Sam Bankman-Fried can't get past the fundamental flaw in his defense strategy

FTX founder Sam Bankman-Fried leaves Manhattan federal court in New York, Thursday, Feb. 16
Sam Bankman-Fried.AP Photo/Seth Wenig
  • Sam Bankman-Fried is struggling to defend himself on the witness stand.

  • He claims that Alameda Research, his crypto hedge fund, was treated the same as everyone else on FTX, his now-collapsed crypto exchange.

  • Prosecutors have plenty of evidence that's simply not true.

As with any secret relationship, the stuff going on behind closed doors between FTX and Alameda Research was hard to explain and probably inappropriate.

As Sam Bankman-Fried testifies on the witness stand in his criminal case, he has struggled to get past a core, key contradiction at the heart of his legal defense.

According to prosecutors, Bankman-Fried violated a slew of criminal fraud and money-laundering laws by stealing money from customers on FTX, the cryptocurrency exchange he ran that was once valued at $32 billion.

Prosecutors allege he siphoned the money to Alameda Research, his cryptocurrency hedge fund, spent it on flashy advertising, and used it to make loans to himself and other executives for personal investments. The hole in customer funds became clear in November 2022, when customers tried to withdraw their funds en masse and FTX lacked the cash to fulfill them.

Bankman-Fried took the unusual — and extremely risky — step of testifying in his own defense. He told a different story, pointing out that the vast majority — around three-quarters — of FTX's users had opted into the risky spot margin trading system.

That system allowed for highly leveraged cryptocurrency trades with the possibility that — in rare occasions when other safeguards were insufficient —customers could lose the funds kept in their accounts through socialized losses.

Alameda was one such trader on the spot-margin system, and the ultra-rare combination of illiquidity, mass withdrawals, and a crypto market crash that November meant that FTX customer accounts were effectively drained, Bankman-Fried claimed.

It's up to the jury to decide which story is the real one. The trouble with Bankman-Fried's story, however, is that it is abundantly clear that Alameda was treated completely differently than every other entity trading on FTX.

Alameda, which SBF owned, had multiple roles on FTX

Bankman-Fried's defense requires convincing the jury that Alameda was the same as any other account trading on FTX, which is why its losses in November of 2022 affected every other account in the spot-margin trading system.

He also concedes, at the same time, that Alameda was much more than just that. It was at once an ordinary trader, a market maker and liquidity provider that ensured customer trades were fulfilled, and a stablecoin converter that turned government-issued fiat currency like dollars into cryptocurrency for trading.

On the witness stand, Bankman-Fried suggested his crypto hedge fund was not dissimilar to Jane Street Capital, the traditional trading firm where he worked before founding Alameda.

His desk at Jane Street, he pointed out, acted as a market maker for international exchange-traded funds in addition to doing more ordinary trading. If Alameda had multiple roles on an exchange like FTX, there was nothing wrong with that, his lawyers argued.

But it is clear, especially as cross-examination began in his downtown Manhattan trial on Monday, that Alameda was unique.

sam bankman fried danielle sassoon courtroom illustration
In this courtroom sketch, FTX founder Sam Bankman-Fried, background center, is cross examined by U.S. Assistant Attorney Danielle Sassoon, left, while Judge Lewis Kaplan listens, background second left, in Manhattan federal court, Monday, Oct. 30, 2023, in New York.Elizabeth Williams via AP

At the very beginning of cross-examination, Assistant US Attorney Danielle Sassoon reminded the jury that Bankman-Fried owned 90% of Alameda and had a substantial stake in FTX. He made money through all of Alameda's functions on the FTX exchange.

Alameda's deep-rooted relationship with FTX goes back to the exchange's beginnings. Before FTX had its own bank accounts, the customer deposits were wired straight into an account owned by Alameda, which had an easier time opening accounts with banks.

And unlike any other user on FTX, Alameda's main sub-account had a $65 billion line of credit, which effectively allowed the crypto hedge fund to borrow unlimited amounts of money.

That Alameda account had a balance, on average, of negative $2 billion throughout 2021, Bankman-Fried testified. It was OK, he said, because the company had assets in places outside FTX, and their net value was billions of dollars more.

But normal customers had no way of getting a line of credit on FTX at all. On the witness stand, Bankman-Fried could name only one other institution with a line of credit: the hedge fund Crypto Lotus, which he said could borrow $100 million from FTX, far less than Alameda's line of credit.

According to contracts Sassoon showed at the trial, companies with lines of credit needed to keep collateral for their withdrawals on the FTX exchange, so that their assets could be liquidated if a leveraged trade went badly. The only company that could take its money elsewhere was Alameda.

Perhaps most damningly, Sassoon brought up an entry from FTX's database with information about Alameda's main account on the exchange. It wasn't even involved in the spot margin trading program, meaning its losses shouldn't have impacted other accounts at all.

Sam Bankman-Fried answered often that he "can't recall" the answers asked by prosecutors.Chelsea Jia Feng

Bankman-Fried downplayed Alameda's importance — and how much he knew

Jurors have heard a lot of this before. Three people in Bankman-Fried's inner circle who pleaded guilty to conspiring with him have pleaded guilty and agreed to testify as part of their cooperation agreements.

FTX co-founder Gary Wang, former FTX executive Nishad Singh, and former Alameda Research CEO and Bankman-Fried's ex-girlfriend Caroline Ellison all took the stand earlier in the trial and discussed Alameda's unique role in FTX, and how it was treated differently behind the scenes.

Bankman-Fried has distributed the blame for FTX's failures among them.

He had largely stepped away from Alameda after he appointed Ellison to a CEO role in 2021, he said, and was no longer involved in its day-to-day trading. As CEO, Ellison failed to make the trades and investments he suggested to hedge in case of a crypto market downturn, Bankman-Fried testified.

As for Alameda's enormous line of credit? Bankman-Fried said he didn't know about it until shortly before FTX's collapse. He only understood that Wang and Singh had programmed some kind of "speedbumps" to ensure Alameda wasn't accidentally liquidated from over-leveraged trades and caused chaos on the rest of the exchange.

He has also more generally downplayed Alameda's non-trading roles on FTX. While FTX may have put customer deposits into Alameda's bank account at first, the exchange later got its own bank accounts. And while in FTX's early months Alameda may have handled half of the exchange's market-making volume, that dwindled to 3% once FTX grew in popularity and other market makers came on the scene, he said.

Sam Bankman-Fried.
Sam Bankman-Fried.Angela Weiss/AFP via Getty Images

Bankman-Fried tried to stress that the market conditions in November 2022, when FTX and Alameda collapsed, were an anomaly. He said that, before then, FTX typically saw $50 million in withdrawals on a typical day. At its height, that November, there were $4 billion in withdrawals per day. It was no wonder, he said, that the exchange couldn't get liquid cash fast enough.

Sassoon previously pummeled Bankman-Fried on the witness stand on Thursday in an unusual hearing without the presence of the jury to determine whether he could bring up testimony related to what his lawyers had told him while running FTX.

While Bankman-Fried gave long, meandering answers in that hearing — much to the judge's frustration — he kept things tighter on Monday, answering many of Sassoon's questions with a chipper "Yep!" or "I don't recall that."

Bankman-Fried's supposedly failing memory introduced the opportunity for Sassoon to bring up exhibits from his testimony to Congress and interviews with journalists, where he had repeatedly extolled FTX's high standards for protecting customer assets.

Bankman-Fried said that the passages from his congressional testimony were being taken out of context and that he "disagreed" with the articles journalists wrote about FTX at the time.

"Would you agree that you know how to tell a good story?" Sassoon asked Bankman-Fried.

"I don't know," Bankman-Fried responded. "It depends on what metric you use."

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