Unchained - SBF Trial, Day 14: Sam Bankman-Fried Casts Blame on Others for Key Decisions at FTX

Episode Date: October 28, 2023

Sam Bankman-Fried took the stand before a jury for the first time in his criminal trial for allegedly defrauding FTX customers. The exchange’s co-founder and former CEO tried to recast the image that prosecutors spent nearly three weeks shaping of an executive who defrauded customers and dismissed the concerns of the three members of his inner circle, all of whom named him as their co-conspirator earlier in the trial.   Responding to his defense team’s gentle questioning, SBF spent large parts of his testimony, offering alternative, often long-winded explanations for actions and behavior that prosecutors allege demonstrated intent to evade legal and regulatory scrutiny of the business he created. He admitted to making mistakes, which supported his defense team’s “failed entrepreneur” strategy, and none more significant than a failure to create a dedicated risk management team.  Bankman-Fried denied committing any crimes or attempting to defraud anyone and said that he believed funds used for sponsorships, real estate purchases, political donations, venture investments and payments to lenders did not come from customer funds. At times, he attempted to shift blame for certain decisions on the inner circle, who he insisted had the authority to take action “on behalf of the company without consulting” him.  SBF described former CEO of Alameda Research, Caroline Ellison, his on-and-off girlfriend, as a good trader and researcher who did not act on his stated concerns about the FTX trading arm’s exposure to market risk and importance of hedging. Ellison, who agreed to a plea deal with prosecutors, testified early in the trial that Bankman-Fried had asked her to manipulate Alameda balance sheets at Bankman-Fried’s direction to make them seem less risky to lenders and that Alameda had used FTX customer funds for its own investments. Prosecutors have promised a robust cross-examination next week. Whether they or Bankman-Fried’s version of events is more persuasive for jurors remains uncertain.  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 SBF Trial, Day 11: How Alameda Got FTX Into a $9 Billion Hole SBF Trial, Day 12: Former FTX General Counsel Speaks Out Against SBF SBF Trial, Day 13: Before Judge, Former FTX CEO Sam Bankman-Fried Gives Few Straight Answers 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 the Unchained Recap for Day 14 in the SBF trial. On his second day on the witness stand, but first day in front of a jury, former FTX CEO Sam Bankman-Fried attempted to make a strong defense in his criminal case. Under direct examination by his lawyer in front of a packed courtroom, the defendant tried to recast his image, expressing ignorance about pivotal events in the prosecution's case and putting the blame on the other members of the so-called inner-circure. Similar to how cooperators had begun by confessing their crimes, SBF came out with bold statements,

albeit of a different nature. Within the first few minutes of testimony, when asked whether he had defrauded anyone, he responded, no, I did not. When asked if he'd taken customer funds, SVF responded, no. In support of the failed entrepreneur theory presented in the defense's opening statement, Bankman Freed admitted, quote, I made a number of small mistakes and a number of large mistakes. By far the biggest mistake was we did not have a dedicated risk management team. We didn't have a chief risk officer. Then over the next several hours, Bankman Fried, who already tends to be verbose, gave what felt like a lengthy list of different explanations for many of the damning assertions by other witnesses. While some of his alternate narratives seemed

plausible, it remains to be seen if the jury will find them all to be, given their sheer number. Early in his testimony, Bankman Fried tried to distance himself from the image that prosecutors painted of him. For instance, tried to deflect blame for any malicious FtX code. He said, quote, I'm not much of a programmer, and also noted that his co-founder, Gary Wong, and the director of engineering, Nishrod Singh, quote, were both authorized to make decisions on behalf of the company without consulting me, though they often would consult with me about it. He also explained that he kept his hair long because, quote, I was kind of lazy and busy, and that he wore shorts in a t-shirt because, quote, I found them comfortable. His attorney, Mark Cohen, who had previously,

in a sidebar discussion with the prosecutors and judge, objected to the fact that the government had shown a photo of SBF holding playing cards, pulled the photo up again. He then had SPF explain that he was holding the cards because he likes to fidget, but not because he plays poker. He also said the fact that he'd become the public face of FTCS was, quote, an accident, since he was, quote, somewhat introverted. An early indication that SPF would attempt to revise some of the key narratives in the prosecution's argument came when he relayed how he heard about the allow negative function, which Wong had testified had been coded into FDX's software just for Alameda to be able to have negative balances that were not part of the margin trading feature. He said that in 2020, because the volume on the exchange had grown, the risk engine was updating slowly. This meant, for liquidations that were triggered automatically, sometimes the same liquidation would be triggered multiple times before the risk engine could update and see that it had already occurred. This caused liquidations that should have been in the thousands of dollars to spiral into the millions of dollars and beyond, which had ramifications that affected not only Alameda but all users.

He said he directed Wong and Singh to create a system to prevent these erroneous liquidations, quote, that maybe it would be an alert or delay or something of that form. He then said that although he didn't know the details of their solution at the time, he now believes that feature was allow negative. For the record, the prosecution showed evidence that this feature was coded into the database on July 31st, 2019, so the timeline of events doesn't match. Early on in his testimony, SvF also established that he had thought it was fine for Alameda to borrow money from FDX as part of the margin trading program. When asked where that money was coming from, he said either collateral put up by other margin traders or from assets that were earning interest on the platform.

As for Alameda's venture investments, he said he thought those were funded from Alameda's profits or sometimes from loans by third-party lenders. Between his professed distance from the code and what he said was his belief that Alameda, as borrowing from FTCS was within the confines of the margin trading program, he painted a picture of an owner who thought the relationship between his two companies was above board and whose work kept him above the nitty-gritty details of FTC's codebase. Bankman Fried then gave a different account of key events in the prosecution's argument, beginning with the accounting bug that overstated the liabilities Alameda owed to FTCS, while others such as FTCS developer Adam Yudidia had testified that the bug had been discovered

in late 2021 and fixed by June 2022, SBF said he had not heard about it until one day in June 2022 when Ellison had come to the FTX office, expressing concern that Alameda may have gone bankrupt. According to Bankman Freed, after a few hours of sleuthing, Wong and Singh had discovered the bug, which overstated the liabilities by $8 billion. SBF said that Ellison then suggested to the defendant

that Alameda could send a balance sheet to lenders who had, requested one as well as pay them back. Bankman Fried said he told her, quote, that sounded right to me as well. He recalled that she said she had thought about a few ways of constructing the balance sheet, but that they didn't discuss it in detail. However, he did say that he noted to her that she could add in the assets in his paperbird entity, but it was, quote, her call. About the seven balance sheet variations Ellison had created and the choice to send the seventh version, he said, quote, I remember looking over it and saying that it seemed reasonable to me. He then stated he thought the funds for repaying the loans would come from Alameda's assets

because the firm had, quote, $5 billion to $10 billion of highly liquid assets off of FTCS in its wallets, bank accounts, and other exchange accounts. SPF also claimed that during this time, he had not heard of the Fiat at FtX.com account that his alleged co-conspirators had claimed to be the main way in which Alameda's Fiatus Fiat currency liabilities to FDX customers were tracked. He said instead that he had learned about it in September or October 2022, just a month or two before the exchange collapsed. Although he said he had heard about it here and there, it was then that he finally looked it up in a database and saw that the size of it was $8 billion, which he said made him, quote, very surprised. He claimed he had thought

Alameda's total liability to FTCS was tracked in a different account, which showed about $2 billion in liabilities and, quote, far more than that in assets. Though he reiterated that he was, quote, surprised, he said he believed it could be paid back. He said he had checked to see that Alameda's net asset value would still be $10 billion, even after accounting for this extra $8 billion in liabilities. He said he would include the value of his paperbird entity, which held his FTCS equity. Quote, I was more than happy to pledge everything I had, he said. Additionally, his testimony about the September 2020 proposal to shut down Alameda was contrary to the three cooperating witnesses who testified that they said that that was impossible because Alameda owed $13 billion to FTCs.

He 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 Alameda down. Finally, he said that in late October 2022, he learned from Singh of the so-called Korean account attributed to Soyan Charles 88. Although this special sub-account tracked the Fiat liabilities that Alameda owed to FDX customers, such as the original Fiat ad account, it was different because here, Alameda would not be charged interest for drawing on its line of credit. As hinted ad in the opening arguments,

Bankman Fried also went on the offense by talking extensively about Ellison's failure to hedge. Noting that their conversations on hedging began in 2021, he said, quote, I would check in periodically to see if Alameda had in fact hedged and was told each time that it had not done so but was planning to look into doing so in the near future. He also said that by June 2022, it had not hedged and that due to the crypto market crash around that time, he became concerned about Alameda's risk

and what he said was at that point, a 75% fall in Alameda's net asset value from the previous year. He also batted away other allegations put forth by other witnesses. regarding Singh's contention that he backdated interest payments related to staking service Ecoserum because SPF wanted to reach 2021 revenues of $1 billion, Big Medfrey told a different story. He said that he was projecting revenues of $1 billion, but Romnik Aurora, head of product, projected slightly less, and so the defendant asked Aurora to confirm if his projections were correct. SPF claimed Singh had been assigned to this task, and that in a subsequent discussion,

Singh, quote, told me that he had dealt with it. Upon finding out the new revenue was from Ecoserum, SPF said, quote, he was a little surprised. For the amount in the insurance fund, which Wong had testified was a made-up number when it was advertised by FTX, SPF simply said that he was not the person who calculated those amounts. Finally, Cohen carefully walked him through a couple of questions probably designed to address Ellison's statements that for SBF, conventional prohibitions such as don't lie, don't steal, didn't fit into his moral framework. Cohen first asked, quote, please answer this question yes or no. Yes or no, would you have philosophical conversations with her? SBF replied, yes. Finally responding in the limited way that his

lawyer and the judge had urged him to adopt, he stated that she would generally initiate their philosophical discussions. Then Cohen asked, quote, without giving any of the substance, what would be the nature of the conversations. SPF responded, quote, generally she would stake out a position on some philosophical topic, usually a contrarian one, and we would debate it.

However, not all these defenses may stick. For instance, early on, he testified that he chose the word research after Alameda for the company name because, quote, research was a generic word that filled out the company name and was better than the internal name,

wireless mouse. A quick Google search online pulls up multiple links in which, prior to the collapse of FTCS, he said that he had chosen the word research for Alameda's name because it would be unobjectionable and unsuspicious to banks, unlike a name invoking words more descriptive of Alameda's work, such as trading or crypto. As for how the defense's direct examination of Bankron-Fried will play out, the judge disallowed most of the defense arguments that were covered in the evidentiary hearing on Thursday, except for how lawyers were involved in FTCS's data retention policy.

Besides that, the defendant will not be allowed to use the advice of counsel defense on other subjects. Cohen estimated he will wrap up Monday morning. Prosecutor Danielle Sassoon advised that she expects her cross-examination to be, quote, substantial, though she expressed hope of finishing before the end of Tuesday. The government also said it expected it will bring rebuttal witnesses, while each side said it projected its closing arguments to last two to three hours. Finally, the parties, along with the judge, will hold a charging conference to decide on jury instructions before deliberations can begin.

This means the trial may well continue into the week after next. Thanks for tuning in, and we will be back on Monday.