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Key witness at Bankman-Fried trial describes hedge fund plundering billions from FTX customers

An FTX co-founder testified on Friday that Sam Bankman-Fried requested a change to cryptocurrency platform's code to allow his hedge fund unlimited withdrawals and transfers without collateral.

MANHATTAN (CN) — A co-founder of FTX cryptocurrency exchange spelled out Friday how a change to the company’s code allowed a crypto hedge fund run by Sam Bankman-Fried, who was also FTX's CEO, to withdraw unlimited funds from FTX customers’ deposits.

During five hours of direct testimony across Thursday and Friday, Gary Wang, a college roommate of Bankman-Fried who pleaded guilty to four felonies in December 2022, described Bankman-Fried as the ultimate decision maker and 90% owner of the company.

“He told us what things to implement,” Wang testified Thursday. “Where things should be placed on the website… limits on how much people can withdraw, things like that.”

His said his own responsibilities as chief technology officer, co-founder and 10% stake owner of FTX included “writing the code, reviewing other people’s code, setting the technical direction for the company.”

Wang, who is cooperating with federal prosecutors’ case against Bankman-Fried, testified on Friday that Bankman-Fried ordered him and former FTX engineering director Nishad Singh in 2019 to implement an “allow negative” coding feature for Alameda Research’s FTX account.

The coding change allowed Bankman-Fried’s crypto hedge fund Alameda Research to maintain a negative balance on the cryptocurrency exchange that was at times greater than FTX’s revenue. When Alameda’s balance was in excess of FTX’s revenue, it was pulling from FTX customers' deposits, he explained.

Wang said that Bankman-Fried had also authorized Alameda $1 billion line of credit on FTX, which was later increased to a $65 billion line of credit despite making contrary statements to the public on the relationship between the two firms.

The $65 billion line of credit granted Alameda incomparable privileges to withdraw and transfer funds on FTX “essentially without any limits,” Wang said.  

Only around a dozen other FTX customers had lines of credit greater than $1 million, he testified.

Alameda was also able to execute trades milliseconds faster than other customers, Wang explained, because it was exempt from Cloudflare software that automatically detects and mitigates Distributed Denial of Service malware attacks on FTX’s server.

Wang testified that Bankman-Fried did not appear shocked by FTX’s catastrophic $8 billion shortfall in early November 2022, just days before the company collapsed and filed for bankruptcy.

He maintained a “neutral demeanor” when confronted with the cold numbers of the cryptocurrency exchange’s losses in the week before the its ultimate undoing, Wang testified Friday.

Despite knowing about the $8 billion shortfall in customer assets while processing a flood of customer withdrawals, Bankman-Fried tweeted the following day: "FTX is fine. Assets are fine.”

FTX’s server were shut off when the company declared bankruptcy days later on Nov. 11, 2022, Wang testified.

Wang said Bankman-Fried had attempted to sell FTX to Binance CEO Changpeng “CZ” Zhao to get funds to pay off the multibillion dollar hole caused by Alameda’s withdrawals but the deal fell through.

Wang, who entered guilty plea one month after FTX’s bankruptcy, testified he met with federal prosecutors about a dozen times. He said he hopes his plea agreement and cooperation with prosecutors will result in “ideally no prison time”.

Bankman-Fried is represented by Mark Cohen and Christian Everdell with the firm Cohen & Gresser.

During cross-examination of Wang, Everdell, a former fraud and cybercrime prosecutor for the Southern District of New York, reiterated good faith defense that Alameda was granted special privileges because it was FTX’s largest — and at times only — market-maker and liquidity provider.

During their opening argument earlier in the week, Bankman-Fried’s lawyers leveled blame for FTX's implosion at Caroline Ellison, Bankman-Fried’s erstwhile girlfriend and former CEO of Alameda Research, telling jurors she ignored Bankman-Fried's pleas to strategically limit Alameda's risky cryptocurrency positions.

Following the conclusion of Wang’s cross-examination next Tuesday, prosecutors expect to call Ellison next to the witness stand.

As prosecutors previewed for jurors on Wednesday, Ellison will testify “she and defendant took customer money again and again to spend it through Alameda."

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Categories / Financial, Securities, Technology, Trials

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