Sure, Sam Bankman-Fried\u2019s trial has revealed that FTX was basically a seething mass of scams. But it has also revealed how Bankman-Fried blew up the lives of the people who are closest to him.<\/p>\n<\/div>\n
Of course everyone who had money trapped on the FTX exchange<\/a> when it collapsed \u2014\u00a0as the result of Bankman-Fried\u2019s trading firm Alameda Research purloining its customers\u2019 funds \u2014 had their lives altered<\/a>. Even if they are made whole by the bankruptcy proceedings, that\u2019s still money that they should have had access to at any time they wanted it. That may mean houses that weren\u2019t purchased<\/a>, medical procedures that were left undone, and life savings lost<\/a>.<\/p>\n<\/div>\n There is a simultaneous drama of ruined lives playing out in the courtroom<\/p>\n<\/div>\n<\/div>\n Bankman-Fried is charged with seven counts: two counts of wire fraud and five conspiracy charges. As we near the end of the prosecution\u2019s case, I have been struck by how bizarre it all is. All the co-conspirators seem oddly younger than their years, as though they got stuck in the \u201cmath camp forever\u201d environment Bankman-Fried created for them and simply failed to grow up.<\/p>\n<\/div>\n The prosecution has made a strong case that Bankman-Fried presided over the various forms of fraud that played out at Alameda Research and FTX, orchestrating some of it and engaging in some of it directly. In the process of making this case, there is a simultaneous drama of ruined lives playing out in the courtroom.<\/p>\n<\/div>\n Everyone who loved Bankman-Fried most in the world is now caught up in the case. We have:\u00a0<\/p>\n<\/div>\n Wang, Singh, and Ellison are now felons. Even if they never do time \u2014\u00a0and they may very well be imprisoned or subjected to house arrest \u2014 their lives are irrevocably changed, not least by whatever restitution requirements they are subjected to. They are barred from taking certain kinds of jobs. And of course, there is the publicity. Bankman, Fried, and Gabe Bankman-Fried\u2019s reputations are tarnished; in the political arenas where they once operated, they are suddenly undesirable.<\/p>\n<\/div>\n It is a Greek tragedy, precipitated by one man\u2019s character flaw: the arrogance of Sam Bankman-Fried.<\/p>\n<\/div>\n The general sense I got, from the testimony of Bankman-Fried\u2019s former friends, was that things just kept escalating<\/p>\n<\/div>\n<\/div>\n During Yedidia\u2019s testimony, we were shown a photograph in court: former President Bill Clinton and former Prime Minister Tony Blair onstage in suits next to Bankman-Fried, in a rumpled T-shirt and cargo shorts. Sure, dressing down is a staple of Silicon Valley startup culture \u2014 and a sign of its swagger. The defense counsel tried to elicit testimony from Yedidia that the cargo shorts were evidence of Bankman-Fried\u2019s humility, but the photograph seemed to signify just the opposite: that the man in cargo shorts is so important, he doesn\u2019t need to dress up, even to meet former world leaders.\u00a0<\/p>\n<\/div>\n Now, in court, Bankman-Fried is wearing a suit.<\/p>\n<\/div>\n In 2019, just months after FTX was founded, Wang oversaw code called \u201callow_negative\u201d<\/a> that let Alameda Research avoid being liquidated by FTX\u2019s risk management. It was turned on in July. No other customer trading on FTX had \u201callow_negative\u201d privileges \u2014 only Alameda. Wang\u2019s testimony suggests that the fraud at FTX started very<\/em> early since the same day that allow_negative was switched on, Bankman-Fried tweeted<\/a> that Alameda\u2019s account \u201cwas like everyone else\u2019s.\u201d<\/p>\n<\/div>\n The general sense I got, from the testimony of Bankman-Fried\u2019s former friends, was that things just kept escalating. For instance, Alameda Research first had a negative balance in late 2019, Wang testified. Wang testified that he heard Bankman-Fried tell another trader that it was okay to continue withdrawing money from the account as long as the amount was less than FTX\u2019s total trading revenue. A little later, Wang discovered that Alameda was negative by $50 million more than FTX\u2019s revenue. Bankman-Fried told him it was fine, and it just didn\u2019t account for the FTT token that the two of them had launched. Wang trusted him.<\/p>\n<\/div>\n Wang also set Alameda Research up with an enormous line of credit, unmatched by anyone else on FTX. Ultimately, the number was $65 billion \u2014\u00a0the result of repeated increases as Alameda Research repeatedly ran up against its credit limit. This line of capital wasn\u2019t visible to auditors, Ellison testified. That credit line was used primarily for trading because it \u201callowed us to make profitable trades we couldn\u2019t have made otherwise,\u201d Ellison testified.<\/p>\n<\/div>\n \u201cOver time, it was something I became more comfortable with.\u201d\u00a0<\/p>\n<\/div>\n<\/div>\n Wang\u2019s testimony revealed how the fraud got bigger, little by little. First, it was okay to dip into FTX\u2019s profits. Then, it was okay to take more. Then, it was okay to take even more. First, it was a little line of credit just to provide liquidity. Then a bigger one. Then an effectively limitless one.<\/p>\n<\/div>\n Ellison testified to something similar, choking back tears: \u201cWhen I started working at Alameda, I don\u2019t think I would have believed you if you told me I would be sending false balance sheets to our lenders or taking customer money, but over time, it was something I became more comfortable with.\u201d\u00a0<\/p>\n<\/div>\n Ellison\u2019s tenure as CEO of Alameda Research was an exercise in optics, she testified. Alameda Research was, by then, FTX\u2019s sin-eater. When FTX took a loss in the hundreds of million dollars because a trader had exploited its system, Wang moved that loss onto Alameda\u2019s balance sheet. FTX\u2019s \u201cinsurance fund,\u201d meant to keep traders from getting stuck with other traders\u2019 losses, was totally made up \u2014 Alameda simply picked up the tab.<\/p>\n<\/div>\n Even that wasn\u2019t good enough. Singh testified to sprucing up FTX\u2019s balance sheet with backdated transactions in December 2021 to push FTX\u2019s revenue \u201cover the line\u201d to $1 billion.\u00a0By the time Singh found out about the use of customer money, in 2022, he was already compromised.<\/p>\n<\/div>\n At every turn, the scams at FTX and Alameda led back to making Bankman-Fried more important<\/p>\n<\/div>\n<\/div>\n In Singh\u2019s case, it wasn\u2019t just balance sheets he was fiddling with \u2014 it was also the American political system. By coordinating with Gabe Bankman-Fried, Singh had funneled money to a number of political causes. That money came from \u201cloans,\u201d which weren\u2019t really loans since he hadn\u2019t signed any term sheets.<\/p>\n<\/div>\n What was the goal here? What was accomplished? Singh testified to more than a billion dollars spent on celebrity endorsements, which made FTX very famous \u2014\u00a0even though the futures platform didn\u2019t operate in the US. The political donations gave Bankman-Fried influence in the highest echelons of power. Ellison testified to Bankman-Fried\u2019s venture investments, which gave him more dominance in the tech world. At every turn, the scams at FTX and Alameda led back to making Bankman-Fried more important.<\/p>\n<\/div>\n This was backed up by expert testimony from Notre Dame accounting professor Peter Easton, who\u2019d also assisted in investigating Enron and WorldCom. In a pie chart that showed how he\u2019d traced funds for the $11.3 billion liability that Ellison, Singh, Wang, and Bankman-Fried had known about in June 2022, we saw that $1.2 billion was a loan repayment to crypto lender Genesis. A substantial chunk had been spent on various investments, including in the celebrity-connected venture firm K5<\/a>, trading firm Modulo (co-founded by one of Bankman-Fried\u2019s ex-girlfriends<\/a>), and AI company Anthropic. <\/p>\n<\/div>\n Another $413 million had gone directly to Bankman-Fried himself, through his wholly-owned company Paper Bird. \u201cOutflows to insiders,\u201d which suggested Singh\u2019s not-quite-loans were included, was $192 million; real estate was another $228 million; and the donations to Gabe Bankman-Fried\u2019s Guarding Against Pandemics, combined with the philanthropy from the FTX Foundation, totaled less than $40 million. <\/p>\n<\/div>\n It is easy to lie with words and harder to lie with money. Bankman-Fried went around telling people that he wanted to make a lot of money to give it away, an idea of the Effective Altruism movement<\/a> that Bankman-Fried affiliated himself with \u2014\u00a0but the amount of money he funneled to his Paper Bird vehicle alone was ten times the size of his philanthropic spending as outlined by Easton. And it was all vastly outweighed by his investments \u2014\u00a0the places where he could prove he was very smart by investing in the right companies early.<\/p>\n<\/div>\n And in brief, explosive testimony, former FTX lawyer Can Sun demonstrated what Bankman-Fried\u2019s tactic was. During the days in November when the exchange imploded, Bankman-Fried was trying to raise money from Apollo, the private equity group. Apollo wanted an explanation for what had happened, and so Bankman-Fried came to Sun to ask him to come up with justifications for the missing funds.<\/p>\n<\/div>\n The defense has struggled to shake the credibility of witnesses such as Yedidia, Wang, and Ellison<\/p>\n<\/div>\n<\/div>\n That \u201cbasically confirmed my suspicions that had been rising all day\u201d that Bankman-Fried had purloined the funds, Sun said. He ran Bankman-Fried through possible explanations, including a margin loan program, and explained that none of them could fit the actual situation \u2014\u00a0for instance, Alameda had borrowed more from FTX than had ever been in the margin loan program. He said Bankman-Fried acknowledged their conversation with a \u201cyup, yup.\u201d \u201cI was expecting a bigger response, but it was very muted,\u201d Sun said.\u00a0<\/p>\n<\/div>\n After that, Singh spilled the beans: Alameda had withdrawn assets that included the customer funds, Sun testified. He quit the next day. Like Yedidia, Sun testified with immunity.<\/p>\n<\/div>\n In the courtroom, we were treated to a Good Morning America<\/em> appearance by Bankman-Fried on December 1st, 2022. In it, Bankman-Fried tried to justify the missing funds through the margin loan program. It was such a flimsy excuse that even George Stephanopoulos could see through it.<\/p>\n<\/div>\n Did Bankman-Fried really think he could get away with it all? He must still think so, or he would not be dragging his closest companions\u2019 names through the mud in a jury trial. Throughout the entire prosecution\u2019s case, the defense has struggled to shake the credibility of witnesses such as Yedidia, Wang, and Ellison. The hits the defense made on Singh<\/a> didn\u2019t make me doubt the overall truth of his story \u2014\u00a0they just made me think that Singh was kind of self-serving and trying to secure himself a lenient sentence.\u00a0<\/p>\n<\/div>\n The problem with being told all your life that you are smart, smarter than everyone around you, is that you can come to believe it. Bankman-Fried is probably better at math than many members of the jury, but I don\u2019t think they are dim enough to be fooled by the margin loan program. The prosecution\u2019s case is fairly overwhelming and should rest today. Bankman-Fried is certainly arrogant enough to take the stand and try to explain it all away. The only question now is whether that will make the jury even less sympathetic.<\/p>\n<\/div>\n<\/div>\n\n