As the trial of Sam Bankman-Fried enters its second day, we’re learning that many FTX employees were aware that Alameda Research had a backdoor into clients’ wallets. However, when they expressed concern, their calls went unanswered and the problem was never resolved.
The Wall Street Journal noted that several anonymous employees at FTX subsidiary LedgerX reported the issue to Julie Schoening, the company’s chief risk officer. Considering the seriousness of the situation, Schoening's response seemed a bit casual.
"The rules (governing cryptocurrencies) are not that strict, but we should clean up these issues," Schoening said.
Her supervisor raised the issue with FTX engineering director Nishad Singh, but no action was taken. The backdoor was reportedly a code that allowed Alameda to hold a negative balance on FTX. This is not possible with any other account on the platform. This directly results in Alameda being able to "borrow" up to $65 billion in cryptocurrency from customer funds at any time.
Singh was one of three executives arrested on suspicion of fraud. Alameda CEO Caroline Elison and FTX co-founder Gary Wang are the other two. All three signed plea agreements agreeing to testify against SBF. FTX COO Constance Wang also agreed to testify against her former boss, although she was never charged with a crime, so things are not looking good for the former crypto tycoon.
Bankman-Fried recently leaked portions of Ellison's private diary to The New York Times. Prosecutors claimed it was an effort to discredit Ellison and tamper with the jury by painting her as a jilted lover. SBF was jailed for the stunt - he was released on bail and placed under house arrest at his parents' home.
This was the last straw for the judge, who had shown mercy when SBF violated bail conditions and contacted former associates, claiming to "tell their stories clearly." The judge could have revoked the bail at that time, but instead banned SBF from accessing the Internet and using computers.
In the days leading up to SBF's trial, prosecutors have come down hard on him and they won't let up. Defense attorneys, meanwhile, tried to paint SBF as an "MIT math nerd who didn't drink or party," saying the young entrepreneur was simply overwhelmed by running a company that was growing so rapidly.
SBF's legal team said: "[It] is like building an airplane and flying it at the same time."
Of course no one should think that such a defense is tenable.