NEW YORK ­— On Tuesday, at the start of the second week in the criminal trial of Sam Bankman-Fried, the former FTX CEO’s defense lawyers finally seemed to make some headway after what was largely seen as an ineffectual first week. 

However, in the afternoon, Caroline Ellison, the former CEO of Alameda Research and ex-girlfriend of SBF, testified, setting the stage for what looks like Ellison and Bankman-Fried blaming each other for Alameda’s usage of FTX customer funds to pay the trading firm’s debts. 

In Wang cross-examination, the defense finds its legs 

Ellison followed Gary Wang, the cofounder of Alameda and FTX, who testified against Bankman-Fried for a third day.  It was the first time the defense did not use many repetitive questions and instead mounted a coherent line of argument to undercut some of Wang’s testimony to the prosecution. Still, by the end, it seemed Wang was a yes man who mostly followed orders from Bankman-Fried. 

In one example, Wang noted that bitcoin’s price in May and June 2022 slid dramatically, causing Alameda’s lenders to ask for their money back. As a result, Wang and top executives started calculating Alameda’s balance on FTX to see whether the trading firm could pay back its loans. 

Read more: US Judge Denies Request to Delay SBF Sentencing

Defense lawyer Mark Cohen highlighted the difference between Alameda’s total assets and Alameda’s balance on FTX, specifically how Alameda had balances and assets external to FTX.  Although Alameda had a large, negative balance, Wang felt “relieved” when he learned Alameda’s net asset value (NAV) was positive, highlighting how Alameda had more assets than liabilities in June 2022. He said Ellison paid back some of its lenders when they realized Alameda’s NAV was positive.

Whose fault was it not to hedge?

Bankman-Fried’s September 2022 memo about possibly shuttering Alameda Research resurfaced in today’s courtroom. One of the bullet points of the memo, shared with the jury, stated Bankman-Fried’s reasons for potentially shutting down Alameda. It said, “The fact that we didn’t hedge as much as we should have alone cost more in EV (expected value) than all the money Alameda had ever made or ever will make, and that’s the kind of critical mistake we’re likely to make if I’m not actually running the show there.” The defense highlighted this quote in yellow and underlined “we didn’t hedge” in red. 

At that point, the defense asked Wang about some Signal chats between Bankman-Fried, Wang, and Alameda traders in which SBF mentioned what Gary said was “the possibility of selling short some S&P 500 futures, and then a few days after that, the price of a bunch of cryptocurrencies fell, and then after that, Sam sent a bunch more messages being angry at Alameda for not doing that.”  

In his follow-up questions, Cohen asked Wang if Ellison did not properly hedge, however, Wang replied that Ellison was CEO but that he didn’t know what the decision-making process was.

Who caused customers to withdraw funds en masse?

When Wang was discussing the events that transpired days before the FTX bankruptcy, he said FTX customers were withdrawing “around $100 million an hour” on November 6, significantly faster than most days which saw a withdrawal rate of about $5-10 million per hour.

The defense brought up the tweet by Binance CEO Changpeng Zhao about how it planned to sell the FTT tokens it owned, then asked Wang, “Binance was FTX’s main competitor, wasn’t it?” When Wang agreed, SBF’s lawyer asked, “And his tweet triggered effectively a run on the bank of FTX, right?” This question was objected to, and the objection was sustained, but when answering a rephrasing of the question, Wang said, “I’m not sure if it was a tweet or the leaked balance sheet,” implying that the cause could also be the Alameda balance sheet that was heavily reliant on FTT. 

Additionally, the defense raised Bankman-Fried’s tweet about how FTX’s assets are fine. Wang said the tweet was “true, but misleading,” however under the defense’s questioning, he did admit that FTX was solvent insofar as FTX had more assets than liabilities. But he explained that it was also illiquid, by virtue of not being able to quickly convert their assets to cash.

Securities Commission of the Bahamas

The defense, attempting to explain the transfers that SBF and Wang made to the Bahamian regulators, brought up an email to Wang that said, “The commission hereby requires you to attend the Commission’s offices at …” and continued, “You are required to appear to 2:00 in the afternoon to answer questions, including under oath.” It also stated that not attending could result in him being liable to be committed to prison for contempt. 

This was later brought up by the prosecution, who showed the email that Wang had received, which was sent at 3:26 p.m. after the meeting had already started. Wang, who drove with Bankman-Fried to the meeting, did not actually converse with the Bahamian regulators; only SBF did. 

$200 Million in loans — but what for?

After being questioned by the defense about $200 million in loans that he had received, the prosecution started its redirect examination of Wang by asking about those loans. Wang expressed ignorance about the loans he received, saying he didn’t know what the investments were for. When asked why he signed them, he responded, “I was given them to sign, they said it was for an investment, and I believed them and they wanted me to sign, so I just signed it.” Then he added that he also signed it because he “trusted” Bankman-Fried. 

Wang, who was asked by the prosecution about Alameda’s special privileges such as its $65 billion line of credit, said Alameda was inefficient because the trading firm could market make without withdrawing $8 billion and having a $65 billion credit line. Moreover, Wang said to Bankman-Fried that Alameda was probably too big to shut down because the firm was borrowing too much money to shut down. Bankman-Fried responded with, “Acknowledged,” Wang alleged. 

Ellison takes the stand, says she warned SBF about risks of VC investment 

Ellison, sporting a gray blazer and a dusty pink dress, took the stand shortly after Wang. Straightforward, articulate, and often describing trades and financial activity in more lay language than Wang did, she may have seemed like a sympathetic witness to the mostly female jury, especially when she described her romantic relationship with Bankman-Fried. 

However, the prosecution took a while to walk through a spreadsheet Ellison had made in September 2021 warning SBF that if FTX made another $3 billion in venture investments, there was “no way” it could repay its loans to lenders. It was a harder-to-follow argument than the simpler line last week that Alameda took FTX customer funds without disclosing it. This line of questioning may have given fodder to the defense that the issue was the difficulty of flying a plane while building it. 

SBF’s and Ellison’s early relationship 

Ellison and Bankman-Fried met during their time at the quantitative trading firm Jane Street when she was an intern and he was a trader. By 2018, Ellison not only left Jane Street to work at Alameda but also started a romantic relationship with Bankman-Fried. 

Ellison, upon joining Alameda, said she realized the firm’s financial footing was much worse than what she had expected. According to her testimony, Alameda had suffered “large losses” and “more than half the company ended up quitting.” Ellison said that she asked why Bankman-Fried didn’t tell her about these glaring details. “He apologized and he said that he hadn’t known how to tell me,” she said in her testimony. 

Read more: Tiffany Fong’s Complicated Relationship With Sam Bankman-Fried Included Getting Yelled at by His Mother

When describing their romantic relationship, Ellison said, “I would say the whole time that we were dating he was also my boss at work, which created some awkward situations. I would say in our personal relationship there was a general theme that I sort of wanted more from our relationship but often felt like he was distant or not paying attention to me.” 

Alameda begins to rely on loans and FTX customer funds

Alameda was funded through loans from third-party lenders, and when Ellison joined, these lenders were asking for their money back, alleged the former Alameda CEO. As a result, Bankman-Fried made it a “big priority” to get more loans “in order to do more trades or just have the ability to do whatever valuable things came up,” which she said included “investments or acquisitions.”

Ellison mentioned two ways Alameda received money from FTX, saying Alameda received FTX customer deposits directly and that Alameda had a $65 billion credit line to take assets off the centralized exchange. “My impression was that FTX marketed itself as a safe, reliable, audited, and highly regulated exchange,” she said, noting that she quickly realized that it wasn’t after discovering that Alameda had used FTX customer funds for expenses, investments, repayments on loans, and trading. 

Read more: Sam Bankman-Fried Adapts to Life in Detention, Trades Crypto for Mackerel Economy: WSJ

Like Wang, Ellison said Alameda’s $65 billion credit line was not necessary for its market-making responsibilities, mentioning that a $100 million to $200 million credit line range would have been sufficient. Ellison also alleged that Bankman-Fried did not disclose this enormous credit line to investors, auditors, and the general public. 

One of FTX’s early investors was Binance, the world’s largest crypto exchange by trading volume. In 2021, Bankman-Fried told Ellison that he wanted to buy back Binance’s stake in FTX. The problem for Bankman-Fried was that FTX, even though it had just raised a $1 billion venture round, didn’t have enough money. As a result, Ellison and Bankman-Fried used $1 billion of the credit line, which depended on FTX customer deposits, to acquire Binance’s equity stake in FTX. Ellison’s takeaway from this situation was that Alameda’s line of credit could be used as a backstop, or source of capital when the firm was strapped for liquidity. 

Enter FTT

In addition to using the line of credit to shore up funds, Ellison alleged that Bankman-Fried had created FTT, the native exchange token of FTX, to borrow more money. In the beginning, FTT was trading hands at less than $1 and was not included in FTX’s balance sheet. 

Eventually, Ellison indicated that Alameda began including FTT in FTX’s balance sheet at Bankman-Fried’s direction as a means to acquire more loans from crypto lenders such as Genesis. Ellison noted that she felt FTT’s inclusion in the balance sheet was misleading because the FTT owned by Alameda in 2021 could not be sold for what they said it was worth on the document. If the huge amount of FTT was sold, the price of FTT would drop considerably,  Ellison said. 

Read more: FTX Objects to $24 Billion IRS Tax Claim

In 2021 when Binance decided to offload some of its FTT tokens, Bankman-Fried told Ellison to buy FTT to keep the price afloat, since the tokens were used to secure loans. Ellison added that Bankman-Fried would become angry when she spoke too much about Alameda’s FTT trading. 

At one point, Alameda trader Victor Xu questioned why Alameda had bought FTT at what he felt was too high a price rather than waiting for the price to fall when it would have cost Alameda less. In a Signal message to him, Ellison wrote, “FTT price is definitely something SBF’s gotten upset at me for talking too publicly about before so I was feeling stressed out about that/struggling how to respond.” Then she noted she agreed with Xu: “I think we fucked up by not taking it down earlier.”  

The ‘expected value’ of political donations and a coin toss on Earth’s destruction

Ellison became Alameda’s co-CEO in 2021 and then CEO in 2022. One of her responsibilities as CEO was to handle the day-to-day operations of Alameda as well as prepare the firm’s balance sheet. Through that exercise, she discovered that, as of mid-2022, the amount loaned to SBF, Wang and Singh totaled around $5 billion. Ellison had a $3.5 million loan passed through her account for FTX staff who wanted to invest in a gambling company in her name since she wasn’t affiliated with FTX. 

Additionally, she noted that Ryan Salame, the former co-CEO of FTX’s Bahamas entity, received a $35 million loan, which was to be used to make donations to Republican candidates. In her conversation with SBF about this, she alleged he said that one could “get very high returns in terms of influence by spending relatively small amounts of money.” She claimed that one example he cited was what she thought was a $10 million donation to then-presidential candidate Joe Biden, which Bankman-Fried felt had “got him some amount of influence and recognition.”  

U.S. prosecutors raised questions to Ellison about Bankman-Fried’s risk behavior. Ellison said Bankman-Fried had previously described himself as “risk-neutral,” meaning he was more comfortable taking risks than most people who were risk-averse. Ellison gave an example of a coin flip where “tails” is Earth’s destruction and “heads” is prosperity more than double of Earth’s current levels, Ellison alleged that Bankman-Fried said he would proceed with the coin flip, risking the planet, a statement that caused a ripple of incredulity in the overflow room. 

Rolling the dice on $3 billion in venture investments

Ellison then started detailing her conversations with Bankman-Fried about potential, bad case scenarios where crypto markets are down 50%, investment ventures are down 100%, FTX-affiliated tokens are down 75%, crypto lender Genesis tightening its loan requirements, among other conditions. 

U.S. prosecutors introduced a spreadsheet Ellison made in September 2021 to analyze these scenarios. In the spreadsheet, Ellison subtracted the value of FTX-affiliated tokens like FTT, SOL, and SRM from Alameda’s net asset value. Ellison said she excluded these tokens, worth about $10 billion, because she wanted to see how much liquidity was available and according to her, these tokens were not liquid by virtue of being hard to sell and volatile. 

After analyzing Alameda’s liquidity, Ellison concluded Alameda was at some risk of not being able to meet its loan recalls, and within her analysis, Ellison made the assumption that Alameda would use FTX customer funds to repay its debt, similar to how customer deposits were used to buy back Binance’s stake in FTX. 

Read more: SBF’s Bid for Release Rejected by US Appeals Court

At the time, she said, Bankman-Fried was considering whether to invest an additional $3 billion into venture investments. 

Ellison, in her testimony, stated she updated her analysis and adjusted several parameters to see how liquid Alameda would be after deploying $3 billion as venture capital. She concluded that if FTX received negative press coverage, Genesis wanted its loans back, and Bankman-Fried poured an additional $3 billion into VC investments, there was a 100% chance Alameda could not repay its lenders, which she said meant there would be “no way we would be able to make the payments” – even if it borrowed FTX customer funds.  

Alameda’s loans from Genesis were open-term loans, meaning they could be recalled at any time. Ellison alleges that upon reviewing the document, Bankman-Fried urged her to assume that Alameda would be able to convert most of its loans to fixed term. He also asked Ellison to convert all of Alameda’s open-term loans to fixed. However, she was able to only convert a fraction. 

Despite Ellison’s analysis, she said Bankman-Fried decided to pursue investing more of Alameda’s liquidity. On January 14, 2022, Bankman announced via X, formerly Twitter,  a $2 billion venture fund called FTX Ventures. 

This long line of questioning through the spreadsheet which showed multiple scenarios felt plodding and may have given the defense fodder for its theory that Bankman-Fried was building a plane while flying it. However, the prosecution might have felt the spreadsheet was necessary to counter any argument by the defense that Ellison was to blame for not hedging, which, in a Signal chat Wang had said made Bankman-Fried angry. 

The trial resumes tomorrow at 9:30 a.m., continuing with Ellison’s witness testimony.