On Wednesday, the criminal trial against Sam Bankman-Fried featured financial and technical expert testimony, a considerable portion of which was mundane. One standout witness relayed his analysis of how much money FTX owed to its customers against how much it actually had over time. However, there were two witnesses whose purpose was unclear, prompting the judge to rebuke the prosecutors.
Although the testimony was less dramatic than earlier this week when the prosecution’s final star witness, former FTX head engineer Nishad Singh, detailed its growing balance sheet problems and Bankman-Fried’s harsh management style, the clear and easy-to-follow financial flows analysis yet again presented a strong case for the prosecution.
Bankman-Fried faces seven felony charges, including wire fraud, conspiracy to commit money laundering and campaign finance violations. Prosecutors allege that Bankman-Fried knowingly misused customers’ funds to prop up Alameda.
Three members of Bankman-Fried’s inner circle, former Alameda CEO Caroline Ellison, FTX former chief technology officer and cofounder Gary Wang and Singh, respectively described an organization and SBF leadership style of profligate spending and a cavalier attitude toward customer assets. If found guilty, Bankman-Fried could spend decades in prison. Ellison, Wang and Singh testified under a plea agreement they hope will keep them out of prison.
Accounting expert analyzes gap in customer funds
In the dry and technical terms of bank accounts and blockchain tech, but accompanied by clear diagrams, flowcharts, pie charts, and graphs, Notre Dame accounting professor Peter Easton dissected Alameda’s bank statements, FTX’s database, cryptocurrency blockchains like Ethereum and Bitcoin and third-party bank statements.
His presentation illustrated how FTX had spent so much in customer funds that, according to his analysis, at the time of its collapse, the gap between what it had and what it owed customers was about $9 billion.
Easton testified, “The amount of customer deposits held in Alameda Research and FTX.com accounts was way less than was owed to customers on FTX. What happened to that money? Well, Alameda Research used it for their own expenditures. Similarly, the amount of FTX hot and cold crypto wallets was far less – the amount owed in those wallets was far less than the amount that was owed to FTX customers, and again, Alameda Research used customer crypto funds to pay for the expenditures.”
Easton, who was hired by the U.S. Justice Department to analyze FTX and Alameda balance sheets and who had done similar work on the Enron and Worldcom cases, told prosecutors that SBF’s firms had spent customer assets on investments, political and charitable donations and real estate, including the luxury Bahamian penthouse where Bankman-Fried and nine others lived.
Customer money flowing out
After explaining one page with four categories of money visually represented on it—Alameda bank accounts, accounts with customer deposits, FTX bank accounts, and an SBF entity called Paper Bird—the prosecutor asked Easton, “Now let’s talk about what happened to the customer funds that moved through these accounts. And was any of the customer money spent?” Easton, who seemed to have an Australian accent, responded, “Oh, yes,” in a tone that sparked laughter in the overflow room.
The diagram, entitled “Commingling of Customer Fiat Deposits with other Funds,” showed how interconnected FTX and Alameda were—rather than arm’s length entities as SBF and Ellison had publicly maintained. It depicted transactions from a nearly 11-month period beginning in January 2022 via a network of more than 50 bank accounts under Bankman-Fried’s control.
Easton concluded that FTX had chronically used customer assets for its own purposes. His blockchain analysis, in particular, showed that, on October 31, 2022, FTX’s customer balance was more than $10 billion greater than the amount FTX held in its crypto wallets.
He demonstrated that numerous investments were made using customer funds. For example, 100% of the investments into trading firm Modulo Capital came from customer funds, according to Easton’s testimony. Other investments that were made with either a part or all of the funds coming from customer assets included Anthropic, Genesis Digital Assets, Robinhood, and K5.
There were numerous real estate purchases made with customer money, such as the Orchid penthouse, SBF’s “Gemini” apartment, and an apartment labeled “Old Fort Bay,” which cost $16.4 million, along with $1.64 million for VAT. Its deed listed the owners as Alan Joseph Bankman and Barbara Helen Fried, who are SBF’s parents.
Of the political donations in his analysis, all of which were paid wholly or in part with customer money, two seemed notable. One, to Fried’s super PAC, was corroborated by an email Fried sent to her son, saying, “Since this is going to our 527 and hence is disclosed, I’m assuming Nishad would be the best person to have his name on it.” SBF responded with an email approving the transaction. Additionally, Easton said a charitable donation to Bankman-Fried’s brother’s nonprofit organization, Guarding Against Pandemics (GAP), received $20 million of customer funds.
Easton also highlighted how loans from third-party lenders were paid off using customer funds. He testified that 68% of the payments to third-party lenders, or $4.5 billion, came from customer money. In fact, payments to several third-party lenders including BlockFi, Voyager, Celsius and Abra, were 100% customer money.
Bankman-Fried attorney David Lisner attempted to cast doubt about Easton’s methods, asking whether it was “fair to say that the amount of fiat kept in the FTX account should not appear as a liability for Alameda.”
Lisner highlighted that the fiat@ftx internal account tracked all customer deposits in all relevant bank accounts from Alameda, North Dimension and FTX. Bankman-Fried’s inner circle had separated the fiat@ftx account to understand the liability split between FTX and Alameda, but Easton admitted to Lisner that he left the fiat@ftx account as is, lumping liabilities owed to customers from FTX’s bank accounts with the customer liabilities from Alameda’s accounts. All this meant, however, was that Easton’s analysis in this one instance was not entirely accurate.
With different witnesses, prosecutors drew attention to Twitter activity by Bankman-Fried that seemed to highlight his indifference to FTX’s growing financial predicament or possibly an attempt to fool some of the political heavyweights and celebrities with whom he corresponded.
In one instance, Eliora Katz, a Washington DC lobbyist whom FTX hired to help with its government relations, read a tweet by Bankman-Fried in which he thanked Maxine Waters, Patrick McHenry, and the House Financial Services Committee. The prosecution also asked Katz to read the defendant’s tweet on Feb. 6, 2022 where he said he was excited to testify before the Senate Agriculture Committee on digital assets.
While Shamel Medrano, an investigative analyst for the Southern District of New York, was testifying, prosecutors presented tweets from several crypto influencers, including @basedkarbon and @crypto_bitlord7, who responded to SBF’s thread on Nov. 6, 2022, with Based Karbon thanking Sam and saying he had deposited more money into his FTX account.
The tweets and private messages, including a conversation with Vox Future Perfect Senior Writer Kelsey Piper, seemed to suggest that Bankman-Fried was offering different messages for different constituencies.
.Medrano testified about screenshots of private Twitter DMs between Piper and Bankman-Fried where Piper asked the defendant, “You said a lot of stuff about how you wanted to make regulations, just good ones, was that pretty much just PR too??.”
Bankman-Fried responded, “There’s no one really out there making sure good things happen and bad things don’t. Usually there’s only one toggle – do more or do less. Yeah, just PR. Fuck regulators.”
Piper then published an article based on their conversation that became a sensation in the days shortly after FTX’s collapse. Right after she published it, SBF DMed her again, asking her to “take it down.”
An irritated judge
At certain points, judge Lewis Kaplan became impatient with prosecutors for calling witnesses who he felt did not add to their case, thereby wasting everyone’s time. Katz, the first witness on Wednesday, spent much of her time on the stand reading from FTX documents and SBF’s communications to federal lawmakers.
Katz acted as though she had been forced to testify, answering in sometimes barely audible, one syllable words and repeating on at least one occasion that some events recounted in earlier testimony occurred before her six-month employment at FTX started in April 2022. She also said that she had no reason to believe that SBF’s statements to lawmakers, some in public hearings before the Senate and House, were false.
Later, Cory Gaddis, a Google records custodian, testified about metadata in Google Docs and spreadsheets. It was not at all clear what the point of his testimony was. Gaddis himself even revealed he was not a metadata expert. On top of that, the prosecutor ended up repeating a number of different documents it wanted to put into evidence multiple times.
In a break shortly afterward, a clearly annoyed Kaplan said of Katz’s and Gaddis’s testimony, “We had a witness this morning, who knew absolutely nothing and spent the time saying I had nothing to do with any of that, [and] read documents that are public records. And this afternoon we fly somebody in from Texas to put in documents about what he knows nothing or next to nothing that are obviously stipulatable. We have 18 people devoting time here to this case and it’s really a crime.”
Be sure to check back for the update tomorrow. If you want real-time updates from the courthouse, be sure to follow me on Twitter! More tomorrow!