Unchained - SBF Trial, Day 4: SBF's Lawyers Annoy Judge Kaplan, While Wang Reveals Alameda’s Special Privileges

Episode Date: October 7, 2023

Laura reports on the testimony of Gary Wang on Thursday, who described Alameda’s special privileges that were programmed into FTX’s code as early as July 2019, a few months after the exchange launched.  These privileges included Alameda’s ability to have a negative balance on its FTX account. This meant that Alameda was able to transfer and withdraw more funds than it had, essentially “borrowing from the exchange.” Those funds, Wang said, belonged to FTX customers, and at the time that FTX declared bankruptcy, Alameda had borrowed $8 billion from the exchange.  Wang said Alameda had a $65 billion line of credit — far higher than any other customer on the exchange. He also revealed details about FTT, the cryptocurrency that FTX had created, and the concerns that were raised about how the tokens were allegedly used to boost Alameda’s balance on the site. If you need to catch up, don’t miss our recent coverage on the trial: SBF Trial, Day 3: Long-Time Friend Says, ‘FTX Defrauded All of Its Customers’ SBF Trial, Day 2: DOJ: Sam Bankman-Fried ‘Lied’ His Way to ‘Wealth, Power, and Influence’ 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. This is the unchanged recap for day four, October 6th of the criminal trial of Sam Bankpenfried. Quick note before we start. The original version of yesterday's recap had two errors, which we corrected later. And since some people may have listened to the inaccurate version, I'll just state those corrections here. I initially said that the Fiat ad account was money in a bank called North Dimension. It was, however, an account at Silvergate Bank, controlled by Alameda Research, but under the name North Dimension. Second, at the time the bug was discovered, it's not that it said that Alameda owed $500 million to FDX customers, but that it said that it owed $500 million more dollars than it actually owed. Okay, now for the most recent update.

In continued testimony Friday, Gary Wong, the co-founder of both Alameda Research and FTCS, who faces a maximum sentence of 50 years in prison, described Alameda's special privilege, that were programmed into FTCS's code as early as July 31st, 2019, a few months after the exchange launched. Prosecutors presented evidence to the court, including previously deleted messages, tweets, and GitHub code documents. Wong, who is cooperating with the government in hopes to preserve, quote, ideally no prison time, noted that these advantages were not disclosed to the public, FTCs customers, or investors. According to Wang, one privileged, included Alameda's ability to have a negative balance on its FTCS account. This meant that Alameda was

able to transfer and withdraw more funds than it had, essentially, quote, borrowing from the exchange. In July 2019, shortly after launch, Bankman Fried allegedly asked Wong and Ashad Singh, FTC's head of engineering, to pay for various FTCX-related expenses from Alameda's accounts and other bookkeeping accounts on FTCX. In particular, the expenses, were those related to FTT, the cryptocurrency created by FTCX. The quote, allow negative feature, which was something that was built into the code, was then enabled for Alameda's account. According to Wong, because Alameda's account was allowed to hold a negative balance,

it withdrew more funds than it had on the site. Those funds, Wong said, belonged to FDX customers, and at the time that FTX declared bankruptcy, Alameda had borrowed $8 billion from the exchange. change. Other FTCS customers that veered into negative territory would be liquidated and closed, Wong said, to protect FTCs and customers from losing money. But Alameda's account was immune to being liquidated because of this allow negative code. According to Wong, SPF had told him to make sure Alameda's account was never to be liquidated on FTCs. On the very same day that

Wong and Singh had instituted Alameda's ability to go negative on FTCX, he tweeted at a user, who was concerned about the relationship between the two companies, quote, Alameda is a liquidity provider on FTX, but their account is just like everyone else's. At some point, in response to a question from an Alameda trader, the defendant said that the max amount Alameda would be able to withdraw from FTCS was the equivalent of its revenues. However, at the end of 2019 or early 2020,

Wong said he checked Alameda's balance on FTX and discovered that it was negative by around 200 million, million dollars, more than FTC's $150 million in trading revenue at the time. Wong, surprised about the situation, said he talked to Bankman Freed, who said to recalculate the values by including all the FTT held in all of Alameda's accounts on FTCs. Wong indicated, in his testimony today, what he believed were two problems with Bankman Freed's approach. One, Alameda was withdrawing U.S. dollars and other cryptocurrencies, not FTT.

Second, if Alameda sold an equal amount of FTT to offset its withdrawals, the price of FTT would crash so severely that the selling, quote, might not be enough to cover how much Alameda was withdrawing. Additionally, Wong explained that FTT collateral was worth less than, say, BTC collateral, because Bitcoin is less volatile and more liquid. Wong said Alameda had a $65 billion line of credit, far higher than any other customer on the exchange had. And originally, it actually started at a few million dollars, but gradually increased because the trading firm wouldn't have enough collateral to place large orders needed for its market making duties. Wong said, quote, initially, it was just a few million dollars,

then a few hundred million dollars. And then this kept happening. So then to prevent this from continuing to be an issue, Sam asked us to take a large number. I took it up to a billion dollars. And then the issue happened again. And then he asked me to take it up even further. And then he asked me to take it up even further, and I told him, I am taking it up to $65 billion. In his testimony, Wong said in June 2022, Bankman Freed wanted a complete picture of Alameda's balances on the FTX exchange. After finding and correcting a bug that did not accurately represent Alameda's balance on FtX, Bankman Freed called a meeting in the Bahamas office to discuss Alameda's balance of negative $11 billion with Wang, Singh and Caroline Ellison, the then-CEO of Alameda Reefat. The then-Reilly

Research and former romantic partner of Bankman Freed. In the meeting, Bankman Fried allegedly instructed Ellison to return the money Alameda owed to its lenders, such as Crypto Lendor Genesis, who was asking for the loans to be repaid. Wong stated that the money to repay Alameda's lenders would all come from FTX customer deposits. By September 2022, Bankman Fried allegedly sent a Google document to Wong and Singh, not Ellison, to discuss possibly shutting down Alameda research, citing a Bloomberg piece that highlighted the closeness between FTX and Alameda. Bankman-Fried also mentioned that Alameda had a weaker culture and leadership compared to another investment firm, Medullo Capital, where Bankman-Fried was an investor

and one of whose executives was another former girlfriend. The day after FTCs filed for bankruptcy on November 11th, Wong said he was instructed by both Bankman-Fried and Bahamian government officials to transfer FTC's assets to the Bahamas regulators. Wang said Bankman-Fried thought it was ideal to transfer FTCS assets to them because they, quote, seemed friendly and open to letting Bankman-Fried remain in power. Despite U.S. regulators also instructing Wong to transfer assets to them, Wong testified that he continued to follow Bankman-Freed's lead

by ignoring the U.S. bankruptcy team and continuing to send funds to Bahamas regulators. Wong returned to the U.S. on November 16th, meeting with the government the next day to express interest in cooperating with the FBI, and federal prosecutors. Wang, who thought getting charged was likely, said he wanted to avoid serving time in prison and thought cooperating with the U.S. government would lighten his sentence. By December, Wong pleaded guilty to four felonies and made a cooperation agreement with U.S. prosecutors. The agreement stated that Wong had to meet with the government, truthfully answer their questions, not commit any more crimes, and testify in court against his former

roommate and math camp buddy. Judge Kaplan expressed his displeasure, sometimes in the form of heavy size with the defense for repetitive questions throughout the week. After several questions that were blocked by the judge, Christian Everdell, Bankman Freed's attorney, asked Wong about his role as CTO, which was a firmly established fact at that point. After an objection from the prosecutors, Judge Kaplan said to the defense team, quote, it's been answered, but let's stop that please, referring to the repetition. Everdale then proceeded to ask whether Wong was focused on the business. side of FTCS. Soon afterward, Judge Kaplan, visibly annoyed, asked what part of let's stop that was obscure?

Everdale then asked questions about the fast growth of FTCS and the number of employees it had when Wong, a co-founder, started. The answer, of course, was that it was just him and SBF. It was at this moment that Judge Kaplan stopped the questions, referring to the fact that Friday's session was supposed to end at 2 p.m. and that the defense appeared to be trying to be trying to do. to run down the clock without ending its cross-examination. He said, quote, if we're really going on to get right to the dot of two, I think we can just break seven minutes early and let you start off afresh on Tuesday. The trial continues next week after the Monday holiday. The prosecution indicated that Caroline Ellicin, Alameda's former CEO, is set to testify next, despite saying

yesterday that Block V CEO, Zach Prince, would take the witness stand after Wong. Tune in next Tuesday for the next dispatch on the SPF trial.