Trial Transcript The Road to FTX’s Collapse – Binance, Hacker Mole, VC Blood Loss

Official Trial Transcript Uncovering the Events Leading to FTX's Demise - Binance Involvement, Hacker's Betrayal, and VC Woes

Author: Songxue, LianGuai

On October 11, 2023, the highly anticipated key witness in the FTX case, Caroline Ellison, took the stand (Ellison is the ex-girlfriend of Sam Bankman-Fried, aka SBF). Currently, star witness Ellison has attended three days of trial, with more revelations related to SBF continuing to surface, and several other individuals have spoken out about the case.

In the trial, SBF claims that it was Binance that led to the downfall of FTX; lawyer Cohen believes that Ellison is to blame for the rapid collapse of FTX; accountants are “unwilling” to audit Alameda; Ellison considered quitting but stayed because of SBF; VCs suffered losses; FTX may have been sabotaged from within…

(Click here to view Ellison’s testimony from the first day of the trial “Ex-girlfriend of SBF reveals explosive details: How SBF manipulated FTX, Alameda, and his ambitions”)

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(Click here to view Ellison’s testimony from the second day of the trial “Bribery, Saudi prince, lies, and Nerd image: Ex-girlfriend reveals more SBF revelations”)

1. SBF claims that Binance led to the downfall of FTX

Internal documents from November 2022 presented in federal court on Wednesday show that SBF believes that FTX’s competitor Binance leaked Alameda’s balance sheet to the media. He believes that Binance should be held responsible for leaking Alameda Research’s balance sheet to CoinDesk, which was a critical event that led to the collapse of FTX and its cryptocurrency empire. Caroline Ellison, former CEO of Alameda, testified on Wednesday that SBF prepared a memorandum dated November 6, 2022, outlining his and others’ plans to seek assistance from potential investors.

In the document, SBF wrote that Binance had been “actively working against us in PR.” “They leaked the balance sheet; wrote a blog about it; then very publicly announced they were selling $500 million of FTT in response, while telling customers to be cautious of FTX.”

Ellison testified that a tweet from Binance CEO Changpeng Zhao (CZ) caused the collapse of the crypto exchange FTX. In the tweet on November 6, 2022, CZ announced that Binance would liquidate its holdings of FTX tokens (FTT). Many reports claim that the liquidation of the tokens caused retail investors to follow Binance’s lead and withdraw funds from FTX, leading to a run on the platform and FTX halting withdrawals before filing for bankruptcy on November 11. Ellison stated that while CZ’s tweet “triggered” the collapse of FTX, the main reason was that Alameda had borrowed $10 billion from the exchange that it couldn’t repay.

2. Is Ellison the culprit behind FTX’s collapse?

Previously, lawyer Cohen argued that Ellison was the mastermind behind FTX exchange’s sudden collapse last year.

Cohen stated in his opening statement last week, “SBF relied on Ellison, believing she could serve as CEO and manage day-to-day operations.” “As a major shareholder of Alameda, SBF had conversations with CEO Ms. Ellison, urging her to hedge to prevent this downturn. She failed to do so, and when the storm hit, it became a problem.”

Ellison said that several months later, SBF blamed her for not hedging the risks of Alameda.

In addition, in one of Ellison’s Google documents, there is a document titled “Expansion Limiting Factors,” where she identified several factors hindering Alameda’s profitability, with “management” being the top factor. Another theme is “hedging,” which involves whether Alameda should further hedge its positions, such as selling cryptocurrencies and buying Nasdaq futures. Ellison expressed doubt about this. Later in the year, in September 2022, the company eventually sold some bitcoins and ethers and invested billions of dollars in Nasdaq futures.

Although Ellison should have hedged the risks of Alameda earlier this year, SBF decided to make multiple investments, putting Alameda in an unhealthy financial state.

Ellison said, “I believe hedging could have helped our situation, but I believe the root cause of our predicament is that we borrowed billions of dollars in term loans and used them for illiquid investments.” – SBF made the decision to proceed with these investments.

3. Accountants “unable or unwilling” to audit Alameda, Ellison takes over auditing task

Alameda collaborated with several accountants between 2021 and 2022, but after reviewing Alameda’s books, “they found themselves unable or unwilling to conduct an audit.” Ryan Salame, former CEO of FTX Digital Markets, testified that initially, he prepared Alameda’s balance sheet, but at some point, Ellison took over this task.

She recalled becoming more motivated during her time at Alameda. “When SBF encouraged me, I became more ambitious.”

4. Ellison considered resigning but stayed upon SBF’s advice

From 2019 to November 2022, she considered resigning from Alameda multiple times. However, after discussing this with SBF, he told her that she was too important and he needed her to stay at Alameda. She believed SBF’s advice and did not want FTX and Alameda to collapse, so she stayed based on SBF’s recommendation.

During the trial, Ellison said that she “felt trapped in the summer of 2022” because the exposure of FTX and Alameda’s financial situation “would lead to a bank run” and both companies “would collapse”.

After the bank run, Ellison said she felt more comfortable talking about it at the November 6th general meeting. Ellison said she was unaware and did not authorize Alameda to provide FTX with a credit limit of $65.3 billion.

5. Disappointed VCs

SBF always found famous VCs by his side: Ontario Teachers’ Pension Plan, Sequoia Capital, SoftBank, Sino Global Capital, LianGuairadigm, Temasek, SkyBridge, Multicoin and other well-known enterprises have provided substantial financial support to FTX.

Disclosures about these investments indicate that these supporters allowed the controversial FTX founder to operate the company with minimal supervision, believing that the company was a relatively safe enterprise in the volatile cryptocurrency field.

There were even detailed reports about the FTX founder collaborating with top venture capital firm partners during video conferences while playing video games.

Most of these venture capital investors claimed to have conducted thorough due diligence, pointing out that their financial situation was good and they had a user-friendly and regulatory-compliant platform that allowed users to trade and store their digital assets.

However, after FTX collapsed, most VCs, including LianGuairadigm and Sequoia, were forced to liquidate their investments when the exchange closed.

Meanwhile, venture capital funding in the cryptocurrency field has declined to its lowest level since 2020, as many venture capital firms have withdrawn from the field due to increased regulatory scrutiny and losses. Additionally, some of these companies face legal lawsuits from FTX users who claim that the company engaged in fraudulent activities.

6. FTX has internal problems? Money laundering, ransom, dark web

Analytics company Elliptic discovered signs of Russian hackers participating in money laundering activities involving stolen assets from FTX last year. FTX was attacked by hackers a few days after its collapse, resulting in a loss of $475 million. Shortly after the data breach, $74 million flowed through RenBridge, a platform associated with FTX’s sister company Alameda Research. In November, out of the 4,536 bitcoins (worth $74 million) converted from Ethereum through RenBridge, 2,849 bitcoins were processed through mixers (primarily ChipMixer service). Elliptic stated that these funds were subsequently mixed with assets associated with Russian criminal networks, including ransomware criminals and the dark web market. Most of the funds stolen in the FTX hack remained dormant until recently when the criminals used THORSwap to convert approximately 72,500 ETH ($120 million) into bitcoins for cross-chain exchange. Despite this, Elliptic states that the identity of the hacker remains elusive and it could be an insider job involving FTX staff.

7. Other Voices on this Case

Alameda Software Engineer Christian Drappi:

The central point of his testimony was an important Alameda all-hands meeting hosted by Ellison a few days after the FTX liquidity crisis was exposed in November 2022.

Drappi revealed that this previously reported meeting was secretly recorded by an Alameda employee who had just joined the company three days before it shut down. Ellison, in the audio excerpt shared with the jury, said that Alameda “borrowed a large sum of money on FTX, causing a shortage of funds for FTX users.”

In the recording, Drappi asked Ellison if there was a plan to eventually repay the creditors on FTX. She responded by saying, “FTX is attempting to raise funds to achieve this goal,” but she added that fundraising efforts ultimately failed. The news of FTX’s attempt to raise funds to repay lenders worried Drappi even more.

Kraken Founder Jesse Powell:

Expressing anger towards the venture capital firms that invested in FTX, Powell said their incompetence led to “clear fraud.” Powell believes that the venture capital firms failed to do due diligence and did not uncover the potential discrepancies in FTX. Instead, they allowed themselves to be deceived by SBF’s charismatic personality. These investors did not consider how SBF’s relationship with Alameda could impact the overall operation of the company.

8. Laughter, Head Shaking, Mockery – The Trial’s Unruly Actions:

SBF exhibited “laughter, obvious head shaking, and mockery” during his ex-girlfriend Ellison’s testimony. Ellison mostly avoided eye contact with SBF, looking down at her own hands between questions, and frequently flipping her hair off her left shoulder.

While lawyers discussed legal matters at the judge’s bench, she did look at SBF. However, SBF’s gaze would shift away, hands tightly gripped. After a brief glance, there was no further eye contact.

During questioning by attorney Cohen, SBF either faced forward with hands tightly gripped or typed on a laptop. He often appeared bewildered.

US Prosecutor Danielle Sassoon pointed out: there has been no communication with the witness yet, but it may have had an obvious impact, especially considering their history, previous attempts to intimidate her, power dynamics, their romantic relationship. “I would like defense counsel to tell him to control his obvious reactions to her testimony.”

LianGuai will continue to report on this case.

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