SBF Recasts His Image as a ‘Surprised,’ Innocent Failed Entrepreneur

On his second day on the witness stand, but first day in front of a jury, former FTX CEO Sam Bankman-Fried attempted to make a strong defense in his criminal case. Under direct examination by his lawyer in front of a packed courtroom, the defendant tried to recast his image, expressing ignorance about pivotal events in the prosecution’s case and putting the blame on the other members of the so-called “inner circle.”

Similar to how cooperators had begun by confessing their crimes, SBF came out with bold statements, albeit of a different nature. Within the first few minutes of testimony, when asked whether he had defrauded anyone, he responded, “No, I did not.” When asked if he’d taken customer funds, SBF responded, “No.”

In support of the “failed entrepreneur” theory presented in the defense’s opening statement, Bankman-Fried admitted, “I made a number of small mistakes and a number of larger mistakes. By far the biggest mistake was we did not have a dedicated risk management team, we didn’t have a chief risk officer.”

Then, over the next several hours, Bankman-Fried, who already tends to be verbose, gave what felt like a lengthy list of different explanations for many of the damning assertions by other witnesses. While some of his alternate narratives seemed plausible, it remains to be seen if the jury will find them all to be, given their sheer number.

Recasting his image

Early in his testimony, Bankman-Fried tried to distance himself from the image that prosecutors painted of him. For instance, trying to deflect blame for any malicious FTX code, he said, “I’m not much of a programmer,” and also noted that his co-founder, Gary Wang, and the Director of Engineering, Nishad Singh, “were both authorized to make decisions on behalf of the company without consulting with me, though they often would consult with me about it.”

He also explained that he kept his hair long, because, “I was kind of lazy and busy,” and that he wore shorts and a t-shirt because, “I found them comfortable.” His attorney, Mark Cohen, who had previously, in a sidebar discussion with the prosecutors and judge, objected to the fact that the government had shown a photo of SBF holding playing cards, pulled it up again. He then had SBF explain that he was holding the cards because he likes to fidget, but not because he plays poker. He also said the fact that he’d become the public face of FTX was “an accident,” since he was “somewhat introverted.”

He said, his alleged co-conspirators said

An early indication that SBF would attempt to revise some of the key narratives in the prosecution’s argument came when he relayed how he heard about the “allow_negative” function, which Wang had testified had been coded into FTX’s software just for Alameda to be able to have negative balances that were not part of the margin trading feature.

He said that in 2020, because the volume on the exchange had grown, the risk engine was updating slowly. This meant that, for liquidations that were triggered automatically, sometimes the same liquidation would be triggered multiple times before the risk engine could update and see that it had already occurred. This caused liquidations that should have been in the thousands of dollars to spiral into the millions of dollars and beyond, which had ramifications that affected not only Alameda, but all users. He said he directed Wang and Singh to create a system to prevent these erroneous liquidations, “that maybe it would be an alert or delay or something of that form.” He then said that although he didn’t know the details of their solution at the time, he now believed that feature was “allow_negative.”

(For the record, the prosecution showed evidence that this feature was coded into the database on July 31, 2019, so the timeline of events doesn’t match.)

Early on in his testimony, SBF also established that he had thought it was fine for Alameda to borrow money from FTX, as part of the margin trading program. When asked where that money was coming from, he said either collateral put up by other margin traders or from assets that were earning interest on the platform. As for Alameda’s venture investments, he said he thought those were funded from Alameda’s profits or sometimes from loans by third-party lenders.

Between his professed distance from the code and what he said was his belief that Alameda’s borrowing from FTX was within the confines of the margin trading program, he painted a picture of an owner who thought the relationship between his companies was above-board and whose work kept him above the nitty-gritty details of FTX’s codebase.

His version of key events

Bankman-Fried then gave a different account of key events in the prosecution’s argument, beginning with the accounting bug that overstated the liabilities Alameda owed to FTX. While others such as FTX developer Adam Yedidia had testified that the bug had been discovered in late 2021 and fixed by June 2022, SBF said he had not heard about it until one day in June 2022, when Alameda CEO Caroline Ellison had come to the FTX office, expressing concern that Alameda may have gone bankrupt.

According to Bankman-Fried, after a few hours of sleuthing, Wang and Singh had discovered the bug, which overstated the liabilities by $8 billion. SBF said that Ellison then suggested to the defendant that Alameda could send a balance sheet to lenders who had requested one as well as pay them back. Bankman-Fried said he told her, “that sounded right to me as well.”

He recalled that she said she had thought about a few ways of constructing the balance sheet but that they didn’t discuss it in detail. However, he did say that he noted to her that she could add in the assets in his Paper Bird entity, but it was “her call.” About the seven balance sheet variations Ellison had created and the choice to send the seventh version, he said, “I remember looking over it and saying that it seemed reasonable to me.”

He then stated he thought the funds for repaying the loans would come from Alameda’s assets, because the firm had “$5 [billion] to $10 billion of highly liquid assets off of FTX in its wallets, bank accounts, and other exchange accounts.”

SBF also claimed that during this time, he had not heard of the [email protected] account that his alleged co-conspirators had claimed to be the main way in which Alameda’s fiat currency liabilities to FTX customers were tracked. He said, instead, that he had learned about it in September or October 2022, just a month or two before the exchange collapsed.

Although he said he had heard about it here and there, it was then that he finally looked it up in a database and saw that the size of it was $8 billion, which, he said, made him, “very surprised.” He claimed he had thought Alameda’s total liability to FTX was tracked in a different account which showed about $2 billion in liabilities and “far more than that in assets.”

Though he reiterated that he was “surprised,” he said he believed it could be paid back. He said he checked to see that Alameda’s net asset value would still be $10 billion, even after accounting for this extra $8 billion in liabilities. He said he would include the value of his Paper Bird entity, which held his FTX equity. “I was more than happy to pledge everything I had,” he said.

Additionally, his testimony about the September 2022 proposal to shut down Alameda was contrary to the three cooperating witnesses who testified that they said that was impossible because it owed $13 billion to FTX. He said, “I at the time did not feel confident that I had gotten a clear reason why. I do believe that they said something about it being difficult to shut Alameda down.”

Finally, he said that, in late October 2022, he learned from Singh of the so-called “Korean account” attributed to seoyuncharles88. Although this special sub-account tracked the fiat liabilities that Alameda owed to FTX customers such as the original fiat@ account, it was different because, here, Alameda would not be charged interest for drawing on its line of credit.

Blaming others

As hinted at in the opening arguments, Bankman-Fried also went on the offense by talking extensively about Ellison’s failure to hedge. Noting that their conversations around hedging began in 2021, he said, “I would check in periodically to see if Alameda had in fact hedged, and was told each time that it had not done so but was planning to look into doing so in the near future.” He also said that by June 2022, it had not hedged, and that due to the crypto market crash around that time, he became concerned about Alameda’s risk and what he said was at that point a 75% fall in Alameda’s net asset value from the previous year.

He also batted away other allegations put forth by other witnesses. Regarding Singh’s contention that he backdated interest payments related to staking service EcoSerum because SBF wanted to reach 2021 revenues of $1 billion, Bankman-Fried told a different story. He said that he was projecting revenues of $1 billion but Ramnik Arora, head of product, projected slightly less, and so the defendant asked Arora to confirm if his projections were correct. SBF claimed Singh had been assigned to this task and that in a subsequent discussion, Singh “told me that he had dealt with it.” Upon finding out the new revenue was from EcoSerum, SBF said he was “a little surprised.”

For the amount in the insurance fund, which Wang had testified was a made-up number when it was advertised by FTX, SBF simply said that he was not the person who calculated those amounts.

Finally, Cohen carefully walked him through a couple questions probably designed to address Ellison’s statements that for SBF, conventional prohibitions such as “don’t lie, don’t steal” didn’t fit into his moral framework. Cohen first asked, “Please answer this question yes or no. Yes or no, would you have philosophical conversations with her?” SBF replied, “Yes.” Finally responding in the limited way that his lawyer and the judge had urged him to adopt, he stated that she would generally initiate their philosophical discussions. Then Cohen asked, “Without giving any of the substance, what would be the nature of the conversations?” SBF responded, “Generally, she would stake out a position on some philosophical topic, usually a contrarian one, and we would debate it.”

However, not all these defenses may stick. For instance, early on, he testified that he chose the word “research” after “Alameda” for the company name because, “‘Research’ was a generic word that filled out the company name and was better than the internal name, Wireless Mouse.” A quick Google search online pulls up multiple links in which, prior to the collapse of FTX, he said that he had chosen the name “Research” because it would be unobjectionable and unsuspicious to banks, unlike a name invoking words more descriptive of Alameda’s work such as “trading” or “crypto.”

Nearing the finish line next week 

As for how the defense’s direct examination of Bankman-Fried will play out, the judge disallowed most of the defense arguments that were covered in the evidentiary hearing on Thursday, except for how lawyers were involved in FTX’s data retention policy. Besides that, the defendant will not be allowed to use the advice-of-counsel defense on other subjects.

Cohen estimated he will wrap up Monday morning. Prosecutor Danielle Sassoon advised that she expects her cross-examination to be “substantial” though she expressed hope of finishing before the end of Tuesday. The government also said it expected it will bring rebuttal witnesses, while each side said it projected its closing arguments to last two to three hours. Finally, the parties, along with the judge, will hold a charging conference to decide on jury instructions, before jury deliberations can begin. This means the trial may continue into the week after next.