NEW YORK—In continued testimony Friday, Gary Wang, the co-founder of both Alameda Research and FTX who faces a maximum sentence of 50 years in prison, described Alameda’s special privileges that were programmed into FTX’s code as early as July 31, 2019, a few months after the exchange launched. 

Prosecutors presented evidence to the court including previously deleted messages, tweets, and Github code documents­. Wang, who is cooperating with the government in hopes to serve “ideally, no prison time,” noted that these advantages were not disclosed to the public, FTX customers, or investors.

Alameda was allowed to transfer and withdraw funds with a negative account balance on FTX

According to Wang, one privilege included Alameda’s ability to have a negative balance on its FTX account. This meant that Alameda was able to transfer and withdraw more funds than it had, essentially “borrowing from the exchange.” 

In July 2019, shortly after launch, Bankman-Fried allegedly asked Wang and Nishad Singh, FTX’s head of engineering, to pay for various FTX-related expenses from Alameda’s accounts and other bookkeeping accounts on FTX—in particular, expenses related to FTT, the cryptocurrency created by FTX. The “allow_negative” feature was then enabled for Alameda’s account.

According to Wang, because Alameda’s account was allowed to hold a negative balance, it withdrew more funds than it had on the site. Those funds, Wang said, belonged to FTX customers, and at the time that FTX declared bankruptcy, Alameda had borrowed $8 billion from the exchange. 

Other FTX customer accounts that veered into negative territory would be liquidated and closed, Wang said, to protect FTX and customers from losing money. But Alameda’s account was immune to being liquidated because of the “allow_negative” code. According to Wang, SBF had told him to make sure Alameda’s account was never liquidated on FTX.

On the very same day that Wang and Singh had instituted Alameda’s ability to go negative on FTX, he tweeted at a user who was concerned about the relationship between Alameda and FTX, “Alameda is a liquidity provider on FTX, but their account is just like everyone else’s.” 

At some point, in response to a question from an Alameda trader, the defendant said that the max amount Alameda would be able to withdraw from FTX was the equivalent of its revenues. However, at the end of 2019 or early 2020, Wang said he checked Alameda’s balance on FTX and discovered that it was negative by around $200 million – more than FTX’s $150 million in trading revenue at the time.

Wang, surprised about the situation, said he talked to Bankman-Fried, who said to recalculate the values by including all the FTT held in all of Alameda’s accounts on FTX. Wang indicated, in his testimony today, what he believed were two problems with Bankman-Fried’s approach. Alameda was withdrawing U.S. dollars and other cryptocurrencies, not FTT. 

Second, if Alameda sold an equal amount of FTT to offset its withdrawals, the price of FTT would crash so severely that the selling “might not be enough to cover how much Alameda was withdrawing.” Additionally, Wang explained that FTT collateral was worth less than, say, BTC collateral because bitcoin is less volatile and more liquid. 

Alameda’s $65 billion line of credit 

Wang said Alameda had a $65 billion line of credit — far higher than any other customer on the exchange—which originally, started at a few million dollars, but gradually increased because the trading firm wouldn’t have enough collateral to place large orders needed for its market-making duties.

Wang said, “Initially it was just a few million dollars… [then] a few hundred million dollars… and then this kept happening, so then to prevent this from continuing to be an issue, Sam asked us to take a large number. I took it up to a billion dollars, and then the issue happened again. And then he asked me to take it up even farther, and I told him I am taking it up to $65 billion.”

In his testimony, Wang said in June 2022, Bankman-Fried wanted a complete picture of Alameda’s balances on the FTX exchange. After finding and correcting a bug that did not accurately represent Alameda’s balance on FTX, Bankman-Fried called a meeting in the Bahamas office to discuss Alameda’s balance of negative $11 billion with Wang, Singh, and Caroline Ellison, the then-CEO of Alameda Research and former romantic partner of Bankman-Fried. 

In the meeting, Bankman-Fried allegedly instructed Ellison to return the money Alameda owed to its lenders, such as crypto lender Genesis, who were asking for the loans to be repaid. Wang stated that the money to repay Alameda’s lenders would all come from FTX customer deposits.  

By September 2022, Bankman-Fried allegedly sent a Google document to Wang and Singh, not Ellison, to discuss possibly shutting down Alameda Research, citing a Bloomberg piece that highlighted the closeness between FTX and Alameda. Bankman-Fried also mentioned that Alameda had a weaker culture and leadership compared to another investment firm, Modulo Capital, where Bankman-Fried was an investor and one of whose executives was another former girlfriend. 

Defying the US government

The day after FTX filed for bankruptcy on November 11, Wang said he was instructed by both Bankman-Fried and Bahamian government officials to transfer FTX assets to the Bahamas regulators. Wang said Bankman-Fried thought it was ideal to transfer FTX assets to them because they “seemed friendly” and open to letting Bankman-Fried remain in power. 

Despite U.S. regulators also instructing Wang to transfer assets to them, Wang testified that he continued to follow Bankman-Fried’s lead by ignoring the U.S. bankruptcy team and continuing to send funds to Bahamas regulators.

Wang returned to the U.S. on November 16, meeting with the government the next day to express interest in cooperating with the FBI and federal prosecutors. Wang, who thought getting charged was likely, said he wanted to avoid serving time in prison and thought cooperation with the U.S. government would lighten his sentence. 

By December, Wang pleaded guilty to four felonies and made a cooperation agreement with U.S. prosecutors. The agreement stated that Wang had to meet with the government, truthfully answer their questions, not commit any more crimes and testify in court against his former roommate and math camp buddy. 

Tension between the judge and defense emerges

Judge Kaplan expressed his displeasure, sometimes in the form of heavy sighs, with the defense for repetitive questions throughout the week. After several questions that were blocked by the judge, Christian Everdell, Bank-Fried’s attorney, asked Wang about his role as CTO, which was a firmly established fact at that point. After an objection from the prosecutors, Judge Kaplan said to the defense team, “It’s been answered, but let’s stop that please,” referring to the repetition. 

Everdell then proceeded to ask whether Wang was focused on the business side of FTX. Soon afterward, Judge Kaplan, visibly annoyed, asked, “What part of ‘let’s stop that’ was obscure?” 

Everdell then asked questions about the fast growth of FTX and the number of employees FTX had when Wang, a cofounder, started (which was, of course, just him and SBF). It was at this moment that Judge Kaplan stopped the questions, referring to the fact that Friday’s session was supposed to end at 2pm and that the defense appeared to be trying to run down the clock without ending its cross-examination. He said, “If we’re really going on to get right to the dot of 2, I think we can break seven minutes early and let you start off afresh on Tuesday.”

The trial continues next week after the Monday holiday. The prosecution indicated that Caroline Ellison is set to testify next, despite saying yesterday that BlockFi CEO Zac Prince would take the witness stand after Wang. 

Sage Young contributed reporting.