FTX founder Sam Bankman-Fried told a jury Friday that he didn’t commit fraud and didn’t take customer funds, beginning his defense against criminal charges that he stole billions from his cryptocurrency exchange and spent the money on investments, political donations, and real estate.
He did, however, say that he "made a number of small mistakes and a number of big mistakes." His biggest mistake, he said, was not having a chief risk officer.
"A lot of people got hurt," he said.
His highly anticipated testimony began Friday morning with questions from his attorney Mark Cohen that attempted to address the heart of the government’s case against his client.
Prosecutors have alleged that Bankman-Fried deliberately stole funds that belonged to FTX customers and secretly lent the assets to his crypto trading firm Alameda Research. They produced several key witnesses over the last month who corroborated those claims.
Cohen on Friday asked his client if he defrauded anyone.
"No, I didn’t," Bankman-Fried said.
Then Cohen asked if Bankman-Fried took customer funds.
"No," Bankman-Fried said.
Bankman-Fried, wearing a suit and tie, faced a jury for the first time Friday after the judge overseeing the criminal trial said he would allow the FTX founder to testify about some legal advice he received while running the cryptocurrency exchange.
Thursday, in a hearing without the jury present, the 31-year-old entrepreneur said FTX lawyers had a hand in drafting the company’s policies that he then followed.
Bankman-Fried said during that hearing that he believed that his crypto trading firm Alameda Research was allowed to borrow customer money deposited with FTX due to a "terms of service" document and another non-public agreement drafted with the help of FTX’s top lawyer.
Criminal defense attorney Adam Kamenstein said an attempt to cast some level of blame on his lawyers could backfire.
"It's a cliche ... it’s a story that’s been told many times," Kamenstein said.
Bankman-Fried's lawyers have said in court that the defendant is not looking to raise a formal "advice of counsel" defense and that instead, Bankman-Fried wants to explain that he took comfort that FTX lawyers created terms of service, loan, and other documents used by the exchange and Alameda.
"The biggest thing I'd be looking for is this guy on the stand is disciplined in what he's saying," Kamenstein said.
'I couldn't have told you the details'
Bankman-Fried spent a lot of time Friday morning discussing how Alameda interacted with FTX, distancing himself from certain decisions and making it clear his executives handled some of the details.
He said some FTX customer funds were routed to Alameda and housed there originally because FTX was not able to get its own bank account, although he said he wasn't exactly sure what was happening with the customer funds that were sent to his trading firm.
He also acknowledged that in FTX's early days, Alameda was the exchange's primary market maker. It was difficult initially to attract other third-party market makers, he said, and Alameda, which had its own account on FTX, could make cryptocurrency available for FTX customers to buy if no other user on the platform was willing to sell.
Alameda and other market makers were given a line of credit to borrow money from FTX so that they could easily buy and sell on the platform, he said. The money that Alameda borrowed he understood to come from other "margin traders" on FTX or "assets that were earning interest on the platform."
FTX, he said, didn’t have restrictions on what could be done with that borrowed money as long as "we believed the risk was being managed," meaning that assets exceeded liabilities.
"We didn’t care if the users withdrew funds to buy muffins," he said.
Several former colleagues have testified that Alameda had what amounted to an unlimited credit line at FTX and could carry a negative balance (a feature known as "allow negative") without being liquidated — and that Bankman-Fried was aware of all this.
Bankman-Fried on Friday said his colleagues had a lot of say over how the exchange's automated computer functions worked.
About the line of credit, he said, he was aware of roughly the amount it was utilizing but not aware of a "theoretical maximum."
He said he did suggest to former FTX executives Gary Wang and Nishad Singh that there could be "an alert or delay" in the liquidation of Alameda’s balance to prevent a repeat of a 2020 error that caused Alameda's balance to be drained. But he said he didn’t know what was being put in place.
"At the time, I couldn’t have told you the details," he said, but now knows that was the "allow negative" feature.
'Net positive'
Bankman-Fried also discussed some key events in 2022 as the crypto market began to melt down.
Between May and June of that year, he said, Alameda, which largely held long positions in cryptocurrencies, suffered significant losses. By June Alameda's net asset value had tanked to roughly $10 billion, down from $40 billion in June 2021.
To add to Alameda's challenges, he said, Alameda CEO Caroline Ellison informed him in June 2022 that Alameda might be bankrupt. Singh and Wang double-checked the calculation, he said, and found instead that Alameda appeared insolvent due to a bug, but actually had a positive balance of $8 billion.
Bankman-Fried said he instructed Ellison to pay back Alameda's lenders. Soon after, Bankman-Fried testified, Singh and Wang told him about another Alameda liability stemming from an account on FTX called fiat@.
"I didn't know at the time what fiat@ was," he said, explaining that he first learned about the nature of the account by looking it up in an FTX database.
But it wasn't until October or November 2022, Bankman-Fried testified, that he learned the account had a negative $8 billion balance.
"I was very surprised," he testified, saying he had previously known of $2 billion in Alameda liabilities. The additional $8 billion brought Alameda's negative balance to $10 billion.
"Did you believe it could be paid back?" his lawyer asked him. "Yes," Bankman-Fried said, explaining that he told Ellison he was "more than happy" to pledge his own assets as a solution.
Bankman-Fried said he had suggested that Ellison hedge Alameda's positions, a move that would have mitigated the risk of the company's long cryptocurrency positions. Ellison never hedged, he said.
At the end of Friday's testimony, Bankman-Fried described an exchange he had with Singh on the balcony of their luxury Bahamas penthouse. Bankman-Fried said he discussed Singh's concerns about Alameda's mounting liabilities.
But Bankman-Fried told him he thought Alameda was "quite net positive."
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