The second week of Sam Bankman-Fried’s closely-watched criminal lawsuit brought up allegations the former FTX chief executive approved bribes of Chinese Communist Party officials, sought emergency funding from Saudi Prince Bin Salman and was aware of the day-to-day operations of Alameda Research, despite claiming he instituted a firewall between the exchange and hedge fund.
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Caroline Ellison, SBF’s former girlfriend and ex-CEO of Alameda, kicked off the week with explosive testimony on Tuesday. Like in the prosecutors’ examination of FTX co-founder Gary Wang last week, Ellison admitted to committing fraud early in her questioning. Both Wang and Ellison have taken plea deals with the U.S. Department of Justice (DOJ), along with another former FTX higher up, Nishad Singh, due to take the stand later in the trial, which could lead to reduced penalties for their professed crimes.
Ellison’s testimony covered her rocky relationship with SBF, her anxieties about Alameda’s nearly unlimited line of credit at FTX and the ways SBF coached the naturally timid math major through becoming the face of one of crypto’s most valuable trading firms. At least once on the stand Ellison broke into tears while discussing the tumultuous days leading up FTX’s collapse, when it became clear the exchange could not cover all the necessary customer withdrawals. (Exchanges, unlike banks, are not supposed to invest or spend deposits.)
Ellison also discussed the relief she felt when a doctored version of Alameda’s balance sheet was leaked to CoinDesk, leading to the publication of an award-winning article that cast doubt on the solvency of SBF’s crypto trading empire. FTX could not meet its obligations to customers, Ellison said, because the money had been stolen.
According to Ellison, FTX customer funds were withdrawn to meet many of Alameda’s financial obligations, including loans it took out from crypto lenders and to patch holes in the balance sheet after several of the supposedly market neutral hedge fund’s crypto investments went bad.
When Genesis Capital, a CoinDesk sister company, asked to see an updated accounting of the trading firm’s position, SBF allegedly “directed” Ellison to create seven false versions of its balance sheet that hid the money Alameda had misappropriated from FTX. She said on the stand she was aware this was a fraudulent misrepresentation that masked the true risks Alameda had accrued.
FTX customer’s assets also paid for Bahamian luxury real estate, venture capital deals and to fund a wide-spread political funding campaign, which was allegedly guided by SBF’s mother, Barabara Fried’s, Democrat campaign financing outfit. Ellison, who had asked for and was denied equity in Alameda, estimated $5 billion in personal loans were disbursed to FTX insiders.
SBF’s lead attorney Mark Cohen developed an argument during a cross-examination that, as CEO, Ellison was responsible for the firm’s deficient management. In particular, Ellison was asked about why the hedge fund failed to hedge for a market downturn or soured deals, which SBF supposedly suggested. For her part, Ellison admitted Alameda could have been more financially prepared, but also said no trading strategy could account for the billions in funds SBF had marshalled elsewhere.
At Ellison’s direction, FTX executives Wang and Singh gathered data about Alameda’s accumulated borrowings that found the firm had withdrawn deposits amounting to over three-quarters of FTX's customers' total holdings, including over half of the ETH on the exchange and lesser amounts of customers’ USDT and BTC. A later witness, Alameda developer Aditya Baradwaj, on Thursday said Alameda lost at least $200 million through preventable mistakes, including $100 million lost to a phishing scheme.
District Judge Lewis Kaplan continued this week to admonish SBF’s defense attorneys, who many courtroom attendees have said are asking redundant questions. Cohen’s ultimate strategy during Ellison’s cross-examination, which began and ended Thursday, has been described as meandering and confusing. In a sidebar with the judge, the prosecution accused SBF of sneering and laughing during Ellison’s testimony, which his lawyers denied.
See also: Defending the Indefensible? Sam Bankman-Fried's Lawyers | Opinion
CoinDesk has combed through recent reporting, court documents and transcripts to find the biggest highlights of the trial this week, including on how exchange token FTT was used to mislead investors, recent revelations about the $400 million attack of FTX and the most damning allegations so far.
- Sam Bankman-Fried considered shutting down his hedge fund Alameda Research in mid-2022 due to concerns over its “nefarious trading activity” and over-leveraged position on the nominally separate exchange, FTX, according to an unpublished blog post introduced in SBF’s trial.
- On Tuesday, former Alameda CEO Caroline Ellison testified the fund knowingly manipulated its balance sheet at SBF’s direction to look “less risky to investors.” The 28-year-old Ellison also said Alameda effectively stole billions of dollars from FTX customers to fund doomed investments and buy influence with politicians.
- SBF’s defense attorneys have argued Ellison, a former romantic partner of the defendant, was a negligent manager of Alameda who ignored instructions from Bankman-Fried to “hedge,” contributing to the businesses’ collapse. The suggested strategy allegedly involved buying S&P 500 options, which SBF (largely erroneously) believed was “uncorrelated” with the crypto market.
- On the stand Wednesday, Ellison revealed SBF was in talks with Saudi Prince Mohammed Bin Salman about backstopping FTX losses before it declared bankruptcy. SBF, allegedly, was regularly briefed on the amount of money Alameda had drawn against FTX customer accounts.
- In an attempt to recover $1 billion in frozen funds on Huobi and OKX exchanges, which were locked up in a money laundering investigation in China, Ellison testified Alameda had attempted to bribe Chinese government officials into releasing the capital. The claim was stricken from the record.
- Ellison also said Alameda paid Thai prostitutes to open accounts on those exchanges so they can run trading strategies meant to slowly drain the locked funds, which represented a significant percentage of the hedge fund’s assets at the time.
- Ellison’s infamous “Things Sam is freaking out about” list was introduced as evidence, a Google Doc she updated “often” detailing her on-again-off-again boyfriend’s growing anxieties. Included on the list were “bad press” coverage and SBF’s scheme to sic regulators on rival Binance, on the belief that FTX would absorb Binance’s customers, which would help fill in its missing $8 billion.
- SBF is accused of cultivating “a culture of secrecy” among higher-ups. This included using encrypted messaging app Signal (and setting messages to delete within a week), and preferably holding in-person meetings. Execs also used “coded” language — like referring to “our Korean friend” to refer to the alleged “backdoor” used to siphon funds from FTX.
- SBF has argued this behavior was recommended by FTX’s hired counsel. Several FTX executives began saving messages during the exchange’s liquidity crisis in November that led to the firm filing for bankruptcy protections.
See also: Could Sam Bankman-Fried's Saga Happen Without Crypto? | Opinion
- FBI agents seized several documents belonging to Ellison when raiding her parents’ home in December 2022, including her personal diary and Google Docs referring to fraudulent activity at FTX in code.
- Lax security practices at FTX could have resulted in billions of dollars in losses when the exchange was hacked last year. Accounts tied to FTX and FTX.US were drained on Nov. 11, 2022, mere hours after the company filed for bankruptcy, after someone accessed hot wallets. A new Wired report claims Gary Wang was able to send an FTX advisor $500 million in crypto while another party sent funds to custodial BitGo. Last week, the stolen funds began to move to privacy tools.
- Russia-based cybercriminal groups have since been linked to the $400 million hack of FTX last November. According to analysis firm Elliptic, a65,000 ETH tranche of stolen funds ($100 million) was transferred to the Bitcoin blockchain using the RenBridge service. The attackers are still unknown, with suspects ranging from rogue employees at FTX to North Korean hacker group Lazarus.
- An Alameda Research developer said the Sam Bankman-Fried-owned hedge fund lost at least $200 million through mismanagement. This includes a $40 million loss yield farming on a “new blockchain of questionable legitimacy,” $100 million lost through a fake phishing link on Google Ads and a host of other calamities spurred by SBF’s desire “to move very, very fast.” The employee, Aditya Baradwaj, also said FTX stored crypto keys in plaintext in an easily accessible file.
- Alameda struggled to get an audit, according to Ellison’s testimony on Thursday. The firm apparently tried to hire accountants in 2021 to 2022, but “they couldn't or wouldn't do it" after reviewing Alameda’s books. Reportedly, former FTX Digital Markets CEO Ryan Salame prepared Alameda's balance sheets, but at some point, Ellison took over this task.
- According to CoinDesk reporters in the room, Ellison’s “cross” was occasionally “meandering” and at times appeared vexing to District Judge Lewis Kaplan, who cautioned SBF’s attorneys not to repeat questions or ask about already established facts. Asked about the firm’s borrowing policies, Ellison reportedly asked Cohen: “Do you have anything more specific?”
- After a back-and-forth between the DOJ and SBF’s lawyers over whether FTX’s now widely-profitable investment in AI startup Anthropic could be brought up, Judge Kaplan said it would be misleading evidence (suggesting that FTX customers could be repaid in part or in whole). In a Sunday court filing, the DOJ said SBF’s $500 million investment in Anthropic in 2022 came from customer funds. Ellison was also an investor in the firm, which is reportedly nearing an investment from Amazon valuing it at $4 billion. Kaplan ultimately agreed Thursday with the prosecution that a successful investment using customer funds was irrelevant, drawing a comparison to someone stealing money from the Federal Reserve to use on Powerball lottery tickets.
See also: Is Sam Bankman-Fried a Sociopath? | Opinion
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