Unchained - SBF Trial, Day 3: Why a True Believer in FTX Flipped Once He Learned One Fact

Episode Date: October 6, 2023

Laura reports on the testimony of three witnesses on Thursday, including one who declared that “FTX defrauded all of its customers” and another stating that he had committed financial crimes at the direction of Sam Bankman-Fried.   Former FTX software developer Adam Yedidia, Paradigm co-founder Matt Huang, and FTX and Alameda co-founder Gary Wang filled in the details of different aspects of FTX and Alameda’s business. Huang’s testimony detailed how Paradigm expressed concern about FTX’s lack of corporate controls and how the company was “owned and controlled by Sam.” Wang has only started his testimony but has already said he implemented advantages for Alameda into FTX’s code at Bankman-Fried’s direction.  Yedidia’s account had the most emotional details, describing how he had a strong belief in the company, to the point where, when employees began leaving FTX, he had messaged Bankman-Fried that he loved him and wasn’t going anywhere, but that it flipped once he realized “FTX defrauded all of its customers.” Find out what new information caused him to have a change of heart in this episode.  If you need to catch up, don’t miss our recent coverage on the trial: SBF Trial, Day 2: DOJ: Sam Bankman-Fried ‘Lied’ His Way to ‘Wealth, Power, and Influence’ SBF Trial, Day 2: DOJ Says Sam Bankman-Fried ‘Lied’ While Defense Claims His Actions Were ‘Reasonable’ SBF Trial, Day 1: Possible Witnesses Include FTX Insiders, Big Names in Crypto, and SBF’s Family 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 In the SBF Case, Elite Corruption Is What’s Really on Trial Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, Laura here with your unchained recap of day three of the criminal trial for Sam Bankman-Fried. Three people testify during the Sam Bankman-Feed trial Thursday, with one declaring that FTX, quote, defrauded all of its customers, and another stating that he had committed financial crimes. Former FTC software developer Adam Yudidia, Paradigm Co-founder Matt Huang, and FTX co-founder Gary Wong took the witness stand, answering questions about their interactions with Bankman Freed and his business dealings. Yidditya, who finished his two-day testimony on Thursday, shared with the court why he resigned from FTCS. In December 2021, Yadidia became aware of a bug in FTC's code base that overstated how much money Alameda

research owed FTCS. When FTCS customers deposited Fiat money, namely the U.S. dollar, into the exchange, sometimes they would route it to an account at Silvergate Bank, controlled by Alameda Research, but under the name North Dimension. This was tracked internally in the FTX database with an account called Fiat at FTCX.com. At the time the bug was discovered, FTX's internal system had mistakenly indicated that Alameda Research owed $500 million more than it actually owed to FTCS customers. But by the time it was fixed in June 2020,

it revealed that Alameda owed $8 billion to FDX customers, a large and concerning number to Yidditya. At this point, Yiddaia had a conversation with Bankman Freed in the paddle tennis courts at Albany, the luxury community where they lived in the Bahamas. Yadidia asked the defendant if everything was okay, and Bankman Fried responded, quote,

we were bulletproof last year, we're not bulletproof this year. When Yadidia asked how long it might be before their bulletproof again, the former FTC CEO replied that it might be six months to three years. In November 2022, as FTCS was imploding, and employees had already started leaving, Yadiddea told Bankman Freed via signal,

quote, I love you, Sam, I'm not going anywhere. To reassure him that he would also not quit. However, Yadidia's attitude changed when he received a phone call from a fellow FTX developer, Lila Clark, who told him Alameda Research had used FTC's customer deposits to pay Alameda's loans to its lenders. During questioning by the prosecution,

he revealed that in June, when he'd seen that Alameda owed $8 billion to FDX customers, he had assumed Alameda had the ability to repay that debt. But in November, after Layla's call, he said he realized, quote, if Alameda was repaying its loans with FTX customer money, that implied it didn't have money of its own to repay the loans with, which means the money was simply gone.

The prosecutor later asked once more about how Yadidia believed in FTCS previously and asked why his belief in the company changed. At that point, he exclaimed, well, FTCS defrauded all of its customers. That silenced the courtroom for several seconds. Next up was Matt Huang, co-founder of crypto investment firm Paradigm. He detailed how and why Paradigm invested into FTCS starting in 2021. Wong said that Paradigm was impressed with the FTC's liquidation engine and its growth in market share. He also expressed how Paradigm's investment decision would have been severely impacted if he had known FTCS could transfer customer deposits out of the exchange wallets and use them for its own purposes. During his testimony, prosecutors showed

email correspondence between Bankman Freed and Paradigm employee Arjun Bollagy, in which the VC firm expressed concern about the lack of traditional corporate governance structures at FTCX. Bollagy wrote, quote, as we understand FTCS is effectively owned and controlled by Sam, liking more traditional corporate governance model rights, etc. One example of where this can negatively manifest with crypto companies is through unintended value leverage, e.g. via FTT, Alameda, or some other mechanism. At another point in his testimony, Huang said, quote, it was generally understood that customer deposits are sort of sacred, that when customers

deposit into the exchange, they expect the ability to get them back out. According to Wang, Paradigm had invested roughly $278 million into FTX since 2021, and that investment has since been marked to zero. Gary Wong, the co-founder of Alameda Research and FTX, began his testimony by declaring that he had committed financial crimes, specifically wire fraud, security fraud, and commodities fraud during his time at FTX. Wong, who was also FTX's chief technology officer, had said Bankman Freed had directed him to place code inside FTC's software that gave special privileges to Alameda. As a result, Alameda could withdraw and transfer out an unlimited amount of customer deposits from FTX, even with a negative balance on the exchange, as well as place trade orders

faster than other customers, giving Alameda a strategic advantage. Additionally, Wong stated that Alameda had a credit line of $65 billion, substantially bigger than large market makers on the exchange that only had single to double-digit million dollar credit lines. During his testimony, the prosecution also explained how the name Alameda research was chosen for the proprietary trading firm. They played a clip from a Blockworks podcast interview with Bankman Freed, in which he said, quote, we knew banks were going to shut us down if we named our company shit coin day traders, Inc. But no one doesn't like research. Huang will continue his testimony tomorrow Friday, after which Zach Prince CEO of BlockFi, will take the witness stand. Tune back in tomorrow with

another update from Unchained on Friday's testimony.