Oct 18, 2023 - Economy

SBF trial: FTX lacked funds to meet customer deposits over a year before collapse, witness says

A man with a white heard looks straight ahead, slightly down, on a sidewalk

Peter Easton, professor at the University of Notre Dame, arrives at court in New York Wednesday. Photo: Stephanie Keith/Bloomberg via Getty Images

When the prosecution in Sam Bankman-Fried's criminal trial asked its accounting expert witness whether his analysis of Alameda Research and FTX's books showed the use of customer funds, he gave a simple answer: "Oh yes."

Why it matters: Shortly after the FTX bankruptcy, founder Bankman-Fried (SBF) repeatedly blamed its shortfalls on accounting errors and a large margin loan that got out of hand — not misuse of his cryptocurrency exchange's customer deposits.

Details: Prof. Peter Easton was contracted by the government to go through the bank statements, loan documents, cryptocurrency holdings and exchange accounts for the crypto exchange FTX and its sister hedge fund, Alameda.

  • Easton works at Notre Dame and specializes in the borders between accounting and finance.
  • "I teach, essentially, penetrating financial statements," he told the court.

Between the lines: Wednesday morning's presentation went into considerable detail of Easton's analysis, showing various instances where flows of funds could be traced, in his estimation, back to FTX customer deposits.

  • By showing at various times that companies owned by SBF had too little funds on hand to cover the cost, he contended the only source of funds could have been customer assets.
  • He gave examples of loans repaid, donations made, venture investments secured and real estate purchased, all originating largely or entirely in customer funds.
  • He also supplemented these examples with emails and Slack messages that supported the case for SBF's involvement in various transactions that, in his view, must have required customer funds to complete.

Of note: Easton also demonstrated the other side, showing various cases were he could see investor funds used in certain transactions.

  • As of early Wednesday afternoon, Easton has not yet been cross-examined by the defense, but the prosecution has concluded its direct examination.

Zoom in: This was a numbers heavy bit of testimony. At one point, a juror could be seen with the fingers of both hands pressed against his temples.

By the numbers: The largest shortfall between customer currency deposits and funds on hand was observed in June 2022, where Easton found it to be $11.3 billion short.

  • However, his analysis found that fiat liabilities fell short of cash on hand beginning at least in the first quarter of 2021 — more than a year and half before FTX's collapse.
  • A similar analysis of FTX's cryptocurrency wallets found the same discrepancy. It appeared, looking at the chart the government showed, that FTX had more than $3 billion in unmet cryptocurrency liabilities from customer deposits going back to January 2021.

The intrigue: Easton demonstrated that even if Alameda had used all the funds available for spot margin trading on FTX, it wouldn't have been enough to cover the company's unmet liabilities to customers.

  • Easton also said he found all the accounts that had an "allow negative" feature on FTX. All of them belonged to Alameda.

The big picture: Easton detailed several top level conclusions he had made from his analysis:

  • There was much less traditional currency on hand at FTX than what the exchanged owed to his customers.
  • There was much less cryptocurrency on hand than customers had deposited.
  • Alameda used those funds (traditional and digital assets) for its own expenditures.
  • Alameda's shortfall could not be explained by using FTX's spot margin trading system.
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