Alameda Research used customer funds as early as 2019, Gary Wang testifies

At a glance

• Gary Wang described Alameda Research using the in-house FTT token as collateral for loans of FTX customer funds since nearly the beginning of FTX’s operations in 2019.
• Gary Wang descibed FTX granting Alameda Research its special privileges within months of the founding of FTX. Alameda’s accounts were running a negative balance as early as late 2019.
• Eventually, Alameda’s line of credit at FTX was set at $65 billion dollars, effectively giving them free access to all customer funds on the exchange.
• Caroline Ellison is expected to testify next Tuesday when the trial resumes.

The first week of Sam Bankman-Fried’s trial concluded with bombshell testimony from FTX co-founder and CTO Gary Wang, who said that the crypto exchange gave Alameda Research special access to borrow customer funds as early as late 2019 — just months after the founding of the exchange.

Department of Justice prosecutors highlighted the special privileges that Alameda Research had on FTX, which allegedly allowed the theft of $8 billion in customer deposits. Above all, this included the ability for many of Alameda’s accounts on FTX to run negative balances, and their immunity from liquidation on margin trades.

Wang testified that Alameda was not treated the same as other customers who traded on the FTX platform, including competing market-makers. This was later put in contrast with a July 31, 2019 post from Sam Bankman-Fried on X (formerly Twitter), explicitly claiming that Alameda’s “account is just like everyone else’s.”

That post wasn’t just contradicted by general practice at FTX, but by very specific circumstance. The same day — July 31, 2019, just a few months after FTX’s initial launch — Wang had implemented and activated special privileges for Alameda, in what was something like Sam Bankman-Fried’s original sin.

Sam Bankman-Fried asked Gary Wang for Alameda’s special privileges

Alameda’s privileges included a feature in FTX’s code known as “Allow Negative.” It did what it sounds like: let specific customers’ account balances go below zero. Wang testified that the feature was only ever activated for accounts associated with Alameda Research, and that it was never turned off until the two firms’ collapse. 

“Allow Negative” was in effect a back door in FTX’s code that allowed Alameda Research to extract $8 billion worth of customer funds from the exchange.

Bankman-Fried asked for this feature initially, according to Wang, because it was necessary for Alameda’s functions as a market maker, including its ability to redeem stablecoins and fund certain operations for the FTT token created by FTX. The defense, in its cross-examination of Wang, would later take pains to characterize these as legitimate reasons for Alameda’s unique privilege to effectively use customer funds at will.

Read more: Why Michael Lewis got Sam Bankman-Fried so wrong

But however legitimate Bankman-Fried’s initial rationale for the request, Alameda Research almost immediately began leveraging the “Allow Negative” privilege to, as Wang characterized it very simply, withdraw more money from FTX than their balance on the exchange. This included money that was transferred to other exchanges for trading purposes.

Under questioning from prosecutors, Wang spelled out that in effect, this meant that Alameda was making use of “money belonging to other customers of FTX.”

Alameda’s borrowing cap set to a ridiculous $65 billion

Wang also detailed the timeline by which Alameda’s negative balance was allowed to grow. Initially, Wang described Sam setting a notional limit on Alameda’s negative balance of no more than FTX’s own trading profits. But this lasted only months.

Wang said that at the “end of 2019 or early 2020” he calculated the balance in Alameda’s account and found that “it was negative by more than what FTX’s [cumulative] trading revenue was at the time.”

When he brought this discovery to Sam Bankman-Fried, Bankman-Fried asked if he had included the market value of Alameda’s holdings of the FTT token in the calculation. Wang said he had not, and adding them to the calculation made the deficit smaller. 

But FTT had been created by Bankman-Fried and Wang as a proxy for FTX equity, and distributed to Alameda at creation. This makes the loans somewhat akin to the related-party transactions that allowed Enron to hide huge debts in off-balance sheet partnerships.

Even after this allowance, Alameda seemingly continued to lose money at a staggering scale. Wang described Bankman-Fried asking him to increase Alameda’s line of credit again and again: “a few million, a few hundred million, then a billion.” 

That billion-dollar line of credit, Wang later said, was meant to be a number so absurdly large that it would never have to be changed again. But by late 2021, Wang says Alameda’s total debt to FTX customers had increased to $3 billion. Wang and Bankman-Fried eventually set Alameda’s borrowing cap at a truly absurd number: $65 billion dollars.

Read more: Sam Bankman-Fried’s college roommate testifies against him

Again and again, Wang detailed how Bankman-Fried had personally instructed himself or others in the commission of their confessed crimes. “[Sam] told me several times to make sure that Alameda’s account is never liquidated on FTX,” Wang summed it up at one point. 

Wang also described a series of budget meetings between himself, Sam Bankman-Fried, Nishad Singh, and Caroline Ellison, who as a group seemed solely responsible for tracking and reconciling roughly 20 Alameda accounts that had borrowed billions of dollars worth of FTX user funds.

In Wang’s telling, no accountant of any sort was present in these meetings, or played any role in keeping track of FTX user funds owed by Alameda.

Defense continues weak strategy

Wang also confirmed to prosecutors that he had pled guilty to multiple fraud counts, and that his cooperation and testimony might influence his eventual sentence. The defense attempted to use this to undermine Wang’s testimony, though not terribly effectively.

Sam Bankman-Fried’s attorneys were generally on the ropes again today. Like yesterday, defense lawyer Christian Everdell was reprimanded multiple times for repetition when he began Wang’s cross-examination at the end of the day. Judge Kaplan even accused him of simply killing time as the clock ticked towards the 2pm ET early dismissal, and Everdell seemed perfectly happy to clock out eight minutes early instead, so court adjourned at 1:52 with Wang’s cross-examination still in progress.

BlockFi CEO Zac Prince was expected to testify today, but Wang’s testimony ran longer than expected. That appears to have led to a shakeup in the expected order of witnesses: former Alameda Research co-CEO Caroline Ellison is now expected to testify on Tuesday.

Ellison’s past romantic entanglements with Bankman-Fried, and the defense’s apparent strategy of hanging Alameda’s failures on Ellison, mean it will be closely watched.

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