Sam “SBF” Bankman-Fried took the stand this week to testify in his ongoing criminal trial in the Southern District of New York, denying any wrongdoing between FTX and Alameda Research, while acknowledging making “big mistakes” during the whirlwind business process. growth.
His official testimony began on October 27, following a hearing the day before. without the jurors present. During the hearing, Bankman-Fried had difficulty answering questions posed by government lawyers, while the next day he seemed much better prepared to face the jury.
Some highlights of Bankman-Fried's testimony this week include denying directing her inner circle to make million-dollar political donations in 2021, as well as claims that FTX's Terms of Use covered transactions between Alameda and the crypto exchange. Additionally, the former CEO stated that he had requested additional hedging strategies for Alameda throughout 2021 and 2022, but they were never implemented.
The defense is expected to conclude questioning of Bankman-Fried on Oct. 30, followed by cross-examinations by the prosecution and closing arguments by both sides. Prosecutors also hinted at a possible rebuttal witness next week: someone who is called to prove that another witness's testimony is false or inaccurate.
Bankman-Fried could be sentenced to 115 years in prison if convicted on all counts of fraud and conspiracy. Cointelegraph's on-the-ground coverage of his testimony is summarized below.
SBF rejects accusations about political donations
Bankman-Fried denied in court that she directed Ryan Salame, former co-CEO of FTX Digital Markets, and Nishad Singh, former director of engineering, to funnel millions of dollars in contributions to political campaigns.
According to data available on OpenSecret, Singh donated $8 million to federal campaigns in the 2022 election cycle. Salame also donated 10 million dollars to politicians through loans of Alameda Research.
Although Bankman-Fried denied instructing the pair to make political contributions, she acknowledged that lobbying in Washington, DC played a key role in her efforts to push for a regulatory framework for crypto companies in the United States during 2021.
"I came to believe I could impact the world."
According to prosecutors, Bankman-Fried used funds from client deposits at FTX to make more than $100 million in political campaign contributions ahead of the 2022 midterm elections.
Bankman-Fried denied any wrongdoing during her testimony, stating that FTX had more than $1 billion in revenue in 2021 and that political donations were made with the exchange's own funds.
Maxine Waters chairs FTX investigation https://t.co/oFMctH4rRh pic.twitter.com/Ox6O5w4nOl
- Jordan Kasten @ dossier.today (@JordanSchachtel) November 17, 2022
The New York Times test
Bankman-Fried had a guide to employee communication at FTX and Alameda Research: the New York Times test.
Under the informal test, employees should not write anything they are not comfortable seeing on the front page of the newspaper. According to Bankman-Fried, even harmless things can "seem pretty bad out of context," so employees should make sure to always provide enough context in written messages.
Bankman-Fried described the test as part of her explanation for why more than 200 channels on Signal had an automatic deletion policy that permanently deleted messages after a week.
Prosecutors used evidence from the auto-delete feature in previous days to suggest any wrongdoing between the companies was being covered up. According to Bankman-Fried, official communications and regulatory procedures were handled through other channels, such as Slack or email, but Signal was the option for daily communication within companies.
Alameda's unique role at FTX
Bankman-Fried provided details on Alameda's multimillion-dollar line of credit with FTX. According to his testimony, Alameda served as FTX's payment provider for electronic transactions while the exchange was unable to have its own account.
In addition to being a payment processor, Alameda was also FTX's primary liquidity provider, market maker, and client.
As a liquidity provider and market maker, Alameda would have to step in and cover client losses if FTX's risk engine failed. During his testimony, Bankman-Fried provided an example of a risk engine failure that resulted in Alameda covering millions of dollars in losses in 2021.
The nature of Alameda's role in the exchange's operations led to custom features in FTX's code, such as the ability to go negative through a line of credit without activating the risk engine. According to Bankman-Fried, the exemption was necessary to avoid the possible liquidation of Alameda, which would negatively affect the crypto markets.
As an FTX client, Alameda was also able to borrow funds by depositing collateral on the exchange. FTX's terms of use allow borrowers to use funds for any purpose, meaning Alameda could trade the borrowed funds.
Alameda's line of credit with FTX grew along with the crypto industry during the bull market.
Alameda fails to cover
Bankman-Fried discussed hedging strategies with Caroline Ellison, former CEO of Alameda Research, in 2021 and 2022 as she sought to protect the trading platform from a potential market downturn.
According to her testimony, Bankman-Fried asked Ellison to hedge $2 billion in Bitcoin (BTC) against a possible price crash in 2021. The strategy was never implemented, she told the jury.
Ellison Notes shared as evidence by prosecutors reveal that Bankman-Fried was "freaking out" about coverage in early 2022. The defense used the evidence to illustrate that coverage was one of Bankman-Fried's biggest concerns and he argued with Ellison frequently.
Without adequate coverage, Alameda was significantly harmed by the collapse of the Terra ecosystem and the drop in cryptocurrency prices. In September 2022, Bankman-Fried learned that liabilities between the companies had increased from $2 billion a year earlier to more than $8 billion.
"I was very surprised," he told the court, saying he believed Alameda's assets exceeded its liabilities by nearly $10 billion.
Recovery provision in the Terms of Use
According to Bankman-Fried, FTX's terms of use include a clawback provision that would socialize losses among clients using margin trading and futures contracts in the event the exchange's risk engine fails.
The document presented to the court states that:
"[...] Your account balance may be subject to recovery due to losses suffered by other users.”
If FTX was unable to cover losses related to spot and futures margins, damages would be shared among all clients. Defense attorneys used the provision to argue that customers trading on FTX were aware of the risks involved.
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