Gary Wang, co-founder and former CTO of FTX, appeared as a witness for the prosecution in the criminal trial of his fellow co-founder Sam Bankman-Fried on Oct. 6.
One fact that emerged during testimony concerns a December 2022 plea deal in which Wang pleaded guilty. In Bloomberg’s account of current testimony, Wang stated that he faces up to 50 years in prison despite his arrangement with prosecutors.
Wang added that he will likely be sentenced leniently due to his cooperation with prosecutors and said that he hopes to receive no prison time at all. It is thought that prosecutors plan to submit a 5K letter to the court on Wang’s behalf prior to sentencing assuming his full cooperation, which would improve his changes at leniency.
Wang described FTX’s failure during testimony
The remainder of Wang’s testimony concerned FTX’s collapse starting with the events leading up to the firm’s November 2022 bankruptcy. Wang said that, after various events prompted heightened withdrawals, FTX could not satisfy withdrawals because it had sent billions of dollars of consumer dollars to its sister firm, Alameda Research.
Wang said that Alameda owed up to $14 billion to FTX in November, adding that Bankman-Fried refused to shut down Alameda due to the impossibility of repaying losses.
He also drew attention to other specific issues. Wang said that a backstop insurance fund, which existed to cover losses in case the company had to liquidate user positions, was represented on FTX’s website with a fake amount.
Wang also described a 2021 exploit in FTX’s margin system that eventually led FTX to close a position worth hundreds of millions of dollars at a loss. Bankman-Fried directed for that loss to be absorbed through Alameda Research, Wang said.
Alameda had unlimited, negative balance
Critically, Wang said that FTX allowed Alameda to borrow any amount within FTX’s trading volumes and maintain an unlimited, negative balance. Wang stated that this borrowed money “belonged to customers” and was used without their permission.
Wang provided further details under cross-examination by Bankman Fried’s defense lawyer. There, Wang stated that allowance for a negative balance permitted Alameda to conduct stablecoin conversions for customers. He also said that Alameda’s line of credit, worth $65 billion, existed to ensure that trading activities were not affected.
Those details could help Bankman-Fried’s defense, as his lawyer intends
to argue that Alameda’s special privileges were necessary to keep FTX operational.
Wang testified for under one hour today, though is likely to be called by the defense next week. Other reports suggest that former Alameda CEO Caroline Ellison and BlockFi co-founder Zac Prince are set to testify next week, as well.
