
Sam Bankman-Fried, the head of FTX, authorised the illegal use of FTX clients' funds and assets to plug financial gaps at an affiliate hedge fund from the exchange's earliest days, FTX co-founder Gary Wang told a New York jury on Friday, as prosecutors pressed their case.
She added that the losses at the hedge fund, Alameda Research, were so large that there was no way to hide them any longer.
FTX was not fine, Wang said, referring to the now-famous tweet that Bankman-Fried wrote just a few days before the exchange filed for bankruptcy in November 2022.
Bankman-Fried, 31, is alleged to have stolen billions of dollars from investors and customers in order to finance a lavish lifestyle in The Bahamas and buy the influence of politicians, celebrities and the public.
Wang, who was FTX's chief technology officer, was part of the inner circle of FTX executives who have agreed to testify against Bankman-Fried in exchange for leniency in their own criminal cases.
He will be arraigned on Monday and will finish his testimony Tuesday. As part of his plea agreement with prosecutors, Wang has pleaded guilty to wire fraud, securities and commodities fraud.
Prosecutors hope to have Caroline Ellison, the former CEO of Alameda and Bankman-Fried's ex-girlfriend, take the stand Tuesday.
In 2017, Wang and Bankman-Fried started Alameda, then founded FTX in 2019.
At the direction of Bankman-Fried, Wang said that he inserted code into FTX's operations that would give Alameda Research the ability to make nearly unlimited withdrawals from FTX and have a line of credit to up to USD 65 billion.
Alameda was given these privileges in the beginning because the hedge fund was the primary market maker for FTX's customers in the exchange's early days.
From the beginning, Alameda took advantage of its unlimited withdrawal capabilities and lines of credit, Wang said, in the forms of cryptocurrencies as well as dollars. It was initially only a few million dollars, but it grew over time.
It withdrew more funds than it had on exchange, Wang said, adding that the money it had withdrew was money from customers.
The relationship was effectively a two-way street, where the exchange could help out the hedge fund and vice versa as FTX quickly grew between 2019 and 2022. When a loophole in FTX's software was exploited to cause hundreds of millions of dollars in paper losses on a particular cryptocurrency, Wang said, Bankman-Fried ordered that loss to be moved onto Alameda's balance sheet because FTX's financial condition was more visible to the public than Alameda's balance sheet was not.
In contrast to Bankman-Fried's public statements that the hedge fund was no different from any other FTX customer, Alameda had deep financial ties to FTX.
In the months leading up to the company's collapse, Alameda's losses amounted to as much as 14 billion dollars. Bankman-Fried and Wang discussed solutions to the problems at Alameda in the summer of 2022, including shutting down the hedge fund, but by then it was too late.
Wang testified yesterday that he had no way of repaying this.
within hours of the filing for bankruptcy, Bankman-Fried ordered him to send the bulk of FTX's remaining assets to the securities regulators in The Bahamas instead of to the US authorities handling the bankruptcy.
Bankman-Fried said the Bahamian regulators had been more friendly to him and they appeared more likely to let him stay in control of the company compared to the US.
On November 18, Wang contacted the FBI, saying he knew what he had done was wrong and he wanted to avoid a long prison sentence.
In opening statements Monday, Bankman-Fried's lawyers said that Wang and other FTX lieutenants failed to do their jobs, including setting up appropriate financial hedges that would have protected FTX from last year's crash in crypto prices.
Bankman-Fried said he was managing a liquidity crisis caused by cryptocurrency values collapsed by more than 70 percent and criticism from one of his biggest competitors that resulted in a run on his companies by customers seeking to recover their deposits.
Bankman-Fried's lawyers tried to downplay any special relationship between Alameda and FTX, saying it was not unusual for market-making institutions like Alameda to have losses or borrow funds from an exchange.