Sam Bankman-Fried’s cofounder describes FTX’s hidden cheat code to misuse customer funds
What Sam Bankman-Fried knew, how early he knew it, and the steps big and small he took to make it happen: His former friend, cofounder of Alameda Research, and FTX’s former chief technology officer Gary Wang laid it all out in damaging testimony on Friday at Bankman-Fried’s federal fraud trial. Wang offered new information on the extent of the actions at FTX and of Bankman-Fried.
According to Wang, in June 2022, with prices of cryptocurrency dropping, some lenders called in their loans to Alameda, a hedge fund that specialized in crypto. Bankman-Fried, who owned 90% of Alameda and the majority of FTX, asked Wang to figure out what Alameda’s balance sheet was. Wang discovered that Alameda owed FTX more than $11 billion. FTX’s revenue then was about $1.5 billion, meaning the other $9.5 billion or so “all came from customers” at FTX, who “did not agree for us to use these funds” and “we said publicly that we would not use customer funds like this,” Wang testified.
After Wang made the calculation, he, Bankman-Fried, and two other top executives, Nishad Singh and Caroline Ellison, met in their Bahamas office, he said. They discussed Alameda’s negative balance. Then Bankman-Fried “turned to Caroline and said, ‘Alameda can go ahead and return the borrows,’” Wang testified. That meant that Alameda should repay its lenders—which, in turn, meant taking further money from FTX customers beyond the $11 billion it already owed.
In September 2022, when Wang asked Ellison how much Alameda was borrowing from FTX, the total amount was up to $14 billion. Bankman-Fried, he testified, did not appear surprised at this number.
Meanwhile, Wang said, he’d hear Bankman-Fried on the phone with investors or journalists or see his tweets assuring everyone that Alameda was simply a customer on the FTX exchange. “He would say that Alameda’s treated like any other market maker on FTX,” Wang said. “It’s trading with its own money and it doesn’t use customer funds.”
Wang, who has pleaded guilty to four counts of fraud and is cooperating with prosecutors in hopes of getting a light sentence, testified that wasn’t the case.
Take the “allow_negative” function in the code for FTX, which allows a customer to withdraw into the negative. The only customer to get this privilege: Alameda. In July 2019, “Sam had asked Nishad [Singh] and I” to change the code, Wang said. (Singh has also pleaded guilty and is cooperating against Bankman-Fried; he has not testified yet.) Bankman-Fried “asked us to do it and we told him we did it,” putting the change through on July 31, 2019.
The same day, in response to a question on Twitter about conflicts of interest between Alameda and FTX, Bankman-Fried posted: “Alameda is a liquidity provider on FTX, but their account is just like everyone else’s.”
In late 2019, Wang says he overheard an Alameda trader asking Bankman-Fried if it was all right for Alameda to continue withdrawing funds from FTX. The response was that as long as Alameda was taking less than FTX’s overall revenue (which it got from taking a fee on each trade), “then it’s fine for Alameda to keep withdrawing from FTX.” FTX’s revenue at the time was between $50 million and $100 million, Wang said. His understanding was that Alameda withdrawing anything more than that would “be taking customer deposits from FTX.”
Wang testified that not long after he ran a database query and found that Alameda had withdrawn more than FTX’s revenue—some $200 million; FTX’s revenue was around $150 million. “It means that Alameda was taking customers’ money,” he said. “Surprised,” he went to Bankman-Fried, who asked him to run the numbers again, this time including the value of a cryptocurrency called FTT, which Bankman-Fried and Wang had created and that Alameda held a huge position in.
The problem with that (beyond the obvious conflicts of interest) is that FTT wasn’t all that liquid, given how much of it was owned by FTX-related entities: If they sold all of their FTT at once, the price would plummet. Moreover, Wang noted, Alameda had been withdrawing money in dollars or cryptocurrencies other than FTT from FTX, not in the FTT. Wang “wasn’t sure which interpretation was correct” in terms of accounting, and “I trusted [Bankman-Fried’s] judgment,” he said.
There were other ways in which the founders deceived FTX customers, Wang testified. A function on the FTX website showed the “insurance fund” amount, sort of an assurance to customers that their money for certain trades was guaranteed. The number on the website was in fact fake: Wang created a formula using the total trading volume from the previous 24 hours, multiplied by a “random number” around 7,500, then divided by a billion, he testified.
“Does that number have anything to do with the actual number in the insurance fund?” prosecutor Nicolas Roos asked.
“No,” Wang said, noting that the fake number was larger than the actual insurance fund.
In another instance, a company that was a customer racked up several hundred million in losses after it found a loophole in the system that let it override the usual collateral requirements. The bet didn’t pay off, and FTX was on the hook for the loss. But Bankman-Fried told Wang to transfer the loss to Alameda’s balance sheet. The reason: “He said that FTX’s balance sheets are more public than Alameda’s,” because investors have access to the FTX accounts.
Wang also testified about what was happening during the final days of FTX and Alameda in November 2022. After details of Alameda’s balance sheet were leaked, which “showed that almost all of Alameda’s balance sheet were cryptocurriences created by you and Sam,” Roos said, a statement Wang agreed with, investors panicked and began withdrawing funds from FTX. In part because Alameda had taken so much money from it, FTX couldn’t cover all the withdrawals and owed customers $8 billion. And Bankman-Fried knew that on November 7, Wang testified, when Bankman-Fried wrote tweets like “FTX is fine. Assets are fine,” and “FTX has enough to cover all client holdings.”
Even after FTX declared bankruptcy on November 11, and Bankman-Fried agreed to resign as CEO, he hoped to work with Bahamas regulators rather than U.S. ones, Wang said, because “they seemed friendly and seemed willing to let him stay in control of the company.” The Bahamas regulators directed Bankman-Fried to transfer some funds to them. Even after a lawyer from the FTX bankruptcy team warned Bankman-Fried not to do it—FTX had filed for bankruptcy in the U.S., and it was quite likely that the funds were part of the U.S. bankruptcy case—Bankman-Fried told Wang to “ignore the instructions and continue transferring funds.” Wang did so, throughout November 12 and into early morning on the 13th. Four days later, in the U.S. and thinking it was “likely” he’d be charged with a crime, Wang voluntarily met with federal prosecutors for the first time.
The trial picks up again on Tuesday, when cross-examination of Wang by the defense, which started late Friday, will continue. Ellison, the former Alameda CEO and Bankman-Fried’s onetime on-and-off girlfriend, is expected to testify after Wang; she has also pleaded guilty and is cooperating with the government.