Summary of SBF Court Statements: Why Did FTX Collapse? Was There Misappropriation of Customer Assets? Relationship with Caroline and Alameda
SBF testified before the jury in a criminal fraud and conspiracy trial on the morning of October 27, Eastern Time.Original: BitMEX Research, WSJ, Yahoo
Compiled by: Cat Brother, Wu Says Blockchain
SBF testified in front of the jury on the morning of October 27, Eastern Time, in a criminal fraud and conspiracy trial. This article mainly compiles the整理 of BitMEX Research on his testimony, supplemented by reports from WSJ and Yahoo.
Previously, Alameda CEO and SBF's ex-girlfriend Caroline Ellison testified on October 12.
Compilation of SBF's Testimony by BitMEX Research
Original link:
https://x.com/BitMEXResearch/status/1718042092226658330?s=20
Q: Have you ever deceived anyone?
A: No, I haven't.
Q: Did you take customer funds?
A: No.
Q: We will discuss in detail what happened at FTX later, but can you give us a rough overview?
A: Sure. At a higher level, there are different types of exchanges. There are spot exchanges where customers deposit $100 to buy $100 worth of Bitcoin or $100 worth of Ethereum. There are also leveraged exchanges, where customers might deposit $100 to buy $500 worth of Bitcoin or sell $200 worth of Bitcoin they don't have (short selling); customers might also deposit $100 and withdraw $50 worth of Bitcoin they don't have, making their Bitcoin balance negative. FTX was primarily a margin exchange, and the vast majority of activities on FTX were done through margin. When you do margin trading, you can think of it somewhat like a mortgage. For example, you have a house worth $100,000, and you might take out a loan for $10,000. This is akin to having a certain amount of Bitcoin deposited and then withdrawing dollars. For margin exchanges, especially for FTX, the biggest risk is that one of the trades has a default risk;
Q: Mr. SBF, did you make any mistakes in this process?
A: Yes, I made some small mistakes and some larger ones. The biggest mistake was that we did not have a dedicated risk management team; we did not have a Chief Risk Officer. We had some people involved in risk management to some extent, but no one was specifically responsible, which led to significant negligence.
Alameda's First Office
Q: Where was Alameda's first office?
A: The first office was in --- --- an Airbnb we rented in North Berkeley, California.
Q: Can you describe the layout of that Airbnb?
A: Yes. It was listed as a two-bedroom Airbnb. We had three people, but it had a loft, so we felt it was like having three bedrooms. There was a living room with a sofa, so that was the fourth bedroom. The rest of the area was an office. We put a lot of desks and computers there, along with most of the boxes from Amazon. Soon we started dealing with the box situation. After living in that apartment for a few months, we rented a more traditional office space in downtown Berkeley.
Alameda's Split in 2018
SBF claimed that after the split, the fund's annualized return reached 50% to 100%.
Q: Okay. Back to Ms. Ellison, when did she join the company?
A: She joined around the end of February or early March 2018.
Q: What happened after she joined?
A: Yes. The company split, and there was a divide. There was a clear disagreement between the two teams in the company, and ultimately one of the teams resigned, taking most of the funds with them.
(For details, see:
https://x.com/Tara_MacAulay/status/1592985303262072834?s=20)
Q: What did you say to Ms. Ellison?
A: I apologized for not telling her earlier that I suspected there might be bigger problems when the issues started arising.
Q: Okay. So, after this split, with half the company leaving, how did Alameda perform?
A: I think she did very well. We resolved the issues that led to the split. We had profitable weeks in a row. Our annualized return was between 50% and 100%.
Moving to Hong Kong
Q: Why did you move the company to Hong Kong?
A: I almost went there by accident to attend a conference. During that week, I had more useful meetings than I had in the previous year in California. I ended up canceling my return flight and renting a WeWork in Hong Kong because I felt there were significant business expansion opportunities for Alameda there.
Q: What was the theme of the conference you attended?
A: It was a general --- --- it was called the Sora Summit. It was a general cryptocurrency conference attended by many industry leaders.
2019 Blog Post: "Our Liquidation Engine --- How We Significantly Reduced the Likelihood of Clawbacks"
Q: What is this?
A: This is a blog post I wrote early in FTX's history about clawbacks and how FTX handled them.
[Then there was a long debate among the lawyers about the admissibility of this blog post. The jury was dismissed, and the debate continued. The defense argued that the blog post should be admissible because it helped rebut the prosecution's claim that FTX was a scam from the beginning. This blog post clearly supported the defense's assertion that FTX was a legitimate business.]
Prosecution: Starting from the last point, it says Gary Wang had a conversation with the defendant in 2019 about Alameda having negative balances. How does this blog post from 2020 respond to that? I really don't understand. This blog post is about comparing FTX's risk and liquidation systems and its clawback history with one or more other exchanges, so it is completely unrelated to whether there were negative balances in 2019. I don't know where the defense attorney inferred from this part of the transcript that there was some grand conspiracy in 2019 that needed to be rebutted.
[The judge ultimately accepted the prosecution's position]
How You Initially Won Customers for FTX
A: We reached out to people we knew in the industry, basically our friends. We gained some of our initial customers this way, a single-digit number. They provided feedback. We iterated the product based on that feedback. Eventually, some of them liked the exchange. They told some of their friends, and then it started spreading through word of mouth and eventually on social media. We began interacting with customers on social media, through customer support, emails, and tickets. We tried to be responsive. We pieced those things together instead of having a paid marketing strategy.
Can Alameda Borrow Money from FTX?
Q: As a customer of the exchange, is Alameda allowed to borrow from the exchange?
A: Yes.
Q: When it borrows, where does the money come from?
A: My understanding is that the money basically comes from margin traders. It comes from the collateral of other margin traders or --- --- basically the collateral of other margin traders, or from assets earning interest on the platform, which are sent to FTX as collateral for other traders' loans and lent to borrowers including Alameda.
Q: What can Alameda do with the borrowed funds from the exchange?
A: Generally speaking, FTX did not restrict what people could do with their borrowed funds. So the answer is the same as for other users, as long as we believe the risks are managed, meaning as long as we believe its assets are greater than its liabilities, we don't mind users withdrawing funds and using them to buy muffins, pay business expenses, invest, or anything else.
Rapid Growth of FTX
A: It grew very quickly. In the early days, it traded millions of dollars a day. That number grew to tens of millions of dollars a day in 2019. In 2020, it grew to hundreds of millions of dollars a day. By 2022, its trading volume reached $10 to $15 billion a day.
2020 Risk Engine Issues and SBF's Story about the Origin of "Allow Negative"
[SBF discussed in detail the situation where the risk engine was not functioning correctly]
At that time, in 2020, the risk engine actually started to lag under the pressure of growth and began to delay. That is to say, it took a few minutes to learn what was happening in the market. We had a user with a relatively small position that needed to be liquidated, so the risk engine liquidated it. I remember initially it was just a few thousand dollars. But because the risk engine took a few minutes to understand market events (including its own trades), seconds later, the risk engine looked at the same account again without realizing it had already liquidated that position, and then liquidated it again, and again, until it had to close the same position multiple times. I think that position went from a few thousand dollars to several million dollars.
When it finally caught up with all the liquidation operations, it realized it had to reverse most of them, so it swung back and forth in the opposite direction. It grew from a few thousand dollars to several trillion dollars in a short time. It was growing exponentially. This was all due to a few minutes of delay. There was a feedback loop when reading its own trades.
……
So the risk engine started passing thousands, millions, and trillions of erroneous trades to Alameda's account. This, in turn, caused Alameda's account to incur losses due to the trillions of dollars of positions being passed, triggering the potential liquidation of the Alameda account, which, in turn, would enter the final stage of the risk engine due to the lack of backup liquidity providers, a stage we always tried to minimize and hoped to avoid, which is the stage of loss sharing among all customers on the platform.
……
Once we realized what was happening, once people truly understood what was going on, we shut it down. We reversed all the trades that should not have happened. This was still a very inconvenient event for everyone involved. While we were dealing with all this, the exchange was basically unusable for an hour. It was terrifying.
……
This was a systemic risk to the entire system and all platforms. We addressed this specific issue by increasing the number of servers and computers allocated to the risk engine so that it would no longer lag behind. That was the specific reason that triggered this issue. But it also exposed a larger concern about whether Alameda's account or any other similarly sized account on the platform would be liquidated, although at that time Alameda was the only account.
[SBF later stated that he asked Gary and Nishad to address this potential issue.]
Q: So what happened next?
A: They told me they had implemented that functionality.
Q: Do you know what that was?
A: At the time, I couldn't tell you the details or its name. I now think I know what that functionality was.
Q: What was it?
A: "Allow Negative."
The Story of Alameda's Co-CEOs
Q: Okay. So who did you hand over Alameda to as CEO?
A: Initially, it was Caroline Ellison and Sam Trabucco.
Q: Why did you ask them to do that?
A: When I was CEO, they were the second and third in command at Alameda. They were both very good traders, very smart, capable people. They complemented each other well. Additionally, they had complementary strengths, and I felt they could form a great team to run the company. They were my best choice at the time.
Q: You said you felt they were complementary. In what ways do you think they are complementary?
A: Caroline is generally regarded as a very good manager. Her subordinates gave me very positive feedback. They described her as engaged, smart, and compassionate. She is not a software developer, but for traders, she is a very good software developer, so she interacts relatively well with the development team. She is also a very good trader, very skilled at researching trades and writing mathematical models. You know, those are some of Alameda's areas of responsibility. She didn't focus much on risk management or unusual trading opportunities or risks. Trabucco focused more on those areas and had been doing those things when he was still a trader. He is also a very good manager, but he is not as naturally gifted in management as Caroline. They complemented each other very well.
Q: So what was Trabucco's role?
A: Trabucco focused more on risk management and finding unusual trading opportunities. He has a good intuition for quickly identifying changes in the market and reacting. He also often collaborates with other teams at Alameda to ensure our strategies and trades are appropriate.
Q: How do the leadership styles of these two CEOs differ?
A: Caroline is more of a strategist; she excels at research, planning, and execution. She likes to look at things from a macro perspective and ensure all the details are considered. Trabucco tends to be more about real-time reactions and adjustments; he can quickly adapt to market changes and make decisions. Although their approaches are different, they are both very effective leaders who can lead Alameda to success.
Q: Finally, how did they work together?
A: They worked very effectively together. Caroline and Trabucco both respected each other's viewpoints and decisions. When they had disagreements, they would sit down and discuss to find a solution that both could accept. They both understood that for the greater good of the company, they needed to unite and work together.
Q: Why did you continue to be involved?
A: I am the owner of the company and the largest shareholder. I care about how it operates. Especially when Trabucco resigned, it was a heavy task for anyone, and I felt Caroline was doing very well in many areas, but there were some important areas where she needed help and support, and I was concerned about what would happen if I didn't do that. There were also some areas, particularly in venture capital, that complemented the work I was doing at FTX.
Caroline and SBF's Relationship
Q: Did you have a romantic relationship with Ms. Ellison?
A: Yes, I did.
Q: When did that relationship start?
A: We started dating in 2020 and dated intermittently for about two years.
Q: When did you break up?
A: We last broke up in the spring of 2022.
Q: What was the reason for the breakup?
A: I didn't have the time or energy to give her what I thought she wanted from our relationship. This wasn't the first time I had this issue; it was due to the time I spent working, but also because I historically haven't been good at maintaining long-term romantic relationships. I think she wanted more from it than I could provide.
Q: Please answer yes or no. Would you engage in philosophical discussions with her?
A: Yes.
Q: Regarding those discussions, who initiated them?
A: Usually, it was her.
Q: Without saying anything substantive, what was the nature of the discussions?
A: Usually, she would take a position on some philosophical topic, often an opposing position, and then we would debate.
SBF's Personal Loans from Alameda
Q: Why did you think you could borrow from Alameda?
A: I own Alameda; I am its main owner. To my understanding, it has made tens of billions of dollars in profits through arbitrage over the past few years, with working capital exceeding that number. So I don't see why I couldn't borrow from it.
Q: Were there any documented records of these loans?
A: I believed at the time that they all were. I think most of them were, but some of the more recent ones may not have been recorded yet.
SBF Denies Guiding Nishad or Salame to Make Political Donations
Q: Based on your interactions with others at FTX, did you learn whether other employees of the company made political donations?
A: Yes, I knew.
Q: Who was that?
A: I know Ryan Salame and Nishad Singh both made political donations. Others may have as well. I don't know if others had significant donations.
Q: Let's take one person at a time. Did you discuss political donations with Mr. Salame?
A: Yes.
Q: Did you tell him to make donations?
A: No.
Q: Did you guide Mr. Salame to make donations?
A: No.
Q: Did you have discussions about donations with Nishad Singh?
A: Yes.
Q: Did you guide him to make donations?
A: No.
Q: Let me return to your donations, Mr. SBF. What was the source of the funds for your donations?
A: Loans from Alameda Research.
SBF Defends Earning Over $1 Billion in 2021, Saying He Wanted to Do So Because "It's Just a Round Number"
A: Ramnik told me his calculation was slightly under $1 billion.
Q: What did you do after that?
A: I first asked him if he was sure that was correct because my calculation was somewhat different from his, and if it was correct, to see if we had missed any sources of income so that the income could exceed $1 billion.
Q: Then what happened?
A: I didn't hear back for a while. Then I asked Ramnik about the progress on this matter.
Q: Looking back, why did you want the income to exceed $1 billion?
A: It's just a round number.
Q: Okay. Did you hear any feedback from anyone on this issue?
A: Yes. I heard Ramnik say Nishad had an update on this issue, so I asked Nishad again.
Q: What did he tell you?
A: Nishad told me he had it handled.
Q: Did you learn more information?
A: Yes. I asked him what that meant. He said there were Serum staking rewards, which was about another $50 million in income.
SBF Believes the Insurance Fund Doesn't Need to Exist as a Separate Pool of Funds, but Just Represents the Company's Commitment.
Q: "The 5.25 million FTT we put into the insurance fund in 2019 now makes the fund worth over $100 million." Mr. SBF, what is your understanding of this?
A: My understanding is that we promised our customers that if a customer's account incurs any losses, FTX would spend at least $5.4 million and 5.2 million FTT tokens to compensate that account before distributing any losses from other users.
In Summer 2022, Genesis Wanted to Raise Equity Capital from SBF.
Q: In the summer of 2022, do you remember having conversations with Alameda's lenders?
A: Yes, I did.
Q: Who did you talk to?
A: I spoke with Genesis, BlockFi, Celsius, and Voyager.
Q: Let's talk about Genesis first. Who did you talk to at Genesis?
A: I spoke with two people: Matt Ballensweig, who was an account manager for Alameda there, and I also spoke with their eventual CEO, who is the CEO of the company that owns Genesis.
Q: First, who initiated the conversation with the CEO?
A: It was Genesis. Matt Ballensweig actually reached out to arrange that.
Q: What did you discuss with the CEO?
A: We had a phone conversation. We talked about Alameda borrowing from Genesis, although that wasn't the main topic. The main topic was Genesis mentioning that they might want to raise equity capital.
Q: From whom?
A: From me.
Q: "Me" refers to you personally?
A: Refers to me personally, FTX, Alameda, or any source.
Q: Did FTX ultimately invest in Genesis?
A: No.
SBF Doesn't Remember What He Sent to Caroline About the Seven "Balance Sheets" for Genesis in June 2022.
A: I remember her saying she initially intended to send something like that, and she considered several different ways to structure it. I don't remember us discussing any details about it. I remember looking at it and saying it seemed reasonable to me.
WSJ Report
Original link:
https://www.wsj.com/livecoverage/sam-bankman-fried-trial-testimony
FTX founder SBF stated that he spent a lot of time lobbying for cryptocurrency regulation in Washington, D.C., and testified before Congress three times. SBF said he would discuss non-commercial issues with congressional members, such as pandemic response and cryptocurrency regulation.
FTX founder SBF testified on Friday that he invested in Solana at a price of 20 cents per token. SBF stated that he believed the funds used for that investment came from Alameda Research's operating profits or third-party loans. The token is currently trading at about $32 but peaked at nearly $260.
SBF stated that he inadvertently became the public face of FTX and told the jury, "I'm a bit introverted by nature." He said that early media interviews went smoothly. From then on, interview requests began to snowball, and his public image rose accordingly. He preferred T-shirts and shorts over business attire. Why did he like wearing shorts and T-shirts? SBF testified, "I find them comfortable." As for his messy hair, he said, "I've been a bit busy and a bit lazy, and I haven't gotten a haircut in a long time."
In 2021, SBF thought it was a good opportunity to market FTX by acquiring naming rights to a professional sports venue. He told the jury, "My impression is that the names of professional sports teams' venues are very famous." FTX ultimately paid $10 million annually for the naming rights to the Miami-Dade County arena where the Miami Heat NBA team plays. Before deciding which facility to choose, he also considered paying for naming rights for the New Orleans Saints, Kansas City Chiefs, and Kansas City Royals. He said that in the end, the Saints and Chiefs chose other partners. SBF said FTX chose not to partner with the Royals. "No offense to the Royals, I didn't want to be seen as the Kansas City Royals of crypto exchanges," he said.
Yahoo Report
Original link:
SBF spent a lot of time on Friday morning discussing how Alameda interacted with FTX, maintaining distance from certain decisions and clearly stating that his executives handled some details.
He stated that some FTX customer funds were initially transferred to Alameda and held there because FTX could not obtain its own bank account, although he said he was not entirely sure what happened to the customer funds of his trading company.
He also acknowledged that in the early days of FTX, Alameda was the primary market maker for the exchange. He said it was initially difficult to attract other third-party market makers, and Alameda had its own accounts on FTX, which could provide cryptocurrency for FTX customers if there were no other users on the platform willing to sell.
He said Alameda and other market makers were given a line of credit to borrow from FTX so they could easily buy and sell on the platform. He learned that the money Alameda borrowed came from other "margin traders" on FTX or "assets earning interest on the platform."
He said FTX did not impose restrictions on what could be done with borrowed money as long as "we believe the risks are managed," meaning assets exceeded liabilities.
"We don't care if users withdraw funds to buy muffins," he said.
Several former colleagues testified that Alameda had effectively unlimited credit on FTX and could maintain negative balances (a feature known as "allow negative") without being liquidated --- SBF was aware of all this.
SBF stated on Friday that his colleagues had significant input on how the exchange's automated computer functions worked.
Regarding the line of credit, he said he had a rough idea of how much it was using but did not know the "theoretical maximum."
He said he did suggest to former FTX executives Gary Wang and Nishad Singh that they could set "an alert or delay" when liquidating Alameda's balances to prevent repeating the 2020 mistake that led to Alameda's balance being depleted. But he said he did not know what measures were being taken.
"At the time, I couldn't tell you the details," he said, but now knows that was the "allow negative" feature.
SBF Also Discussed Some Key Events When the Crypto Market Began to Collapse in 2022
He said that between May and June 2022, Alameda primarily held long positions in cryptocurrencies and suffered significant losses. By June, Alameda's net asset value had plummeted to about $10 billion, down from $40 billion in June 2021.
He said the challenges faced by Alameda were quite severe, and Alameda's CEO Caroline Ellison told him in June 2022 that Alameda might go bankrupt. He said Singh and Wang rechecked the calculations and found that Alameda seemed insolvent due to a loophole, but in reality, it had $8 billion in positive assets.
SBF said he instructed Ellison to repay Alameda's creditors. Shortly thereafter, SBF testified that Singh and Wang informed him about another Alameda debt arising from an account on FTX named fiat@.
"I didn't know what fiat@ was at the time," he said, learning about the nature of the account by looking it up in the FTX database. It wasn't until October or November 2022 that he learned the account had a negative balance of $8 billion.
"I was very surprised," he said, as he previously knew Alameda had $2 billion in debt. The additional $8 billion brought Alameda's negative balance to $10 billion.
"Do you think it could be paid back?" his lawyer asked him. "Yes," SBF said, adding that he told Ellison he would be "very willing" to use his assets as a solution.
SBF said he suggested Ellison hedge Alameda's positions, a move that would mitigate the risk of the company's long cryptocurrency positions. He said Ellison never hedged.
At the end of his testimony on Friday, SBF described a conversation he had with Singh on the balcony of their luxury penthouse in the Bahamas. SBF said he discussed Singh's concerns about Alameda's increasing debt.
But SBF told him he believed Alameda was "fairly net positive" (profitable overall).
