In September 2022, two months before the collapse of Alameda Research, Sam Bankman-Fried wrote a memo suggesting it may be time to shut it down.
In testimony Friday, he said that due to turmoil in the crypto market at the time, he was worried there were serious risks for Alameda. If bitcoin were to fall another 50%, for example, “Alameda might be roughly insolvent,” he said.
Bankman-Fried recalled his concern that then-CEO of Alameda, Caroline Ellison, had not hedged against market crashes despite many conversations he said he had had with her about hedging. “I was worried Alameda might go bankrupt,” he told the court.
Referring to a document Ellison wrote at the time, titled “Things Sam is freaking out about,” defense counsel Mark Cohen noted that the first entry on the list was “Hedging.”
“Were you freaking out?” he asked his client.
“I don’t tend to show a lot of freakout-ness, but relative to my standard, yes.”
SBF said he worried that Alameda’s “culture had been decaying somewhat,” and he worried there “might not be great management in place.”
In the memo, SBF had written that “current Alameda leadership is good, but not good enough to be able to trust with such a big operation.”
In June last year, Bankman-Fried recalled, Ellison told him “Alameda may have just gone bankrupt.”
It turned out there was an accounting bug that caused an $8 billion overstatement in Alameda’s liabilities. After the bug was fixed, he said, the firm’s net asset value was between $8 billion and $10 billion.
Court has adjourned for the day and week.
Sam Bankman-Fried will be back in court Monday to continue his testimony. Cross-examination is expected to start in the second half of the day and into Tuesday, prosecutors said Friday.
Sam Bankman-Fried’s casual wardrobe and wild curly hair were a subject of discussion in court on Friday.
After Caroline Ellison, SBF’s ex-girlfriend and the former CEO of Alameda Research, testified earlier this month that Bankman-Fried’s style was part of a marketing strategy to look like an eccentric startup founder, SBF’s lead attorney Mark Cohen sought to undermine that on Friday.
“Why did you wear the shorts and T-shirts?” Cohen asked.
“I found them comfortable,” Bankman-Fried replied.
Cohen also asked about the hair.
“I was kind of busy and lazy and didn’t bother getting a haircut for long periods of time,” Bankman-Fried said.
Overall, SBF said he never intended to be the public face of FTX. It was “an accident” at first, he told the court.
“I hadn’t intended to be a public face of anything,” he said, adding that he is “somewhat introverted.”
When shopping for an arena with which FTX could launch a a brand partnership, Bankman-Fried said his company had talks with a few different sports venues.
Eventually, they settled on the home of the Miami Heat, which was eventually christened the FTX Arena.
Others that didn’t work out included football stadiums for the New Orleans Saints and the Kansas City Chiefs, as well as the Kansas City Royals’ baseball stadium.
“No offense to the Kansas City Royals, but we didn’t want to be known as the Kansas City Royals of crypto exchanges,” SBF said Friday afternoon.
The FTX Arena was later renamed the Kaseya Center, following the company’s collapse last fall.
Bankman-Fried discussed Caroline Ellison, his ex-girlfriend and whom he appointed co-CEO of Alameda. Ellison is the prosecution’s star witness, who offered damning testimony earlier in the trial that cast Bankman-Fried as a criminal mastermind.
SBF said Friday she was a competent manager and trader who could also interface with developers. But he also alluded to what he saw as some blind spots, such as not being as adept at risk management and hedging.
He said he “didn’t have the time or the energy” to put in what he believed Caroline Ellison wanted from a relationship, telling the court: “She wanted more from it than I was willing to give.”
Defense lead Mark Cohen asked him about philosophical conversations the two had as a couple, which SBF said were usually initiated by Ellison. SBF stated that often she would stake out a contrarian philosophical position, “and we would debate it.”
Former crypto billionaire Sam Bankman-Fried’s testimony aims to highlight his view that other executives at FTX and Alameda often acted independently, without direct oversight from Bankman-Fried, who was the CEO of both companies for a time.
“Ultimately, I had authority,” he said. “On the other hand, I wasn’t much of a programmer,” and didn’t directly supervise the work of developers who were building FTX’s code.
Bankman-Fried is essentially saying that he wasn’t aware of the so-called back door that Alameda used to withdraw FTX customer funds — a key issue in the case.
“I wasn’t entirely sure what was happening,” Bankman-Fried said.
At one point, in the early days of crypto exchange FTX, its automated “risk engine” suffered an error that turned a routine liquidation of a few thousand dollars into an almost catastrophic series of trades.
Within the company, they called it the “auto-deleveraging event,” FTX founder Sam Bankman-Fried said Friday in testimony in his criminal fraud trial.
As FTX grew, the volume of trades strained the company’s computer systems, and the “risk engine was effectively sagging under the weight of that growth.” The engine was an automated program that would liquidate positions that were at risk of going negative.
Because of a delay of a few minutes, the risk engine closed a “relatively small position” over and over. To correct its error, it had to buy back the erroneous sales. The engine wound up in a feedback loop that wound up moving “trillions” of dollars.
“That caused downstream issues, unsurprisingly. It was ridiculous.” The trading became so large, it had to go to a backstop liquidity provider, in this case Alameda, because it was the largest account on FTX. That caused Alameda’s account to go under water, triggering a potential liquidation of Alameda’s account.
“The whole thing shouldn’t have happened,” Bankman-Fried testified Friday.
FTX leaders had to shut the exchange down for an hour to fix the problem.
“It was scary,” SBF said, because it exposed a larger concern “that if there were an erroneous liquidation of Alameda, it would have disastrous consequences.”
When Sam Bankman-Fried and Gary Wang started FTX in 2019, there were already dozens of crypto exchanges. However, SBF said Friday that he felt their “design philosophies” were “clunky” and “didn’t make a lot of sense.”
“If you wanted to trade, there were hundreds of wallets you had to manage for a single account,” he said. The goal of FTX was to set up an exchange that was more seamless and approachable for traders.
Bankman-Fried testified Friday that he initially envisioned quickly selling FTX to cryptocurrency exchange Binance, since he “had no idea how we would get customers.”
However, Binance ended up using an internal team to build out its own exchange platform. And the more he thought about it, Bankman-Fried said, the more he became convinced that he could grow FTX despite the challenge of attracting customers.
It began to feel “less hopeless, like maybe we could figure it out,” SBF said.
“I thought there was maybe a 20% chance of success,” and an 80% chance it would shut down after a few months, he told jurors. “Even that 20% chance was a huge opportunity, given that the biggest exchanges at the time were multibillion-dollar companies.”
The first office for Alameda Research was a two-bedroom Airbnb in North Berkeley, California, Bankman-Fried said Friday.
“There were three of us, but it had an attic. So that seemed like a third bedroom to us.”
The name, he said, came from Alameda County.
“I’m not very good at naming things,” SBF said. At the time, the firm wanted to be under the radar, he said.
“I didn’t want to call it ‘Sam’s crypto trading firm’ or anything like that,” because there was a lot of budding competition in crypto. “Research” was a generic term that filled out the name of the company.
It was a more sensible name than what they’d been calling their operation internally: “Wireless Mouse.”
Bankman-Fried testified Friday that he knew “basically nothing” about crypto before starting Alameda Research.
“I had absolutely no idea how they worked…I just knew they were things you could trade.”
When asked by his defense counsel why he founded Alameda Research in the fall of 2017, he said that at the time, “there was a ton of excitement, a ton of demand…” but not a lot of infrastructure for large trading firms.
Lead defense attorney Mark Cohen asked Sam Bankman-Fried: What was your vision when you founded FTX?
“We thought that we might be able to build the best product on the market” and “move the ecosystem forward,” Bankman-Fried answered.
“It turned out basically the opposite of that,” he added.
Cohen asked: “Did you defraud anyone?”
“No I did not,” SBF replied.
“Did you make any mistakes?” Cohen asked.
“I made a number of mistakes,” Bankman-Fried replied.
Sam Bankman-Fried, dressed in a gray suit and tie, is back on the stand for a second day to begin his full testimony before the jury that will decide his fate.
He stood patiently, hands folded, as each juror filed in past the witness stand.
Sam Bankman-Fried is set to testify before a jury on Friday, starting at 9:30 am ET, in his first complete appearance before them on the stand.
The courtroom is packed, and the line for the overflow room is the longest it’s been since the trial started. Author Michael Lewis, who released a book on Bankman-Fried earlier this month, was seen in the courthouse lobby ahead of the proceedings.
On Thursday, in a highly unusual twist, Judge Kaplan sent the jury home in the afternoon in order to hear Bankman-Fried give testimony to determine whether certain arguments by the defense — specifically, whether Bankman-Fried’s reliance on advice of legal counsel in the past indicates he lacked criminal intent.
Kaplan said Thursday he hopes to hand the case to jurors early next week.
Under cross-examination Thursday, Sam Bankman-Fried frequently gave vague, meandering answers in which he said he was “not entirely sure” or didn’t recall past conversations about company policies and meetings with lawyers.
At one point Judge Lewis Kaplan interjected, urging Bankman-Fried to “listen to the question, and answer the question directly.”
For example, when asked whether he thought Alameda was permitted to spend FTX customer deposits, Bankman-Fried replied: “I wouldn’t phrase it that way but I think the answer to the question I think you’re trying to ask is ‘yes.’”
As questioning progressed, SBF appeared to fidget more and nervously sipped water in between answering questions.
Much of the testimony centered on communication and document-retention policies at FTX and Alameda.
We are starting to get a general sense of Sam Bankman-Fried’s blame-the-lawyers defense that his lawyers have previously hinted at.
When it came to questions on how to structure promissory notes — payments from Alameda to Bankman-Fried and others — there were concerns over potential double-taxation.
Ultimately, SBF said, it was FTX’s in-house counsel and other lawyers who decided the notes should be structured as loans rather than dividends. Bankman-Fried said he took comfort in the fact that lawyers had said they should be structured as loans.
Similarly, Bankman-Fried said that he “skimmed” iterations of FTX’s Terms of Service, which were drafted by in-house and outside counsel.
Asked by his lead attorney whether he believed that Alameda’s borrowing from FTX was in accordance with the Terms of Service, he replied: “Um, yes, under many circumstances.”
Sam Bankman-Fried took the stand in his criminal fraud trial Thursday afternoon.
Wearing a gray suit and lavender tie, he appeared to test the microphone before Judge Lewis Kaplan announced that jurors would be sent home for the day.
Kaplan said there are potential areas of testimony that are in dispute, and that the details he has are not adequate for him to rule on.
He has asked Bankman-Fried to give testimony to him, in court, outside the presence of the jury. Kaplan will then determine whether that testimony can be repeated to the jurors.
In response to Kaplan’s line of inquiry about document retention, SBF said FTX and Alameda relied heavily on encrypted apps like Signal to protect against “constant attempts to hack FTX.” He said he believed that using those apps’ auto-delete policy was proper because conversations on Signal were meant for chatter rather than as a setting to discuss formal policies or to share business records.
“Sam didn’t defraud anyone,” lead defense attorney Mark Cohen told jurors, arguing that his client acted in good faith throughout the rise and fall of his startups.
“Sam was someone who worked very hard,” Cohen said, adding that SBF was “a math nerd who didn’t drink or party.”
As for the mistakes that led to FTX’s and Alameda’s undoing, Cohen argued that Bankman-Fried and his colleagues, like many entrepreneurs, were “building the plane as they were flying it.” But as the crypto industry flailed in 2022, they were about to fly into “a perfect storm.”
Cohen echoed some of the defenses Bankman-Fried has made over the past year, including that “things were moving quickly” and FTX didn’t have a fully built-out risk management team.
“It’s not a crime to be the CEO of a company that later files for bankruptcy,” he said.
Cohen also sought to undermine the prosecution’s star witness, Caroline Ellison, Bankman-Fried’s ex-girlfriend and former CEO of Alameda. Cohen told the jury that despite Bankman-Fried’s directive to place hedges on Alameda’s risky positions, she failed to do so. Bankman-Fried himself complained in documents leaked to the New York Times that he believed Ellison wasn’t able to handle the job.
In their opening statements to a newly sworn-in jury in Manhattan federal court on October 4, lawyers laid out previews of their cases, offering two divergent narratives for the collapse of Sam Bankman-Fried’s crypto empire.
Assistant US Attorney Thane Rehn painted a picture of a villainous, greedy businessman whose boundless appetite for wealth and power led him to steal billions of dollars in customer funds.
“He had wealth, he had power, he had influence,” Rehn said. “But all of that — all of it — was built on lies.”
Rehn reiterated the government’s accusations that Bankman-Fried used his crypto exchange, FTX, as his own personal piggy bank, using the money he took from customers to enrich himself and his family, buy luxury beachfront property in the Bahamas and funnel millions into US political campaigns.
“This man,” Rehn said, pointing to Bankman-Fried a few feet away, “stole billions of dollars from thousands of people.” He repeatedly underscored a central argument: that Bankman-Fried stole, enlisted others to help him steal, lied about stealing, and continued to lie to try as he sought to cover up his crimes.
As Rehn spoke, Bankman-Fried, dressed in a suit and tie and flanked by his attorneys, trained his eyes on a laptop, expressing no reaction to the prosecutor’s allegations. But as his own lawyer, Mark Cohen, stepped up to speak, Bankman-Fried’s demeanor softened and his focus shifted to the jury box.
One factor weighing on Sam Bankman-Fried’s decision to testify: Securing enough Adderall to allow him to fully participate in his defense.
It took a number of phone calls, emails and formal complaints to secure Bankman-Fried a sufficient supply of the drug, which he uses to treat ADHD.
Lead attorney Mark Cohen wrote in a letter to the judge earlier this month that his client “has been doing his best to remain focused during the trial,” despite not receiving his full dose of the medication.
In short: SBF was supposed to get four doses of Adderall each day, but he can only get it from the Metropolitan Detention Center, where he’s being held. So he was only getting one in the morning and one in the evening during the days he appeared in court.
The resolution came in the form of an extended-release form of the medication, which Bankman-Fried is now getting every morning.
Krystal Rolle, the Bahamian lawyer who represented Sam Bankman-Fried after the collapse of FTX, has finished testifying.
Rolle told the court that Bankman-Fried cooperated with authorities when he was ordered to transfer digital assets of FTX Digital Markets to the Securities Commission of the Bahamas.
After a meeting with the Securities Commission, Rolle, Bankman-Fried and former FTX CTO Gary Wang immediately begin the “very, very long” long process of transferring the assets, she said.
