‘Oh, Yes’: Accounting Prof Says Sam Bankman-Fried’s FTX Definitely Mishandled Customers' Money

NEW YORK – To help make their case that Sam Bankman-Fried committed a historic multibillion-dollar fraud, prosecutors enlisted an accounting professor who assisted the government investigations into Enron and WorldCom two decades ago.

University of Notre Dame accounting professor Peter Easton took the stand in the ongoing trial Wednesday morning. Asked whether FTX ever spent user deposits, Easton, who was hired by the Department of Justice to trace billions of dollars of Alameda and FTX funds, replied definitively: “Oh, yes.”

User deposits were reinvested into businesses and real estate, used to make political contributions and donated to charity, the professor testified.

With the composed demeanor of someone familiar with a witness stand, Easton walked through a chart he created showing a widening gulf between FTX user deposits and the exchange’s bank balances.

Read all of CoinDesk’s SBF trial coverage here.

The chart showed user deposits falling beneath FTX’s bank balances around March 2021 – meaning user funds had lost their backing by that point, according to Easton’s analysis.

By June 2022, when FTX deposits were at their peak, the exchange only had around $2 billion on hand to back more than $11 billion in user deposits, Easton testified.

The professor next walked through charts tracking inflows and outflows of FTX customer money into a variety of business investments.

“We can conclude all of the purchase of Modulo Capital was made using customer funds,” he said, referring to a Bahamas-based financial firm owned by FTX.

Easton said his investigation also showed customer funds were behind a majority of FTX’s investment into SkyBridge Capital, a firm led by Anthony Scaramucci – Donald Trump’s famously short-lived communications director. FTX customers also funded the bulk of a $550 million FTX investment into Genesis Digital Assets, a bitcoin mining firm (which is not the same company as Genesis, the subsidiary of CoinDesk parent Digital Currency Group), Easton testified.

An additional chart showed FTX user money flowing into a bank account for Paper Bird, Inc., an entity owned solely by Bankman-Fried. Easton said FTX users funded the “majority” of a $100 million investment Bankman-Fried made into Dave, Inc., a mobile banking platform, via Paper Bird.

Former FTX lobbyist testifies

Also Wednesday, former FTX lobbyist Eliora Katz testified, illuminating a contrast between Bankman-Fried’s public comments about the exchange’s safeguards and the secret reality that led to its demise a year ago.

Bankman-Fried’s testimony before the House Financial Services Committee came up early in the Department of Justice questioning of the witness, alongside the FTX founder’s tweets about investor protection.

“We have a transparent system,” Bankman-Fried said in a clip played for the jury of his comments before Congress. Bankman-Fried, in the video, also discussed the company’s risk-monitoring system, contrasting it with the opaque Wall Street mess that fueled the 2008 financial crisis.

The truth, according to prosecutors and FTX insiders who have testified after pleading guilty, was very different: poor financial record-keeping and improper siphoning of customer money to Bankman-Fried’s nominally separate trading firm, Alameda Research. And once that started coming to light, the company fell apart in a rapid, 2008-style collapse.

Katz actually said relatively little on the stand. The prosecutor just kept showing her tweets and transcripts and asked her to read them out loud, and she often kept her answers short: “yes” or the like. She seemed to be mainly on the stand to contrast FTX’s public statements on crypto investor protection and how it actually handled customer funds, and to introduce statements about cryptocurrencies being commodities instead of securities – an important regulatory distinction in the U.S.

Some of the Department of Justice’s exhibits focused on statements by Bankman-Fried that much of the crypto market is commodities. The former CEO of FTX is charged with conspiracy to commit commodities fraud.

Katz also emphasized repeatedly that Bankman-Fried’s testimony both before the House committees occurred prior to her joining FTX. She appeared visibly uncomfortable on the stand. The witness denied putting together various materials published by FTX and said she believed that everything Bankman-Fried told the public about investor protection was true.

Judge blasts prosecutors and SBF’s lawyers

Early in the afternoon, Judge Lewis Kaplan admonished both the prosecution and defense lawyers, calling testimony from two of the day’s witnesses “a joke.”

The parties should have agreed that certain documents were real, rather than have witnesses testify to their authenticity, he said.

Katz, the former FTX lobbyist, did not need to testify about comments made in the public record and a Google employee who also took the stand did not need to fly in from Texas to testify about what JSON data, a text-based interchange format, was, Kaplan said. He argued that the lawyers could have agreed to some of the exhibits.

“This afternoon, we flew in a witness to testify about something he knew nothing about?” the judge asked about Google’s Cory Gaddis, who testified to the jury for only a few minutes. “This is a crime,” Judge Kaplan said.

Gaddis was brought in to testify that Google keeps logs of user activity and that different Gmail email addresses have different IDs.

UPDATE (Oct. 18, 2023, 21:22 UTC): Adds final section on the judge admonishing lawyers.