Sam Bankman-Fried allegedly lied about many things over the course of his cryptocurrency exchange’s collapse.
But when the since-indicted FTX co-founder first heard about the $8 billion deficit that would later sink his crypto empire, all he said was “that sounds correct.”
And despite being aware of the multi-billion-dollar deficit at Alameda Research and FTX, Bankman-Fried repeatedly told customers and investors that “FTX was fine.”
This, as Gary Wang, the failed exchange’s co-founder and chief technology officer — as well as a former math camp friend of Bankman-Fried’s — wrapped up his second and final day of witness testimony Friday (Oct. 6) in the criminal trial of Bankman-Fried.
“FTX was not fine,” Wang told the jury Friday, “because FTX did not have enough assets for customer withdrawals.”
Wang, along with two other former senior FTX executives including Alameda CEO Caroline Ellison and FTX engineering director Nishad Singh, pleaded guilty to felony fraud charges just weeks after FTX’s collapse. All are cooperating with federal prosecutors.
The former CTO and co-founder is the first of the three to testify against his old boss and friend. The crypto entrepreneurs all flipped on Bankman-Fried in the hopes of receiving more lenient sentences for their role in what federal prosecutors have described as “one of the biggest financial frauds in American history.”
Wang has pleaded guilty to felony fraud charges stemming from his role in the episode, and is testifying in hopes of receiving a more lenient sentence.
When asked to describe his preferred outcome in the case, he replied “ideally, no prison time.”
At the center of today’s testimony from Wang were the false assurances made repeatedly by Bankman-Fried to FTX customers and investors that the exchange was a safe trading platform with sophisticated risk mitigation measures to protect customer assets, and that Alameda was just another customer with no special privilege compared to other institutional customers.
“We gave special privileges to Alameda Research on FTX… And we lied about this to the public,” Wang said.
Wang detailed to the jury Alameda’s previously undisclosed ability to trade faster than other customers on the exchange, as well shared the technical details of the hedge fund’s unique ability to maintain a negative balance on FTX without triggering automatic liquidation — a risk control other customers were subject to — due to an “allow_negative” line of code that Bankman-Fried instructed Wang and Nishad Singh to write in July 2019, just months after the exchange opened for business.
When asked by the prosecution what Alameda did with its special privileges, Wang replied that the trading firm “withdrew more than it had in its account — like, $8 billion, in fiat and crypto.”
That money, Wang told the court, came from FTX customers.
During cross-examination, the defense tried to paint the “allow negative” feature as a normal business practice and one that was necessary for Alameda to perform its role as a market maker on FTX.
Wang described the backdoor as a secret feature that no other customer had, and explained that it was originally meant to allow for Alameda to take as much money as FTX allowed for.
He testified to the court that he did a database query in early 2020 and found that Alameda’s balance was negative more than FTX revenue. There was a time that when Alameda owed FTX around $11 billion, while the exchange itself was only generating around $1.5 billion in revenue.
These imbalances didn’t seem to bother Bankman-Fried, Wang said. Instead, Alameda’s spending grew broader and never stopped.
Among the alleged falsehoods peddled by FTX included the exchange’s emergency “backstop fund,” a supposed amount of cash-on-hand that FTX kept for rainy days.
While FTX displayed a dollar amount for the backstop fund on its site, Wang told the court that the figure “had no basis in reality” and was calculated using a formula that was not based on anything real.
The actual amount in the fund was much lower than what was displayed, Wang testified.
The trial broke for the weekend at the end of Wang’s testimony, which finished around 2 p.m.
Prosecutors said that Caroline Ellison, their star witness who was intimately entangled both professionally and personally with Bankman-Fried, will take the stand at some point on Tuesday.
The case is off on Monday (Oct. 9) for the federal holiday.