Pod Insights Equity Podcast The FTX co-founder and Alameda CEO didn’t hold back at SBF’s trial (Chain Reaction) About this episode This week, we have a bonus mini episode where Jacquelyn talks with TechCrunch+ editor-in-chief Alex Wilhelm to dive back into the Sam Bankman-Fried trial and what has transpired in its second week.
Major witnesses who were involved in the downfall of FTX and its sister company Alameda testified like Gary Wang, CTO and cofounder of FTX, and Caroline Ellison, CEO of Alameda.
The two of them plead guilty to a number of charges and could face maximum sentences of 50 to 110 years, respectively. It’s also worth noting Wang and Ellison testified as part of a cooperation agreement for pleading guilty.
Jacquelyn and Alex talk about key points from the trial, anecdotes that you can’t read on a transcript and what she anticipates from both the prosecutors and defense going forward.
Want more? Here’s the latest on the SBF trial:
Former Alameda CEO Caroline Ellison explains how FTX hid losses, sandbagged lenders
Alameda Research allegedly paid Chinese officials around $150M to regain $1B worth of exchange accounts
Alameda Research’s ex-CEO Caroline Ellison testifies, claims SBF directed her to commit crimes
Alameda had a $65B line of credit and ‘unlimited withdrawals’
As SBF’s trial heads into its second week, here’s what we know so far
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Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products.
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Transcript 0:00 Speaker 00 Hey everyone, it's Jaclyn Melanick. Welcome to Chain Reaction, a show that unpacks and dives deep into the latest trends, drama and news with some of the biggest names in crypto, breaking things down block by block for the crypto curious.
0:17 Speaker 00 Today, we're doing a mini episode to dive back into the Sam Bankman-Fried trial and what has transpired in week two. There were major witnesses who spoke that were involved in the downfall of FTX and its sister company Alameda, like Gary Wang, CTO and co-founder of FTX, and Caroline Ellison, the CEO of Alameda. The two of them pled guilty to multiple counts, four for Gary, seven for Caroline, and could face maximum sentences up to 50 or 110 years respectively. It's also worth noting that they testified as a part of their cooperation agreement for pleading guilty. Anyways, Alex, how are you?
0:53 Speaker 01 I'm really good, and I've had the pleasure of being one of your editors on all your coverage of this trial. And so I can say fun things like, I'm caught up on Caroline, but I'm not caught up on Gary, but it sounds like the litany of witnesses has continued all week.
1:08 Speaker 00 Yeah, so most of this week was Caroline. She spoke all day on Wednesday, all day on Thursday. Gary was all day on Tuesday, so I guess not another sharing.
1:18 Speaker 00 And at the end of Thursday, we had one former Alameda employee who was a software engineer. And then we also had a brief intro from Zach Prince, who is the founder of BlockFi.
1:30 Speaker 01 Who was all tangled up in the collapse of FTX because there was some money moving around between both companies.
1:35 Speaker 00 Yes, so BlockFi was a crypto lender that lended to FTX, but it also ended up declaring bankruptcy as a result of the whole situation with FTX. So we'll hear more about that on Friday.
1:47 Speaker 01 Oh, man. Going back through our coverage of this era of the crypto market, I had almost forgotten how many companies hit the skids in and around the same time that FTX fell apart. It was a shocking amount of domino collateral damage.
2:02 Speaker 00 Yeah, honestly, that was a big part of Caroline's testimony was what happened in May 2022, when Terra Luna collapsed and subsequently, a lot of crypto companies struggled because the market fell and a lot of the crypto lenders that lent money to people. Like had to get that money back. And that was a big problem that also led to FTX and Alameda's downfall is during the summer of 2022, a lot of these crypto lenders reached out to them and they were like, hey, we want our money back. And they were like, oop, we don't really have it. This is me paraphrasing, but obviously that was kind of the gist of it.
2:38 Speaker 01 Didn't quite say it like that.
2:40 Speaker 00 Honestly, I would not be surprised if they did, based off everything I've seen. So.
2:45 Speaker 01 All right. So let's talk about a couple of the high points here. So when it comes to Caroline, a couple of things stood out to me, one of which was the different balance sheets that had been prepared.
2:54 Speaker 00 Yeah. So Caroline Ellison testified that Alameda modified its balance sheets in 2022, when crypto lenders like Genesis were basically asking for some of their open term loans back. And open term loans are the ones that you could basically pay back at any time if the lender reaches out, or you have to pay back when they reach out. So instead of showing them the correct balance sheets, Caroline actually came up with seven alternative balance sheets for SBF to look at. And they picked lucky number seven. That was the balance sheet that they went with. And instead of saying FTX took customers' deposits, which is shown on the original balance sheet that they show in evidence,
3:35 Speaker 00 they actually just kind of like mixed it up. So it looks less risky on their books and concealed it to make it look better for lenders.
3:42 Speaker 01 And if Caroline's testimony is accurate, that is fraud.
3:45 Speaker 00 Yeah, that's Caroline's testimony.
3:48 Speaker 01 Pretty cut and dry that that's, that's a fraudulent effort there. So that was a big point of contention and showed a lot about how FTX was operating at the time. We also had a number of more crazy stories. There was a whole thing about bribing China.
4:01 Speaker 00 Yeah. So there were testimony from Ellison about Alameda paying Chinese officials to get their trading accounts back from OKX and Huobi in China. They were locked for over a year and they had about a billion dollars worth on them. And apparently they tried normal routes first. Wait, not even normal. They tried to get their lawyers involved to contact Chinese officials, didn't work. And then they involved apparently Thai prostitutes that opened accounts that they thought they could trade the accounts to the prostitutes. That didn't work. And then basically, they had some of their like Chinese employees get in touch with government officials and the accounts were reopened to Alameda after Ellison made about 100 million to 150 million in payments
4:45 Speaker 00 of crypto transfers to unnamed accounts, even though she didn't know for certain who they were at the time. And then later on, she found out that they were Chinese officials and it's important to note that the judge said this isn't a part of the case. They're not being charged with this. But it was to be shared to show the trust and confidence and motives between the two, like SBF and Ellison.
5:09 Speaker 01 Well, it's always interesting to see when foreign bribery doesn't actually land in the fraud trial because it's distinct but used merely as you show how the fraud happened.
5:17 Speaker 00 I feel like the jurors are also just not gonna like see it that way. This is gonna be in their minds as, oh yeah, this is a part of the trial, even if they're told it's not.
5:26 Speaker 01 Now, the thing that I want to kind of underline here is the way Caroline's phrasing all this is she was directed to do these things at the behest of the CEO, Sam Bankman-Fried.
5:35 Speaker 00 Yeah, a lot of her testimony was like, Sam told her to do it. I was dishonest. I kind of joked to some people, I bet every time she says one of those words, she gets a year off her sentence, you know? Because she was saying it so much. And I do kind of believe her testimony and obviously she's supposed to tell the truth. So hopefully it is true. But it felt as if she kind of just wanted to do whatever Sam told her to do. They did have a relationship and it was in and out throughout the whole time she was at Alameda. And it could have been a power dynamic situation.
6:09 Speaker 01 Yeah. Now, there was other witnesses also involved. We had Gary and there were some discussions about a line of credit.
6:14 Speaker 00 Yeah. So basically Gary Wang testified that Alameda got, quote, "special privileges" with massive lines of credit, like $65 billion worth of credit and unlimited withdrawals. They also had the ability to have negative balances. So if they were about to get liquidated, no, they're not. So it basically allowed Alameda's accounts on FTX to do whatever they want. And these were special privileges that were only given to them and no other accounts.
6:43 Speaker 01 So essentially after customer funds had been used by FTX and SBF for various things, including, I believe some of the money went to Alameda. If they lost it all, they could still just get more.
6:53 Speaker 00 Yeah, basically. And
6:56 Speaker 00 Like normal, large businesses have single to double digits of credit in the millions is what Wong said, but FTX started out with like a couple hundred million and then they're like, surely we won't hit that. And then they put it to a billion and they're like, surely we won't hit that line of credit. And they did, and they did again and again. And then Gary basically said, you know what, I'll make it 65 billion. We won't hit that. And I guess they didn't get the chance to hit it because in the end they had to file for bankruptcy.
7:22 Speaker 01 I don't think there was enough money to allegedly steal to reach a $65 billion figure. So I want to look ahead though, because I feel like we have been discussing these testimonies all week long, but I'm not sure what's coming up later on in the trial. So you've been in the courtroom. Where are we going?
7:38 Speaker 00 Yeah. So basically Zach Prince started his testimony on Thursday afternoon. It was literally the first 10 minutes. I think they just wanted to get him in the door. He was probably waiting to come up all day. And so we'll see Zach Prince and then we'll also have a quote, law enforcement witness. They didn't say much more than that. And basically we're anticipating there to be a lot of investor related witnesses coming down the pipeline. Gary and Caroline were some of the biggest names involved in the situation. You know, Gary, Caroline, and then someone named Nishad Singh, who was the director of engineering, were basically the three people a part of Sam's inner circle. So we've got two of the three already. We're anticipating that Nishad will come down the line. We don't know when. They don't tell us until the end of the day. They'll say a few names, but yeah, we're
8:23 Speaker 00 kind of anticipating that to happen. And I think investors, people who lost money will be the kind of the prosecutor's defense here or motive to get Jerry's hearts. And these are the things that these people could relate to.
8:37 Speaker 01 Yeah. So one more question for me, which is what's been the defense's reaction to these, I believe we would call them bombshell witnesses. Are they able to do cross reference, cross?
8:48 Speaker 00 Cross examinations.
8:51 Speaker 01 I know what words I'm trying to say.
8:53 Speaker 00 Of course.
8:53 Speaker 01 Are you allowed to do cross examination? Is that coming up later? How are the witnesses holding up?
8:56 Speaker 00 Yeah, so they do cross examination after the prosecutors get to ask them as many questions as they want, and so do they. I would say that the defense is not doing that well. That's the argument that everyone's been making. They kind of did well with Gary on Tuesday, but when it came to Caroline, she said, "Don't recall" like a million times. And you can't force her to say yes or no to your question. She just kept saying, "Don't recall, don't recall." And so I think whatever they were trying to get at there really wasn't successful. But there was one point where Sam Bankman-Fried's dad gave a thumbs up to his lawyers and said, "Good job." So maybe they are seeing it in a different light.
9:35 Speaker 01 Well, I think it all matters what the jurors think versus what you and I think. But Jackie, I take it you're going to be back onsite next week?
9:42 Speaker 00 Yep, for sure.
9:43 Speaker 01 Awesome, and I hope you're charging all of your lunches to your corporate card because you have been busy. Thank you for going. Thank you for doing all this great work. And I know people probably know where to find you because this is your podcast, but what's your Twitter handle?
9:55 Speaker 00 J A C Q M E L I N E K. Jack Melanick.
9:58 Speaker 01 If you don't follow it, you're a fool.
10:00 Speaker 00 Thanks, Alex.
10:05 Speaker 00 We'll be back every other week with interviews with top players in the crypto ecosystem. Catch us on Thursdays for interviews with experts in the Web3 space. You can keep up with us on Spotify, Apple Music, or your favorite pod platform, and subscribe to our companion newsletter, also called Chain Reaction. Links to the newsletter and the stories we talked about can be found in our show notes, and be sure to follow us at @chain_reaction on Twitter. Chain Reaction is hosted by myself and produced by Yashad Kulkarni and Maggie Stamets with editing by Kel. Bryce Durbin is our illustrator. Alyssa Stringer leads audience development, and Henry Pickavet manages TechCrunch's audio products. Thanks for listening. See you next time.
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