Unchained - SBF Trial, Day 5: SBF's Defense Finally Found Its Legs, But Can It Counter Caroline Ellison?

Episode Date: October 11, 2023

Caroline Ellison, former CEO of Alameda Research and SBF's ex-partner, took the stand to reveal the alleged financial mismanagement at Alameda and FTX, which she claimed was at Bankman-Fried’s direction. The cross examination of Gary Wang finally began to show how SBF’s lawyers plan to defend him, though Wang largely appeared to be a yes man who simply trusted and followed his friend and co-founder. Ellison's revelations included Alameda's hidden trading of FTT to prop up its price, her warnings to SBF about Alameda’s inability to pay back its lenders if he put billions more into venture investments, and his views on risk and “expected value.” For instance, she claimed he said if, with a coin toss came up tails and would mean Earth’s destruction, he would toss the coin if there it was twice as likely that it would more than double prosperity on Earth. However, her testimony seemed designed to preemptively rebut the defense’s potential argument that Alameda needed to borrow customer funds because she had not hedged.  Catch up on Unchained’s previous coverage:  Sam Bankman-Fried Trial: Here’s Everything That Happened So Far 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 Did Sam Bankman-Fried Have Intent to Defraud FTX Investors? 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 5, October 10th of the criminal trial of Sam Bankman-Fried. On Tuesday at the start of the second week in the criminal trial of Sam Pinkman-Fried, the former FTX CEO's defense lawyers finally seemed to make some headway after what was largely seen as an ineffectual first week. However, in the afternoon, Caroline Ellison, the former CEO of Alameda Research, and the the ex-girlfriend of SBF, testified. Setting the stage for what looks like, Ellison and Bankman-Fried blaming each other

for Alameda's usage of FTCS customer funds to pay the trading firm's debts. Ellison followed Gary Wong, the co-founder of Alameda and FDX, who testified against Bankman-Fried for a third day. It was the first time the defense did not use many repetitive questions and instead mounted a coherent line of argument

to undercut some of Wong's testimony to the prosecution. Still, by the end, it seemed that Wong was a yes man who mostly followed orders from Bankman Freed. In one example, Wong noted that Bitcoin's price in May and June of 2022 slid dramatically, causing Alameda's lenders to ask for their money back. As a result, Wong and top executives started calculating Alameda's balance on FTX to see whether the trading firm could pay back its loans. Defense lawyer Mark Cohen highlighted the difference between Alameda's total assets, and Alameda's balance on FtX, specifically how Alameda had balances and assets external to FtX. Although Alameda had a large negative balance on FtX, Wong felt relieved when he learned that

Alameda's net asset value, or NAV, was positive, highlighting how Alameda had more assets than liabilities in June of 2022. He said Ellison paid back some of its lenders when they realized Alameda's nav was positive. Bankman Freed's September 2020 memo, about possibly shuttering Alameda research resurfaced in Tuesday's courtroom. One of the bullet points of the memo shared with the jury stated Bankman-Freed's reasons for potentially shutting down Alameda. It said, quote, the fact that we didn't hedge as much as we should have alone cost more

in EV, which means expected value, then all the money Alameda has ever made or ever will make. And that's the kind of critical mistake we're likely to make if I'm not actually running the show there. So the defense lawyers here highlighted this quote in yellow and underlined, We didn't hedge in red. At that point, the defense asked Wong about some signal chats between Bankman Freed, Wong, and Alameda traders, in which SPF mentioned what Gary said was, quote, the possibility of selling short some S&P 500 futures.

And then a few days after that, the price of a bunch of cryptocurrencies fell. And then after that, Sam sent a bunch more messages being angry at Alameda for not doing that. In his follow-up questions, Cohen asked Wong if Ellison did not properly hedge. However, Wong replied that Ellison was CEO, but that he didn't know what the decision-making process was. When Wong was discussing the events that transpired days before the FTX bankruptcy, he said FTX customers were withdrawing, quote, around $100 million an hour on November 6th, significantly faster than most days, which saw of withdrawal rate of about $5 million to $10 million per hour. The defense brought up the tweet by Binance CEO Chang Peng Xiao

about how the company planned to sell the FT tokens it was owned and then asked Wong, quote, Binance was FTCS's main competitor, wasn't it? When Wong agreed, SPF's lawyer responded, quote, and his tweet triggered effectively a run on the bank of FTCS, right? This question was objected to by the government and that objection was sustained, but when answering a rephrasing of the question, Wong said, quote,

I'm not sure if it was the tweet or the leaked balance sheet, implying that the cause could also have been the Alameda balance sheet that was heavily reliant on FTT. Additionally, the defense raised again at Bankman-Fried's tweet about how FTC's assets are fine. Wong said the tweet was, quote, true but misleading. However, under the defense's questioning, he did admit that FTCS was solvent

insofar as FTX had more assets than liabilities. But he explained that it was also illiquid by virtue of not being able to quickly convert their assets to cash. The defense, attempting to explain the transfers that SPF and Wong made to the Bahamian regulators, brought up an email to Wong that said, quote, the commission hereby requires you to attend the commission's offices at, and then there was an address, and continued, quote, you are required to appear at 2 o'clock in the afternoon to answer questions under oath.

It also stated that not attending could result in him being liable to be committed to prison for contempt. However, this was later brought up by the prosecution who showed the email that Wong had received, and it was sent at 3.26 p.m. after the meeting had already started, Wong, who drove with Bankman-Fried to the meeting, did not actually converse with the Bahamian regulators, only SBF did. After being questioned by the defense about $200 million in loans that he had received, the prosecution started its redirect examination of Wong by asking about those loans. Wong expressed ignorance about the loans he received, saying he didn't.

know what the investments were for. When asked why he signed them, he responded, quote, I was given them to sign. They said it was for an investment. And I believed them and they wanted me to sign. So I just signed. By them, he's referring to some FtX lawyers. Then he added that he also signed it because he, quote, trusted bankman freed. Wong, who was asked by the prosecution about Alameda's special privileges, such as its $65 billion line of credit, said Alameda was inefficient because the trading firm could market make without withdrawing $8 billion and having a $65 billion line of credit. Moreover, Wong said to Bankman Freed that Alameda was probably too big to shut down because the firm was borrowing too much money. Bankman

Freed responded with acknowledged, Wang alleged. Ellison, sporting a gray blazer in a dusty pink dress, took the stand shortly after Wong. Straightforward, articulate in often describing trades and financial activity in more lay language than Wang's. did, she may have seemed like a sympathetic witness to the mostly female jury, especially when she described her romantic relationship with Bankman Freed. However, the prosecution took a while to walk through a spreadsheet Ellison had made in September of 2021, warning SBF that if FTCS made another $3 billion in venture investments, there was, quote, no way it could repay its loans to lenders. It was a harder to follow argument than the simpler line last week that Alameda took FTX customer

funds without disclosing it. This line of questioning may have given fodder to the defense that the issue was the difficulty of flying a plane while building it. Ellison and Bankman-Fried met during their time at quantitative trading firm Jane Street when she was an intern and he was a trader. By 2018, Ellison said that she had not only left Jane Street to work at Alameda, but also started a romantic relationship with Bankman-Fried. Ellison, upon joining Alameda, said she realized the firm's financial footing was much worse than what she had expected. According to her testimony, Alameda had suffered, quote, large losses, and that, quote, more than half the company ended up quitting.

Ellison said that she asked why Bankman Free didn't tell her about these glaring details. Quote, he apologized and he said that he hadn't known how to tell me, she said in her testimony. When describing the romantic relationship, Ellison said, I would say the whole time that we were dating, he was also my boss at work. which created some awkward situations. I would say in our personal relationship, there was a general theme that I sort of wanted more from our relationship,

but often felt like he was distant or not paying attention to me. Alameda was funded through loans from third-party lenders, and when Ellison joined, these lenders were asking for their money back, alleged the former Alameda CEO. As a result, Bankman Freed made it a, quote, big priority to get more loans, quote, in order to do more trades

or just have the ability to do whatever valuable things came up, which she said included, quote, investments or acquisitions. Ellison mentioned two ways Alameda received money from FTCS, saying Alameda received FTCS customer deposits directly, and that Alameda had a $65 billion credit line to take assets off the centralized exchange. Quote, my impression was that FTX marketed itself as a safe, reliable, audited,

and highly regulated exchange, she said, noting that she quickly realized that it wasn't, after discovering that Alameda had used FDX customer funds for expenses, investments, repayments on loans, and trading. Like Wong, Ellison said Alameda's $65 billion line of credit was not necessary for its market-making responsibilities, mentioning that a $100 million to $200 million credit line range would have been sufficient. Ellison also alleged that Bankman Free did not disclose this enormous line of credit, to investors, auditors, and the general public.

One of FTC's early investors was Binance, the world's largest crypto exchange by trading volume. In 2021, Bankman Fried told Ellison that he wanted to buy back Binance's stake in FTX. The problem for Bankman Freed was that FDX, even though it had just raised a $1 billion venture round, didn't have enough money. As a result,

Ellison and Bankman Freed used the $1 billion line of credit, which depended on FTX customer deposits to acquire Binance's equity stake in FTCX. Ellison's takeaway from this situation was that Alameda's line of credit could be used as a backstop or source of capital when the firm was strapped for liquidity. Amazon presents Jamal versus the Shih Tzu. Descending from the gray wolf, Shih Tzu's live by their own untamed primal code of not giving a single Shih Tzu. But Jamal shopped on Amazon and bought dog treats, chew toys, and 32 ounces of carpet cleaner.

Hey, Jamal, you've been promoted to Pack Leader. Save the everyday with deals from Amazon. In addition to using the line of credit to shore up funds, Ellison alleged that Bankman Freed had created FTT, the native exchange token of FTCS, to borrow more money. In the beginning, FTT was trading hands at less than, less than a dollar and was not included in FTX's balance sheet. Eventually, Ellison indicated that Alameda began including FTT and FTC's balance sheet at Bankman-Fried's direction as a means to acquire moral loans from crypto lenders such as Genesis. Ellison noted that she felt FTT's inclusion

in the balance sheet was misleading because the FTT owned by Alameda in 2021 could not be sold for what they said it was worth on the document. If the huge amount of FTT was sold, the price of FTT would drop considerably, Ellison said. In 2021, when Binance decided to offload some of its FTT tokens, Bankman-Fried told Ellison to buy FTT to keep the price afloat, since the tokens were used to secure loans. Ellison added that Bankman Fried would become angry when she spoke too much about Alameda's FTT trading in front of others. At one point, Alameda trader Victor Schu questioned why Alameda had bought FTT at what he felt was too high a price, rather than waiting for the price to fall, when it would have cost Alameda less. In a signal message to him, Ellison wrote,

quote, FTT price is definitely something SBF's gotten upset at me for talking too publicly about before. So I was feeling stressed out about that slash struggling how to respond. Then she noted she agreed with Shoe. Quote, I think we fucked up by not taking it down more earlier, meaning by not buying it lower earlier. Ellison became Alameda's co-CEO in 2021 and then CEO in 2022. One of her responsibilities as CEO was to handle the day-to-day operations of Alameda as well as prepare the firm's balance sheet. Through that exercise, she said, she discovered that as of mid-2020, the amount loaned to SBF, Wong, and Singh totaled around $5 billion. Ellison herself had a $3.5 million loan passed through her account for FDX staff who wanted to invest in a gambling company in her name,

since she wasn't affiliated with FTX. Additionally, she noted that Ryan Salem, the former co-CEO of FTX's Bahamas entity, received a $35 million loan, which was to be used to make donations to Republican candidates. In her conversation with SBF about this, she alleged, he said,

that one could, quote, get very high returns in terms of influence by spending relatively small amounts of money. She claimed that one example he cited was what she thought was a $10 million donation to then presidential candidate Joe Biden, which Bankman Fried felt had, quote, got him some amount of influence and recognition.

U.S.S. prosecutors raised questions to Ellison about Bankman Fried's risk behavior. Ellison said Bankman Fried had previously described himself as, quote, risk neutral, meaning he was more comfortable taking risk than most people who were generally risk-averse. Ellison gave an example of a coin flip where, Tails is Earth's destruction,

and heads is prosecuting. prosperity more than double Earth's current levels. Elson alleged that Bankman Freed said he would proceed with the coin flip, risking the planet, a statement that caused a ripple of incredulity in the overflow room. Ellison then started detailing her conversations with Bankman Freed about potential bad case scenarios where crypto markets are down 50%, investment ventures are down 100%, FTC's affiliated tokens are down 75%, crypto lender genesis tightens its loan requirements, etc., amongst other conditions. U.S.

prosecutors introduced a spreadsheet that Ellison made in September 2021 to analyze these scenarios. In the spreadsheet, Ellison subtracted the value of FTX-affiliated tokens like FTT, Sahl, and Serum from Elamita's net asset value. Ellison said she excluded these tokens worth about $10 billion because she wanted to see how much liquidity was available, and according to her, these tokens were not liquid by virtue of being hard to sell and volatile. After analyzing Alameda's liquidity, Ellison concluded Alameda was at some risk of not being able to meet its loan recalls, and within her analysis, Ellison made the assumption that Alameda would use FTC's customer funds to repay its debt, similar to how customer

deposits were used to buy back Binance's stake in FTCS. At the time, she said, Bankman-Fried was considering whether to invest an additional $3 billion into venture investments. In her testimony, Ellison said she updated her analysis and adjusted several parameters to see how liquid Alameda would be after deploying $3 billion as venture capital. She concluded that if FTX received negative press coverage, Genesis wanted its loans back, and Bankman Freed poured an additional $3 billion into venture investments, there was a 100% chance Alameda could not repay its lenders. which she said meant there would be, quote, no way we would be able to make the payments,

even if Alameda borrowed FDX customer funds. Alameda's loans from Genesis were open-term loans, meaning they could be recalled at any time. Ellison alleges that upon reviewing the document, Bankman Freed urged her to assume that Alameda would be able to convert most of its loans to fixed term. He also asked Ellison to convert all of Alameda's open-term loans to fixed. However, she was able to only convert a fraction. Despite Ellison's analysis, she said Bankman Freed decided to pursue investing more of Alameda's liquidity. On January 14, 2022, Bankwin announced via X, formerly known as Twitter, a $2 billion venture fund called FTX Ventures.

This long line of questioning through the spreadsheet, which showed multiple scenarios, felt plotting, and may have given the defense fodder for its theory that Bankman Fried was building a a plane while flying it. However, the prosecution might have felt the spreadsheet was necessary to counter any argument by the defense that Ellison was to blame for not hedging, which, as mentioned earlier, in a signal chat, Wang had said had made Bankman Fried angry. The trial resumes again tomorrow at 9.30 a.m. continuing with Ellison's testimony. Unchained, we'll be back with more updates tomorrow. Thank you.