When asked whether he acted like he cared about consumer protection, Sam responded, I think I did care about them, yes. Coming to the point, Sassoon asks Sam whether he made public statements that FTX was a safe platform. He responded, I remember things around specific parts of the FTX platform that were related to that. I don't remember a general statement to that effect. I am not sure there wasn't one. Of course, the prosecution had an exhibit to clarify Sam's memory. They presented a tweet from August

2021, which stated, as always, our user's funds and safety comes first. Putting an even finer point on the issue, Sassoon presented a tweet from October 2022, in which Sam had described the crypto ethos as economic freedom, the freedom to own your own assets. Sassoon managed to get Sam to acknowledge that when he made that tweet, he knew Alameda was carrying an $8 billion liability to FTX. Now, what you see here is the pattern of what the prosecutor was trying to do. She's trying to catch Sam in lies that are relevant in the specifics, but also relevant in the fact that he's just lying. Prosecution moved on to Sam's testimony in front of Congress. Sam admitted that he had filed a document which laid out FTCS's key principles for ensuring investor protections on digital asset platforms.

This document included numerous opinions on how to protect crypto customers, including the avoidance of conflicts of interest. Sam acknowledged that conflicts of interest are a, quote, potential problem. Sassoon turned to Sam's public support for regulation. She alleged that it was simply a marketing ploy and not an earnestly held position for Sam, which he disagreed with. Sassoon put it to Sam that, quote, in private, you said things like fuck regulators, didn't you? Sam responded, I said that once. To which, of course, the prosecution presented a text message conversation between Sam and Vox's Kelsey Piper, which had occurred in early November. Kelsey had asked Sam whether his pro-regulation stance was just for PR reasons.

Sam was made to read his response to the courtroom. Yeah, just PR. Fuck regulators. Now, Sassoon noted that Sam had testified under oath before Congress that FTCS's risk management program required customers to pledge collateral on the platform itself, rather than holding collateral off platform. Sam agreed that he had given roughly that testimony. The prosecution presented an exhibit of Sam's congressional testimony, which sparked a

humorous misunderstanding. The defense said that they had no objection to the exhibit as long as it wasn't being presented for its truth, but merely as evidence that Sam had said it. Sassoon, a little perplexed, noted that it was Sam's own statements. When asked by the judge how she was offering the document, Sassoon responded, we don't think its representations were accurate, so no, it's not being offered for its truth. Sassoon presented Sam with a marketing deck published by FTCS, which described how poorly futures exchanges are designed. The document stated that rival exchanges had, quote, lost hundreds of millions of dollars of customer funds to clawbacks. When asked to read a bullet point on how FTX was solving those issues, Sam obstinately responded, the first word

is preventing, the second word is clawbacks. This gets to another point that many who are in the courtroom reported, that Sam was acting throughout this testimony fairly petulantly. Whether that endears him to the jury or not, I guess, remains to be seen. Sam was asked a series of questions which required him to confirm that customers were not allowed to use outside collateral to trade on FTCX. For example, he acknowledged that a customer could not pledge their house as collateral. Seeming as though she had sprung the trap, Sassouin asked if there were any customers aside from Alameda who were allowed to pledge outside collateral not held on FtX. Sam responded, I can name a couple of instances where we considered or, in fact, did do that.

He said that a firm called Crypto Lotus had been allowed to do this and that FtX had considered allowing Three Arrow's capital to use outside collateral as well. This unexpected answer seemed to throw Sassouin off for tempo. She asked follow-up questions about how large Cryptootus's account was and whether this special privilege was disclosed to the public. The prosecution was then handed a note from an FBI agent seated in the front row who had previously given testimony. Regaining her bearing, Sassoon asked whether Sam was friends with the head of Crypto Lotus. He responded that he was not. However, finding the right question, Sassoon asked whether Sam had a personal relationship with anyone at Crypto Lotus. Sam responded that he had been friends with a more junior employee at the firm.

Now, this line of questioning was essentially the only weak point in the cross-examination, where Sam ever so briefly had gained the upper hand. However, Sam still brought home the point, getting Sam to admit that Alameda and Crypto Lotus stood alone as the only firms allowed to pledge collateral, not custodied with FTX. Turning to Sam's public statements about Alameda's special privileges, Sam had a vague recollection of stating that Alameda played by the same rules as other customers, but denied saying they had no special privileges. He said that, I remember saying that I did not believe Alameda would be front-running or preying on users' information on the exchange, that their trading

access was just like other users. I'm not sure I did thousands of interviews. I don't honestly remember the details. When asked if he said that Alameda and FTX operated separately, Sam responded that, quote, I remember that coming up with some specific instances with respect to specific ways in which they could operate separately. I'm not sure about the more general context. Contrary to that, however, the prosecution presented an exhibit in which Sam stated that, quote, Alameda is a liquidity provider on FTX, but their account is just like everyone else's. Sassoon put to Sam that this statement was general and not limited just to front running. Sam responded, at the time, I thought it was implicit from the question that it was responding to. Now, if you're scratching your head,

basically the point here is that Sam is trying to argue that every time he said that Alameda was just like everyone else, he was only referring to front running, and that Alameda didn't have special access to CFTX users' trades. Now, from there, there are a couple instances of the prosecution trying to catch Sam in low-stakes evasion. For example, he was asked whether he flew to the Super Bowl on a private plane. Sam responded that he couldn't remember. Sassoon quipped, is that because you traveled on private plane so frequently? And noticeably irate, Sam bonded, it's because I traveled over a hundred times that year. I can't recall how I went any particular time. Bringing the receipts, Sassoon showed that Sam had spent around $15 million on private jet

travel during his time as FTX CEO. Now, one of the more revealing parts of the testimony, which gets back to what I was saying before about how Sam just treated everything and every entity he owned as all part of one big conglomerate, Sassoon began to ask questions about more specific spending from Alameda. She asked about a tranche of Robin Hood shares purchased by Sam using 546 million borrowed from Alameda. The loans were originated in May 22. Sassoon established that shortly after the purchase, Sam transferred the shares into a holding company owned by Sam and other FTCS executives. After a bit of back and forth about the corporate structure of various entities involved in the deal, Sassoon landed the punch. She presented an affidavit showing that Sam had tried to transfer the Robin Hood

shares from the FTCS state into his own name. Sassoon asked, were you aware as you sought to take custody of $650 million in Alameda investments that at that moment FTC's customers could not withdraw funds, Sam answered that he was, quote, extremely aware. After Sam denied considering calling up the broker to see if they would transfer the shares without thinking about it, Sassoon once again presented him with the evidence. It showed Sam asking, Should I try calling up the brokerhood is with and see if they'll just give me the shares without thinking about it? Towards the end of the long day, Sassoon moved back to June of 2022, when Alameda paid back loans from external lenders. She asked if Sam knew this would put FTCS

at risk, which he refused to admit. Trying again, she asked whether Sam knew there was, quote, a risk that Alameda would never be able to repay its debts to FTCS. Again, Sam avoided responding, saying that he, quote, did not at that time think that the odds of that were significant. Sassoon asked whether this meant that Sam knew there was some risk. He responded that, there's always a risk with margin trading that there would be clawbacks. Seeing her opening, Sassoon moved in for the kill. She asked, taking money from FTX to pay back lenders, that's not margin trading, is it? Sam said, I don't think that's what happened, and I'm also not saying that's not margin trading. An exasperated judge demanded that Sam answered the question.

When asked of his testimony was that paying back lenders was a margin trade, Sam said, It's my testimony that it depends on the details, but that very well could be a margin trade. I'm sorry, it's a hypothetical. I'm speculating here. In response to further questioning on whether repaying loans was a margin trade, Sam offered the response, potentially, yeah, I can explain if you want. We didn't get to hear that explanation of exactly what Sam was referring to here, but the damage had been done. Now, this was broadly how the cross-examination went across the grueling hearing. Sassoon would often pin Sam down to a position and then present

evidence of seemingly contradictory prior statements. In other lines of questioning, Sam would say that he couldn't recall pivotal tweets and interviews throughout the rise and fall of FTX, and Sassoon would then put those words in front of Sam and have him read them back for the jury, or playback interview segments which showed Sam misleading the world, given what we now know. Now, when it comes to how he appeared, Sam seemed evasive at times. Throughout the cross-examination, he answered that he wasn't sure or couldn't recall nearly 150 times. Most catastrophically for his case, Sam also appeared to be misleading. He was caught over and over and over again in contradictory statements on both large and small topics. The prosecution was able to put direct evidence to him regarding misleading

public statements, and he failed to come up with a single convincing explanation. In other words, the cross-examination appeared to go about as poorly as it possibly could have for Sam, which, of course, was largely in line with the predictions offered by legal commentators throughout the case. Basically, every lawyer that has spoken to the idea of Sam giving testimony has repeated the traditional wisdom that a defense attorney should never allow their client to take the witness stand and open themselves up to cross-examination. With this dissection of Sam's narrative, we got a practical demonstration of why that legal advice is always given. Sam was constantly bristling at the questioning. Multiple reporters who are familiar with Sam's character noted that in the past, Sam would often

snap during this kind of tough questioning. During Twitter spaces or hostile interviews, he would often belittle anyone who questioned his motives or his actions. With that response unavailable to him, Sam was obviously simmering with rage at points, but had to keep a lid on it. Now, the question, of course, will be whether or not the jury got the same impression of Sam as the scores of crypto reporters who packed the courtroom, each of whom are far more likely at this point with Sam's nature than they care to be. Now, the prosecution was not done with Sam by the end of the day. They expected to take another couple of hours this morning to cement the theory of the case they presented in the opening arguments, that FTX was an empire built on Sam's lies, that Sam had lied to counterparties, to banks, to investors,

and to customers, and that through their cross-examination, they were going to put Sam's lies front and center for the jury to see. Teddy Schlafer, a reporter at Puck News, summed it up this way. I feel like the big thing that Sassoon has really gone at is this idea of truth, that Sam is lying. All morning it's been, here's an interview you gave to a reporter. Here's something you said to Congress. Here's something that you said on Twitter, to customers. It really makes me think back to the opening statement, how they're really going to make him out to be a liar. What's more, Teddy continued. Sam has not mounted a credible defense to date. The entire defense case is basically Sam. If you're a juror and you're trying to sit there asking,

what is the reason I have to vote to acquit, I don't know what you're looking at. You're basically believing that this character is more credible than the preponderance of documentary evidence and Caroline, Neshad, and Gary. I don't think Sam has given that juror a reason to acquit. Now, Carly Riley, the host of overpriced JPEGs, put it a little bit more bluntly. She said, he avoided, he avoided, even when it didn't seem like something that needed to be avoided. He did this all while seeming incredibly semantic and pedantic for sure, but also like an asshole. One person said to me, what the jury had prior to Sam taking the stand was a stick figure version of him that was this criminal CEO. Now Sam had basically gotten on the stand and breathed

life into that stick figure and made that person real. That arrogant, the rules don't apply to me, person came to life before them. So friends, that is the wrap of yesterday's testimony. I'm sure we will do a little conclusion tomorrow on the end of the cross-examination. From there, we will be on to the final witnesses for the defense, closing arguments, and then jury deliberations. But for now, we will wrap there, and I will say, until tomorrow, be safe and take care of each other. Peace.