On October 5th, during Sam Bankman-Fried's trial, Gary Wang, co-founder of Alameda Research and FTX, provided extensive insights into the intricate relationships between the companies, shedding light on how this crypto empire ultimately resulted in an $8 billion shortfall in customer assets.
According to Wang, Alameda began receiving special discounts from FTX in 2019, a few months after FTX's inception. Prosecutors presented screenshots from FTX's database and code from GitHub to demonstrate that Alameda was permitted to maintain unlimited negative balances at FTX, secure a $65 billion credit line in 2022, and enjoy an exemption from FTX's clearing engine.
Over time, financial matters became increasingly entangled between the companies. In 2020, Bankman-Fried informed Wang that Alameda's negative balance should not surpass FTX's revenue, although this rule had evolved over the years. For instance, Alameda's liability to FTX grew from $300 million in 2020 to $3 billion by the end of 2021.
When asked why he agreed to Alameda's terms, Wang cited his trust in Bankman-Fried's judgment.
However, during Wang's testimony, the defense argued that these alleged privileges were part of Alameda's role as FTX's primary market maker. They also pointed out that other market makers enjoyed similar privileges at FTX, highlighting that the ability to go negative is a fundamental characteristic of market makers.
Prosecutors also raised the issue of the 2021 MobileCoin (MOB) vulnerability. Bankman-Fried purportedly instructed Wang and Caroline Ellison to include the multimillion-dollar deficit in Alameda's balance sheet rather than retaining it on FTX to conceal losses from FTX investors.
Regarding the potential replacement of Alameda with another market maker, discussions were held months before FTX's collapse. However, at that time, the company's debt stood at $14 billion, making it impractical. Alameda continued its operations until November 2022.
Wang's testimony is set to continue on October 10th, the same day Ellison is scheduled to appear. Additionally, on October 5th, prosecutors questioned Adam Yedidia, focusing on Alameda's $8 billion liability to FTX. Yedidia is a close friend of Sam Bankman-Fried and a developer at FTX. He was one of ten individuals staying at Bankman-Fried's $35 million luxury resort in the Bahamas.
Yedidia testified that since early 2021, FTX used an Alameda account called North Dimension to deposit user funds while encountering difficulties in opening its bank account. These funds were considered Alameda's liability to FTX, eventually reaching $8 billion by June 2022.
Initially, Yedidia did not view this as a problem when he learned of it in 2021. However, after realizing the magnitude of the liability in 2022, he expressed his concerns to Bankman-Fried during a tennis match. Bankman-Fried suggested resolving the debt within six months to three years, expressing confidence in Alameda's ability to handle the situation. Yedidia resigned in November 2022 upon discovering that Alameda had used the funds to repay creditors.
The prosecution used this case to illustrate the commingling of funds between the two companies. In response, Bankman-Fried's defense sought to provide a broader perspective on FTX and Alameda's relationship to the jury.
The defense emphasized FTX's rapid growth and the tireless efforts of its leadership during the 2021 bull market, with Bankman-Fried overseeing multiple facets of the company. Defense attorneys also highlighted that Yedidia had been the subject of multiple investigations by prosecutors under immunity orders, which protect him from any charges related to his role at FTX. Furthermore, Bankman-Fried's defense argued that FTX's struggles in opening bank accounts and its reliance on North Dimension, an account in Alameda, to deposit funds were widely known.
Yedidia's cross-examination is set to continue in federal court in lower Manhattan during the afternoon of October 5th. Additionally, two witnesses testified during the trial's second phase: Matthew Huang, co-founder of Paradigm, and Gary Wang, co-founder of FTX and Alameda Research.
Paradigm invested a total of $278 million in FTX across two funding rounds between 2021 and 2022. Huang mentioned that Paradigm was unaware of the commingling of funds between FTX and Alameda and the privileges granted to Alameda on the crypto exchange.
These privileges included an exemption from FTX's liquidation engine, allowing Alameda to maintain a negative balance with FTX. Huang acknowledged that Paradigm did not conduct extensive due diligence on FTX and relied primarily on information provided by Bankman-Fried.
Another concern for Paradigm was FTX's absence of a board of directors. Huang revealed that Bankman-Fried was hesitant to have investors join FTX's board but eventually committed to forming one and appointing experienced executives to serve on it.
In brief testimony, Gary Wang admitted to committing wire fraud, securities fraud, and commodities fraud alongside Sam Bankman-Fried and Carolyn Ellison.
