
Sam Bankman-Fried authorized the illegal handling of FTX clients' funds and assets from the exchange's earliest days to plug financial gaps at an affiliate hedge fund, FTX co-founder Gary Wang said in a New York jury on Friday, as prosecutors pressed their case that Bankman-Fried was the mastermind behind one of the biggest frauds in U.S. history.
In his testimony Monday, Wang said: Eventually, the losses at the hedge fund, Alameda Research, became so large that there was no way to hide them any longer.
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, stole 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.
FTX's chief technology officer, Wang, is part of FTX's inner circle of FTX executives who have agreed to testify against Bankman-Fried in exchange for leniency in their own criminal cases. He is expected to be released from jail Tuesday, according to the affidavit. As part of his deal with prosecutors, Wang has admitted 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.
He told the jury 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 up to $65 billion. The hedge fund was first to give Alameda these privileges because the hedge fund was the primary market maker for FTX's customers in the exchange's early days.
From the start of the program, 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 originally only a few million dollars but grew over the years.
The transaction was effectively a two-way street, where the exchange could assist in the hedge fund and vice versa as FTX quickly grew between 2019 and 2022.
At one point, 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.
Alameda's deep financial ties to FTX were in contrast to Bankman-Fried's public statements that the hedge fund was 'no different' from any other FTX customer.
In the months leading up to the exchange's bankruptcy, Alameda's losses reached as much as $14 billion.
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.
''No way of repaying this,'' Wang testified.
Bankman-Fried ordered Wang to send the bulk of FTX's remaining assets to the securities regulators in The Bahamas instead of to the U.S. authorities handling the bankruptcy.
Bankman-Fried said the Bahamian regulators'seemed more friendly to him, and they appeared more likely to let him stay in control of the company compared to the United States'.
Then on Nov. 17, 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 this week, Bankman-Fried's lawyers claim 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.
The Bankman-Fried said he was managing a liquidity crisis caused by cryptocurrency values that collapsed by over 70% 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 connection between Alameda and FTX, saying it was not unusual for market-making institutions like Alameda to have losses or borrow funds from an exchange.