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The First Two Weeks of FTX Trial: Friends to Foes, Secrets Exposed

The First Two Weeks of FTX Trial: Friends to Foes, Secrets Exposed

2023-10-17 | 5m


- Three close friends of SBF testified against him in court, suggesting he was the mastermind behind the collapse of FTX and Alameda. They said that SBF was actually aware of FTX and Alameda’s intertwined operations and misconducts, not a naive entrepreneur who “acted in good faith” as his defense lawyer claimed.

- During this time, $400 million that had been stolen when FTX declared bankruptcy suddenly moved again.

In the high-stakes courtroom drama surrounding Sam Bankman-Fried (SBF), a tale of shifting loyalties and surprising revelations has unfolded. Close allies of the former FTX founder and ex-CEO took the stand, and to the shock of many, they seemed to turn their backs on the man who was once at the helm of one of crypto's most prominent empires.

The trial began with SBF's defense attempting to paint him as a visionary entrepreneur who had built billion-dollar companies from scratch. They called him "Sam" in a friendly, almost endearing manner, emphasizing his accomplishments. “Sam didn’t defraud anyone,” they stated. “Sam acted in good faith. [...] He didn’t steal any money.”

But as the days unfolded, a different narrative began to emerge.

When “Allies” Testified

For the past two weeks, three of those who were once close to SBF were summoned to the stand. They included Adam Yedidia, a friend from MIT who had worked closely with SBF at FTX; Gary Wang, the former CTO of FTX and a co-founder of the crypto exchange; and Caroline Ellison, the former CEO of Alameda and SBF's girlfriend.

Fragile Since June 2022

Yedidia's testimony revealed a pivotal conversation where SBF had admitted that FTX was "not bulletproof." This candid admission suggested that SBF was aware of the growing financial risks at the exchange, as Alameda at that time bore an $8 billion liability to FTX.

This suggested that SBF was intimately aware of the vulnerabilities within FTX that could jeopardize the exchange's financial stability, despite his public claim in November 2022, “FTX is fine. Assets are fine.”

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Also, the statement suggests that SBF might have had knowledge of the financial risks posed by Alameda's activities within FTX.

A Kingdom of Falsehoods

Gary Wang probably provided some of the most damning testimony. He said that he was told by SBF to change a vital piece of FTX software code, enabling Alameda to obtain a staggering $65 billion credit line on FTX. This credit line was unlike any other, as no other customer had a credit line exceeding $1 billion. The code alteration allowed Alameda to maintain a negative account balance and essentially borrow money from FTX's unsuspecting customers. This revelation was a testament to the intricate maneuvers that transpired behind the scenes, involving not only Bankman-Fried but also other high-ranking FTX and Alameda executives.

Additionally, Wang also revealed the inner workings of FTX's supposed safety net – its backstop insurance fund. This fund was designed to cover losses when a customer's position required liquidation. However, Wang's testimony painted a grim picture. He disclosed that the value of the backstop insurance on FTX’s website, was, in reality, a sham, providing a false sense of security to customers and investors. The revelation added another layer to the already complicated web of allegations surrounding FTX.

Wang went so far as contradicting the rosy statements made by SBF. He bluntly asserted that "FTX was not fine, and assets were not fine."

Secrets, Scandals, and Schemes Behind Closed Doors

Caroline Ellison's testimony was nothing short of a gripping exposé into the world of intrigue and deception that revolved around SBF and his financial empire.

Almost Too Much Creativity in Accounting

One of the most startling aspects of Ellison's testimony was her account of the creative accounting tactics that had been employed to trick both Alameda’s investors and FTX’s users. Ellison revealed that she had resorted to manipulating balance sheets and using vague language to cover up Alameda’s risky financial situation and the enormous sums Alameda had siphoned from FTX. Astonishingly, by May 2022, Alameda had covertly withdrawn over $10 billion from the pockets of unsuspecting FTX customers. When questioned about why these illicit withdrawals were labeled as "FTX borrows," Ellison unflinchingly pointed to SBF as the mastermind behind this financial sleight of hand. She admitted that she was merely following orders from SBF, who had explicitly instructed her to avoid explicitly labeling it as "FTX customer money."

Probably because of these creative accounting practices that Alameda had faced great difficulty in getting an audit. Despite various attempts to hire accountants throughout the years, they had encountered resistance, with auditors refusing to review Alameda's books. For an entity of that scale to record all of their dubious financial transactions on Google spreadsheets, it's no surprise that no auditor was willing to take on the job.

Global Operations Gone Wrong

Ellison's testimony took an even darker turn when she described the shocking details of FTX’s "extensive global operations" where deceit and unscrupulous tactics seemed to know no bounds, both geographically and ethically.

According to Ellison, Alameda, under SBF's instructions, had devised many questionable schemes in an attempt to release capital that had been locked up in a money laundering investigation in China. Among numerous failed strategies, she detailed an unusual scheme involving paying Thai prostitutes to open accounts on certain exchanges, setting up trades through these accounts with the intention of depleting Alameda's China-based funds, and transferring the value to the accounts of these individuals, where Alameda could later recover them. When all had failed, SBF even tried to bribe Chinese government officials “in the ballpark of $100 million” so they would release the locked up capital.

Furthermore, it was disclosed that FTX considered raising capital from none other than Saudi Arabian Prince and Prime Minister Mohammed Bin Salman in June 2022, when Alameda was in deep water. The mere idea of such a financial alliance hinted at the scale of FTX's operations and its then impact on international finance.

A Culture of Deceit Shaped by Its Leader

The former Alameda CEO recounted how SBF had normalized a culture of deceit within the organization as he had explicitly stated that lying and stealing money were permissible in his worldview. Over time, this permissive attitude towards deception had become an integral part of the environment she worked in.

Since deception could not work in the light, Ellison discussed how SBF had cultivated a culture of secrecy among the higher-ups in the organization. This involved the use of encrypted messaging apps like Signal, with messages set to delete within a week, and a preference for in-person meetings. Executives also employed coded language, such as referring to "our Korean friend," which allegedly alluded to a backdoor used to siphon funds from FTX to Alameda. SBF had argued that this secretive behavior had been recommended by FTX's hired counsel.

Ellison's testimony also brought to light her infamous "Things Sam is freaking out about" list, a Google document that she regularly updated. This document provided a window into SBF's growing anxieties, which included concerns about "bad press" coverage and a scheme to get regulators to crack down on rival Binance. This scheme was rooted in the belief that FTX could absorb Binance's customers, thereby addressing its own staggering $8 billion shortfall. The list served as a tangible record of the pressures and machinations that were at play behind the scenes.

In sum, Caroline Ellison's testimony was an account of manipulation and deception that spanned both Alameda and FTX. Her revelations placed SBF squarely at the center of the alleged financial misconduct and painted a vivid picture of the world he had created within his house of cards.

Stolen $400 Million Moved Amid Trial

Coincidentally, during the first two weeks of trial, over $400 million that had been stolen from FTX on the day of bankruptcy began to move again. According to the blockchain analysis provider Elliptic, it is suggested that those responsible for laundering the money may have connections and a history related to cybercrime. Like many other crypto hackers, they funneled the stolen money through cryptocurrency "mixing" services to obfuscate the trail. Surprisingly, some of the funds were laundered through a service owned by FTX, adding a layer of complexity to the operation.

Closing Thoughts

The testimony from SBF’s once-close allies raised a cloud of suspicion around him, portraying him as the mastermind behind the alleged misdeeds. The spotlight shone on these individuals who, not long ago, were seen as smart, privileged, and full of potential. Now, they appeared to be painting a picture of themselves as individuals who merely acted as directed by SBF, as if they were not fully-fledged adults with their own agency and discernment.

Their testimony revealed a surprising level of compliance to SBF, suggesting a lack of autonomy or even moral judgment in their actions. The blame is consistently placed on Bankman-Fried, as though his influence was so overwhelming that they couldn't resist his commands. This narrative raises questions about the extent to which personal responsibility and accountability should factor into the unfolding legal drama.

As the trial is expected to continue until November, it becomes evident that the narrative was far from over, and more astonishing revelations may still be waiting to unfold. Several other high-ranking executives within FTX and Alameda, including Ryan Salame and Sam Trabucco, are on the list of potential witnesses.

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Source: Cointelegraph

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