SBF returns to the witness stand admitting mistakes but refusing to plead guilty, Binance, ex-girlfriend, and Three Arrows caused FTX to collapse.

Former CEO of FTX, SBF, confesses to errors on witness stand but maintains innocence as downfall blamed on Binance, former partner, and Three Arrows Capital

Written by: Song Xue, LianGuai

Sam Bankman-Fried (referred to as SBF) returned to the witness stand on Monday morning local time, facing possible harsh questioning from federal prosecutors after testifying on Friday that he made mistakes but did not commit the fraudulent acts that led to the collapse of FTX. SBF completed his testimony in the morning, and the prosecution will have the opportunity for cross-examination.

The 31-year-old former billionaire defended himself in a fraud trial, refusing to plead guilty to two counts of fraud and five counts of conspiracy. He admitted making mistakes that led to FTX’s bankruptcy on November 11, 2022, causing harm to customers and employees. LianGuai has summarized SBF’s testimony as follows.

Click here to view LianGuai’s special topic: “A Prisoner with Presidential Ambitions – SBF Trial Overview”

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1. $8 billion loan and “embezzlement”

Sam Bankman-Fried, the founder of FTX, testified on Monday that he believed his hedge fund Alameda Research, had enough assets to pay off the $8 billion debt owed by the cryptocurrency exchange until a few days before both exchanges collapsed. He told the jury that he felt worried and surprised but not panicked when he learned in October 2022 that Alameda had borrowed $8 billion from FTX clients’ deposits.

“If it were much bigger, I would call it a crisis,” he said.

The prosecutor said SBF plundered billions of dollars from FTX clients’ funds to support Alameda’s speculative investments and to donate to US political campaigns. If convicted, he could face decades in prison.

However, SBF stated that he did not steal customers’ money.

SBF gave different explanations for where the money went. He tried to emphasize that FTX was a “margin” exchange and that many clients, including Alameda, borrowed money from other users to place bets.

The prosecutor repeatedly questioned SBF about whether using FTX funds to repay lenders constituted margin trading. “My testimony is that it depends on the details, but it’s likely margin trading,” SBF sighed. “I’m not saying this is what happened, and I’m not saying it wasn’t margin trading either.”

SBF admitted that Alameda’s credit limit was $65 billion, more than $64 billion higher than other market makers.

When FTX applied for bankruptcy last year, it owed customers about $8.7 billion. “Customers demanded immediate withdrawals of billions of dollars,” he said. “If we didn’t want significant delays financially, we needed a large amount of external capital.” SBF attempted to describe FTX’s situation at the time as a “bank run.” “In fact, I started liquidating Alameda,” and from then on, he began talking to potential investors.

“In my view at the time, although Alameda and FTX still had the ability to meet their obligations, liquidating the company to clear its holdings would be a lengthy process.”

2. Alameda’s Solvency Crisis Risk and the “Nonexistent Flaw”

SBF said, with the collapse of FTT, this meant that Alameda faced the risk of solvency crisis. “From the night of November 7th to the morning of November 8th, the market experienced a collapse”, “to my knowledge, assets related to Alameda significantly plummeted in value. FTT fell by approximately 80% in around 12 hours. Solana dropped by about 50%. Overall, this caused Alameda’s assets to shrink by about 50%, and this 50% shrinkage affected its net asset value…slightly above zero. This means that Alameda still has the ability to meet its obligations, but with little room for error.”

However, once customer withdrawals reached $4 billion per day, “we are on the verge of a liquidity crisis,” SBF said.

SBF said that at the time, Alameda’s net asset value was $10 billion, FTX had no flaws, and customer assets were not under attack.

He stated: “So my view at the time was that the exchange was in good condition, with no flaws in terms of assets.”

But later, there was a wave of runs on the exchange and Bitcoin withdrawals on FTX were backlogged. “On November 7th, customer withdrawals increased further, with withdrawals on the FTX platform amounting to approximately $4 billion, about 100 times more than usual.

“The only way to return all funds is to close the business by liquidating all margin positions on the exchange,” but SBF was concerned about this because FTX is a margin trading platform, which means there are borrowings and leverage involved. “This would only be done in an extreme 100% withdrawal scenario.”

3. Binance as the Catalyst for FTX’s Collapse and the Intention to Acquire FTX

After CZ’s tweet, customer withdrawals “increased significantly.” “I’m worried that this indicates the possibility of a run and liquidity crisis,” said SBF, with daily customer withdrawals reaching $1 billion, nearly 10 times more than any other day he had seen.

SBF pointed out: The redemption of FTX tokens by Binance ultimately led to the collapse of FTX. FTX provided a significant amount of native FTT tokens to Binance. In November 2022, Binance CEO CZ threatened to sell these tokens, triggering a run on FTX.

CZ had previously stated: “As part of Binance’s exit from FTX equity last year, Binance received approximately $2.1 billion in equivalent cash (BUSD and FTT). Due to the recent events exposed, we have decided to liquidate the remaining FTT balances on our account.”

SBF also admitted that he “was likely the one who pulled the trigger” and made the decision to repurchase Binance’s share of assets in FTX.

“I contacted Binance CEO Zhao Changpeng to discuss the possibility of acquiring FTX. Later that day, they signed a letter of intent to acquire FTX…about a day later, they backed out.”

Four, Caroline Ellison’s failure to fully hedge against market downturn also led to FTX’s collapse

SBF testified: FTX’s collapse was due to Caroline Ellison, the head of Alameda Research trading firm (also SBF’s ex-girlfriend), failing to adequately hedge against the market slump.

He stated that he asked Caroline Ellison to trade in order to offset the risks of cryptocurrency prices falling from mid-term. SBF, in response to the defense lawyer’s question, said that Ellison agreed that Alameda should hedge and also said that some risky investments should not be made.

However, SBF’s testimony also pointed out: “Alameda’s hedging didn’t help because it wasn’t hedging in the wider market.”

Five, holding 90% of Alameda’s shares

SBF admitted to owning 90% of Alameda and being a billionaire for a period of time. The prosecutor attempted to ask if this meant that Alameda was a subsidiary of FTX, but SBF opposed the idea.

The prosecutor then asked SBF if he had no involvement at all in Alameda’s 2022 transactions. He answered, “It depends on how you define transactions. I wouldn’t say I wasn’t involved in any way.”

Six, FTX and Three Arrows Capital, Alameda Research and MobileCoin, BitMax Token

SBF admitted in the trial that some cryptocurrency companies had special privileges on FTX, when U.S. Assistant Prosecutor Danielle Sassoon asked if FTX customers could use their equity in external investments as collateral for the exchange, SBF said a company called Crypto Lotus was allowed to do so, which had connections with Three Arrows Capital (3AC).

Alameda Research absorbed hundreds of millions of dollars in losses from FTX customer accounts through high-risk transactions related to cryptocurrencies MobileCoin and BitMax Token. He said FTX customers took advantage of some vulnerabilities in FTX’s risk engine. As part of its liquidity provider program, FTX transferred accounts to Alameda, which ultimately resulted in the loss of hundreds of millions of dollars for that account. FTX’s liquidity provider is a market maker who agreed to handle large account positions near liquidation.

Seven, a non-intervening CEO

SBF portrayed himself as a CEO who does not intervene in the company’s operations and often leaves operational details to others.

For example, FTX programmers Nishad Singh and Gary Wang (who have pleaded guilty and agreed to cooperate with prosecutors) testified that SBF instructed them to grant Alameda special trading privileges on FTX. Prosecutors said this allowed the fund to siphon off customer funds.

SBF testified that he asked Wang and Singh to prevent Alameda from being erroneously liquidated, but he did not know that their solution would result in a negative balance for Alameda.

In addition, FTX programmers Nishad Singh and Gary Wang (who has pleaded guilty and agreed to cooperate with prosecutors) testified that SBF instructed them to grant Alameda special trading privileges on FTX, which prosecutors say allowed the fund to siphon off client funds.

But prosecutors questioned this claim.

The prosecutor asked, “You didn’t understand the details of the code changes you were directing?”

“No, I trusted Wang and Singh,” SBF replied.

Eight, SBF’s Effective Altruism

The concept behind Effective Altruism is to generate maximum impact by spending money prudently to solve problems.

SBF has talked about effective altruism and claimed that he would eventually donate all of his wealth for various reasons. “I think some donations might have positive public relations value,” he said. “These are separate from the testimony I gave.”

Prior to the collapse and bankruptcy of cryptocurrency exchanges last year, SBF was the darling of Capitol Hill controlled by the Democratic Party. He donated nearly $40 million to candidates within two years.

Nine, SBF’s Einstein-like Mop of Hair

The prosecutor presented an article from The New York Times that quoted SBF as saying, “It’s important that people think I look ‘crazy.'” SBF claims not to remember saying that.

Here is an excerpt from the article:

“I said, Sam, you’ve got to cut your hair, man—it looks ridiculous,” Croghan said.

SBF said, “Honestly, I think cutting my hair is a negative for me. It’s important that people think I look crazy.”

The prosecutor asked SBF if not cutting his hair was because he was too busy. SBF said, “That sounds about right.” The prosecutor then asked SBF if he told others that he thought his appearance was “important.” SBF said he couldn’t remember.

SBF is known for his iconic Einstein-like mop of hair and always wearing t-shirts and shorts.

Ten, SBF in the Eyes of Ex-girlfriend and Colleagues:

SBF’s ex-girlfriend Ellison mentioned the romantic relationship with SBF. She talked about the difficulty of reporting directly to her boyfriend, pointing out that SBF could fire her at any time. She said, “Throughout the entire time we were dating, he was also my boss, which led to some awkward situations,” and added that SBF often seemed unenthusiastic and did not give her enough attention.

In Singh’s testimony: he used to think of SBF as an outstanding entrepreneur. This view became less optimistic after he discovered how client funds were handled in the months leading up to FTX’s collapse. “Sam is an awe-inspiring figure, so I admire and respect him a lot, but over time, a lot of things have been eroded.”

Singh admitted while testifying that he was under “severe emotional distress.” He described in detail his unstable relationship with SBF, which at times made him feel “humiliated,” and with the collapse of the company, he had suicidal tendencies.

Singh stated that he wanted to get rid of the debt. Reflecting on Singh’s behavior, SBF said, “He had suicidal tendencies. He made it clear to us and others.”

Eleven, Other Information

• The prosecution presented emails, tweets, interviews, press releases, and congressional testimony, where FTX and SBF assured investors that the exchange was secure, and Alameda followed the same rules as other exchanges. Assistant US Attorney Danielle Sassoon attempted to highlight the discrepancies between SBF’s statements on FTX risk management and his involvement with Alameda before and after the exchange collapsed. SBF said he didn’t remember or wasn’t sure what he had said in the past.

• When the prosecution tried to prove SBF’s responsibility for FTX and Alameda, SBF fought back. When asked if he gave orders as the CEO, SBF replied, “I gave orders to some of them.”

• The prosecutor pointed out that SBF backdated documents and mentioned the testimony of former FTX executive Nishad Singh, who stated that SBF told him to retroactively increase the exchange’s income to $1 billion by backdating Serum staking fees. When the prosecutor showed him a document signed on January 1, 2021, SBF said he signed it much later than that date and admitted that it might not have been his first time doing something similar.

• The prosecution emphasized that SBF cultivated a certain image by not cutting his hair and wearing t-shirts and shorts. “Do you have a high opinion of yourself?” the prosecutor asked. “I do,” SBF replied.

• SBF often said that he didn’t remember what he had said in certain situations, and “I’m not sure” became a standard answer. At times, he also failed to directly answer questions, prompting the judge to tell him at one point to “just answer the questions.”

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