Unchained - SBF Trial, Day 11: How Alameda Got FTX Into a $9 Billion Hole

Episode Date: October 19, 2023

The courtroom was abuzz on Wednesday as financial and technical experts took the stand in the ongoing criminal trial against Sam Bankman-Fried. Accounting professor Peter Easton, a standout witness, presented a detailed analysis showing that Alameda had spent customer funds on VC investments, real estate, and political and charitable donations. Easton, who had previously worked on high-profile cases like Enron and Worldcom, said that by the end, the gap between what FTX owed to customers and what it had on hand was $8.8 billion. The defense, led by attorney David Lisner, attempted to challenge Easton's methods. Lisner questioned the accounting of the fiat@ftx internal account, which tracks customer deposits. Easton admitted to lumping amounts owed to customers from FTX’s bank accounts with what was owed to customers from Alameda's bank accounts, giving the defense an opportunity to question his accuracy. The day also saw other witnesses, including a former FTX lobbyist and a Google employee, both of whose relevance was questioned by Judge Kaplan. The judge criticized the prosecution for wasting time with witnesses who seemed to offer little to the case. Catch up on Unchained’s previous coverage:  SBF Trial, Day 1: Possible Witnesses Include FTX Insiders, Big Names in Crypto, and SBF’s Family SBF Trial, Day 2: DOJ Says Sam Bankman-Fried ‘Lied’ While Defense Claims His Actions Were ‘Reasonable’ SBF Trial, Day 3: Why a True Believer in FTX Flipped Once He Learned One Fact SBF Trial, Day 4: SBF’s Lawyers Annoy Judge Kaplan, While Wang Reveals Alameda’s Special Privileges SBF Trial, Day 5: SBF's Defense Finally Found Its Legs, But Can It Counter Caroline Ellison? SBF Trial, Day 6: Caroline Ellison Recalls 'The Worst Week of My Life' SBF Trial, Day 7: In SBF Trial, Did the Defense Lose Its Opportunity With the Star Witness? SBF Trial, Day 8: Former BlockFi CEO Adds Credibility to Fraud Charges SBF Trial, Day 9: Nishad Singh Describes Former FTX CEO as a Bully and Big Spender SBF Trial, Day 10: Defense Struggles to Discredit Nishad Singh's Testimony Did Sam Bankman-Fried Have Intent to Defraud FTX Investors? Why These Lawyers Say It's Over for SBF-But His Only Hail Mary Is to Testify Here’s How Sam Bankman-Fried’s High-Stakes Trial Could Play Out SBF Trial: How Sam Bankman-Fried’s Lawyers Might Try and Win His Case The High-Stakes Trial of Sam Bankman-Fried Begins: What to Expect Learn more about your ad choices. Visit megaphone.fm/adchoices

Thanks for tuning in to Day 11 of the Unchained Recap of the SBF trial. On Wednesday, the criminal trial against Sam Bingman-Fried featured financial and technical expert testimony, a considerable portion of which was mundane. One standout witness relayed his analysis of how much money FTX owed to its customers against how much it actually had over time. However, there were two witnesses whose purpose was unclear, prompting the judge to rebuke the Although the testimony was less dramatic than earlier this week when the prosecution's final star witness, former FTX head engineer Nishad Singh, detailed its growing balance sheet problems

and Bankman Freed's harsh management style, the clear and easy to follow financial flows analysis yet again presented a strong case for the prosecution. In the dry and technical terms of bank accounts and blockchain technology, but accompanied by clear diagrams, flow charts, pie charts, and graphs, Notre Dame accounting professor Peter Easton dissected Alameda's bank statements, FtX's database, cryptocurrency blockchains like Ethereum and Bitcoin, and third-party bank statements. His presentation illustrated how FtX had mismanaged customer funds so severely that, according to his analysis, at the time of its collapse, the gap between what it had and what it owed customers was about $9 billion.

$1. Easton testified, quote, the amount of customer deposits held in Alameda Research and FTCS.com accounts was way less than what was owed to customers on FTCS. What happened to that money? Well, Alameda Research used it for their own expenditures. Similarly, the amount of FDX hot and cold crypto wallets was far less. The amount owed in those wallets was far less than the amount that was owed to FDX customers. And again, Alameda Research used customer crypto funds to pay for the expenditures. Easton, who was hired by the U.S. Justice Department to analyze FTCS and Alameda balance sheets and who had done similar work on the Enron and Worldcom cases, told prosecutors that SBF's firms had spent customer assets on investments, political and charitable donations, and real estate,

including the Bahamian penthouse where Bankman freed and nine others lived. After explaining one page with four categories of money visually represented on it, first Alameda bank accounts, second accounts with customer deposits, third FTX bank accounts, and fourth, an SPF entity called Paperbird. The prosecutor asked Easton, quote, Now let's talk about what happened to the customer funds that moved through those accounts. And was any of the customer money spent? Easton, who seemed to have an Australian accent, responded,

oh yes, in a tone that sparked laughter in the overflow room. The diagram entitled, co-mingling of customer fiat deposits with other funds, showed how interconnected FTCS and Alameda were, rather than arm's length entities as SPF and Ellison had publicly maintained. It depicted transactions from a nearly 11-month period, beginning in January 2022, via a network of more than 50 bank accounts under Bankman-Frieds control.

Easton concluded that FTCS had chronically used customer assets for its own purposes. His blockchain analysis in particular showed that on October, In October 31st, 2022, FTCS's customer balance was more than $10 billion greater than the amount FTCS actually held in its crypto wallets. He demonstrated that numerous investments were made using customer funds. For example, 100% of the investments into trading firm Modulo Capital came from customer funds, according to Easton's testimony. Other investments that were made with either a part or all of the funds coming from

customer assets included Anthropic, Genesis Digital Assets, Robert, and, and, and, and, and K-5. There were numerous real estate purchases made with customer money, such as the Orchid Penthouse, SPF's Gemini apartment, and an apartment labeled Old Fort Bay, which cost $16.4 million, along with $1.64 million for VAT. Its deed listed the owners as Alan Joseph Bankman and Barbara Helen Freed, who are SPF's parents. Of the political donations in his analysis, all of which were paid wholly or in part with customer money, two seemed notable. One, to Freed's Super PAC, was corroborated by an email Freed sent to her son, saying, quote, since this is going to our 527 and hence is disclosed, I'm assuming Nasad would be the

best person to have his name on it. SPF responded with an email approving the transaction. Additionally, Easton said a charitable donation to Bankman Freed's brothers' nonprofit organization, guarding against pandemics, received 20 million. million dollars of customer funds. Easton also highlighted how loans from third-party lenders were paid off using customer funds. In fact, payments to several third-party lenders, including BlockFi, Voyager, Celsius, and Abre were 100% composed of customer money. Bankman-Fried attorney David Lister attempted to cast doubt on Easton's methods, asking whether it was, quote, fair to say that the

amount of fiat kept in the FTX account should not appear as a liability for Alameda. Listener highlighted that the Fiat at FTCS internal account tracked all customer deposits in all relevant bank accounts from Alameda, North Dimension, and FTCX. Bankman Freed's inner circle had separated the Fiat ad FTCS account to understand the liability split between FTCS and Alameda, but Easton admitted to listener that he left the Fiat ad FTCS account as is, lumping customer FTCS bank account liabilities with Alamedas. All this meant, however, was that Easton's analysis. in this instance was just not entirely accurate. Using different witnesses, prosecutors drew attention to Twitter activity by Bankman Freed that seemed to highlight his indifference to FDX's growing financial predicament or possibly an attempt to fool some of the political heavyweights and

celebrities with whom he corresponded. In one instance, Elieora Katz, a Washington, D.C. lobbyist whom FtX hired to help with its government relations, read a tweet by Bankman Freed in which he thanked Maxine Waters, Patrick McHenry, and the House Financial Services Committee. The prosecution also asked Katz to read the defendant's tweet on February 6th, 2022, where he said he was excited to testify before the Senate Agriculture Committee on Digital Assets. While Shemel Madrano, an investigative analyst for the Southern District of New York, was testifying, prosecutors presented tweets from several crypto influencers, including based carbon and CryptoBitlord 7, who responded to SPF's thread on November 6th.

Based Carbon, for instance, thanked Sam and said he had deposited more money into his FDX account. The tweets and private messages, including a conversation between Vox Future Perfect senior writer Kelsey Piper, seemed to suggest that Bankman Freed offered different messages for different constituencies. Medrano testified about screenshots of private Twitter DMs between Piper and Bankman Freed, in which Piper asked that it had Fennon, quote, you said a lot of stuff about how you wanted to make regulations, just good ones. Was that pretty much just PR too? Bankman Fried 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. Piper then published an article based on their conversation that became a sensation in the days shortly after FTCS's collapse. Right after she published it, SPFDM'd her again asking her to quote, take it down. At certain points, Judge Lewis Kaplan became impatient with prosecutors

for calling witnesses who he felt did not add to their case, thereby wasting everyone's time. After Katz, the first witness on Wednesday, spent much of her time on the stand reading from FTX documents and SPF's communications to federal lawmakers. She acted as though she had been forced to testify, answering in sometimes barely audible, one-syllable words, and repeating on at least one occasion that some events recounted in earlier testimony occurred before her six-month employment at FTX started in April 2022. She said also that she had no reason to believe that SBF statements to lawmakers, some in public hearings before the Senate in House, were false. Later, Corey Gaddis, a Google Records custodian, testified about metadata and Google Docs and spreadsheets. It was not at all

clear what the point of his testimony was. Gattis himself even revealed that he was not a metadata expert. On top of that, the prosecutor ended up repeating numbers of different documents it wanted to put into evidence multiple times. In a break shortly thereafter, a clearly annoyed Kaplan said of Katz's and Gaddis' testimony, quote, we had a witness this morning, here he was referring to Katz's testimony, who knew absolutely nothing and spent the time saying, I had nothing to do with any of that, and read documents that are public records. And this afternoon, we fly somebody in from Texas. here he's referring to Corey Gattis

to put in documents about what he knows nothing or next to nothing that are obviously stipulatable. This is like a judicial term, meaning like the lawyers could have figured this out without requiring this person to fly in from Texas. We have 18 people devoting time here to this case and it's really a crime. That's it for the update.

Thanks for tuning in and be sure to check back for the update tomorrow. If you want real time reporting from the courthouse, be sure to follow me on Twitter. More tomorrow. Thank you.