Sam Bankman-Fried’s defense finally woke up

Yesterday, Singh condemned Bankman-Fried for continuing to make venture investments despite knowing the money came from customer funds, even calling the actions taken at FTX “evil.” Today, the defense pointed out that Singh took out a loan from FTX in order to buy a $3.7 million house on Orcas Island in Washington after Singh says he found out about the misuse of customer funds. 

So far, the prosecution’s witnesses have been credible — Caroline Ellison, the former CEO of Alameda, especially. The defense has been grinding away, trying to make it sound like Bankman-Fried’s alleged co-conspirators are just trying to save their own skins at Bankman-Fried’s expense. (All three have pleaded guilty to assorted crimes, made cooperation agreements, and await sentencing.) Sure, on some level, the suggestion that Singh may have been embezzling is worse for Bankman-Fried — Singh wasn’t a money guy, and someone had to approve it. But it’s the best the defense has done so far to undermine a witness’s credibility.

Defense lawyer Mark Cohen began in the grand legal tradition of roasting the witness. Some of the roasts were to be expected: Why was Singh opining on whether spending $1 billion on sponsorships was excessive, when Singh was head of engineering, a department is decidedly not marketing?

Then Cohen landed a pretty good dig on the Bahamas penthouse. Billionaires and millionaires (on paper, at least) living together as roommates is objectively funny; one of said roommates being cross-examined solemnly on whether or not he thought it was “really expensive” to live in a $30 million apartment is even funnier.

Singh said he didn’t know what was normal for billionaires and that he “felt confused about it.”

“But not confused enough to move out,” Cohen said.

After that, Cohen lost some steam. The prosecution has a strong narrative, even managing to bring witness testimony to emotional crescendos. The defense, by contrast, doesn’t seem clear on the notion of chronological storytelling. Today we skipped around between September 2022, June 2022, November or December 2021, October 2022, and August 2020. Because I assume you also live in a unidirectional timeline, I am going to give my summary out of the order in which it was presented. I am also going to ignore the places where Cohen swung and missed because I am honestly sick of writing about the struggle-bus aspects of the defense. 

In July 2019, Singh wrote the code for “allow_negative,” at the direction of Gary Wang, co-founder and chief technology officer of FTX, who, like Singh, has pleaded guilty to a handful of crimes. At the time, Singh said he understood the point of the code was to allow FTX to move FTT, as well as to modernize some of the accounting-related functions. 

Wang had testified that the function of that code was to let Alameda Research, which was co-owned by Wang and Bankman-Fried, withdraw money, even when its account didn’t have any.

In August 2020, FTX had its first event where none of the market-makers, including Alameda Research, could assist in liquidating an account. (Alameda couldn’t step in because it had run out of collateral.) So what happened next was auto deleveraging, which is a different risk management system that sticks some traders with the loss. This kind of thing tends to make customers unhappy.

I am now going to give you some backstory that the jury didn’t get in this testimony. We’ve heard before — from Wang and from Ellison — about a $65 billion line of credit extended to Alameda. No one else on the platform had access to this amount of money, which was essentially unlimited. But here, for the first time, we have a plausible, non-criminal explanation for why Alameda got a huge line of credit: to avoid sticking other customers with losses through auto deleveraging. (Alameda would always take the hit instead, and it would always have enough collateral to do so.) Singh didn’t remember whether Alameda’s line of credit had been increased at this time, but if the timeframes do line up, that’s the least damning explanation for the line of credit I’ve heard yet.

It doesn’t undo the fact that Bankman-Fried repeatedly assured the public that Alameda had no special privileges on FTX — which seems like an obvious lie — but it does make the line of credit sound less bad. That’s not nothing!

In November or December 2021, Singh became aware of a bug in Alameda’s system that overstated how much Alameda owed FTX. Essentially, the bug didn’t correctly track account withdrawals, making the amount Alameda owed FTX look bigger than it was. Singh said that Adam Yedidia — another witness — seemed worried about it but Wang was relaxed because “the direction of the bug was safe.” If it had under-estimated how much Alameda owed FTX, that would have been a bigger cause for concern.

By June 2022, the bug had created an $8 billion discrepancy between how much Alameda actually owed FTX, and how much the internal accounting said Alameda owed FTX. Yedidia testified earlier that was when he noticed Alameda owed FTX an awful lot of money, and became concerned about it. But Singh said that he wasn’t concerned at the time, since he assumed Alameda had the assets to repay FTX. 

I am a little confused about why we are spending so much time with the bug. In Yedidia’s case, it explains what he knew and why he knew it. For everyone else? The only thing I can think of is that I am to believe that the bug was so big that no one knew how much money Alameda actually owed, except that it was a lower amount, and thus Alameda spent money it didn’t have. But that seems pretty weak — especially since Singh testified about lying to auditors yesterday and last week, Ellison testified to making up seven fake balance sheets to send to lenders.

Singh claimed he wasn’t aware that Alameda Research was using FTX customer funds until September 2022, but the defense got me to doubt that. After all, Yedidia put together enough to get nervous about what Alameda was doing from handling the programming on the bug alone, and he wasn’t even doing anything shady like transferring money from Alameda’s account to the “Korean friend” account. (I still don’t know what the deal is with the username “seoyuncharles88” and I am starting to get kind of pissed that no one is explaining it.)

Singh testified that by September, he knew the money wasn’t there. And that was when Cohen brought up the Orcas Island house, which Singh bought in October 2022. (Sadly, there were no photos, details on square footage or number of bedrooms, so I had to look that up afterward: six bedrooms, a lap pool, and a hot tub.) He’d borrowed $3.7 million from the FTX exchange, despite his testimony yesterday about trying to slow down what he viewed as FTX’s frivolous spending. I guess he didn’t see his own spending as frivolous.

The testimony wasn’t as spectacular as on Singh’s direct yesterday — we didn’t get any more cinematic retellings of conversations — and Cohen’s tendency to jump around in time made the narrative a little less than clear. But the Orcas Island house undercut Singh’s moral authority, making him look inconsistent. Even if the jurors don’t follow the timeline or get some of the other nuances, that’s pretty easy to grasp.

The prosecution, on redirect, did manage to make the point that FTX was essentially a rats’ nest of scams, but Singh still seemed less reliable than he had in his initial testimony. Still, in discussing Singh’s loans, something curious came out: Singh apparently felt morally obligated to repay the money he’d borrowed from FTX, but not legally obligated. That’s because there was no paperwork associated with many of them — he just found large sums transferred to his bank account. They were loans “in a loose sense,” Singh said. “They weren’t really loans.”

Honestly… that kind of sounds like classic embezzlement. And to me, it made Singh’s sweeping moral statements about “heinously criminal” acts at FTX ring hollow. Singh was for sure the best storyteller of the alleged co-conspirators, but by the time he stepped down from the stand, I wondered how much of the story was self-serving.

At the break, I saw Joe Bankman, the defendant’s father, talking with defense counsel. He looked happy, and who could blame him. I think I wasn’t the only one who thought the defense finally managed to show up.