This is not at all what happened. Alameda’s “borrows” were not made via the normal margin lending program. You can see Caroline Ellison admitting so in a contemporaneous meeting that was recorded and played in court. Nishad Singh and Gary Wang explicitly wrote code to allow Alameda specifically to take customer funds from FTX via the “allow_negative” flag, according to their own sworn testimonies. It seems like Matt Levine is confusing this collapse with the Mango Markets collapse that happened around the same time, his description fits Mango much better than FTX.
Alameda also lied to investors, as Caroline Ellison testified during the trial and pleaded guilty to doing. According to her sworn testimony, it was SBF who directed her to do so.
“In the ordinary course of business” is doing a lot of work in Levine’s account. The allow_negative flag sure doesn’t sound ordinary to me.
I also think some of the wording focuses more than I would on affirmative lies. I don’t think Levine is wrong in his wording, but I’ve seen a few people get the impression that SBF could do anything with the money as long as the TOS didn’t explicitly forbid it.
That’s kind of like saying a mechanic doesn’t convert his repair clients’ cars when he secretly rents them out to teenagers for joyrides after repairing them. The repair contract didn’t explicitly say he couldn’t...
“[T]he words ‘to defraud’ in the mail fraud statute [which is interpreted analogously] have the ‘common understanding’ of ‘”wrongdoing one in his property rights by dishonest methods or schemes,” and “usually signify the deprivation of something of value by trick, chicane, or overreaching.”‘” “The concept of ‘fraud’ includes the act of embezzlement, which is ‘”the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s own care by another.”’”
The fact that Alameda could and did “borrow” (much) more than any other account on FTX due to the allow_negative flag is consistent with Levine’s description, but I agree a fuller accounting of events would include this piece of information and the accusations you cite.
Could you say a bit more about why the allow_negative flag, which was unique to Alameda accounts, is consistent with Levine’s references to borrowing “in the ordinary course of business . . . based on their crypto positions”? A special exception for a customer owned by FTX’s CEO, which allowed said customer to go over $10B in the red when no other customer was allowed a similar privilege, does not sound “in the ordinary course of business” to me. That doesn’t sound “based on their crypto positions” either.
Source for over $10B: this summary of recent testimony by an accounting professor in the trial. Also from the same source: “The main takeaway: from January 2021 all the way up until FTX’s (and Alameda’s) collapse on Nov. 11, 2022, all of Alameda’s “allow negative”-enabled accounts on the exchange were massively in the red. And despite this woeful state of affairs, it didn’t stop Alameda from paying out billions to meet its obligations.”
Levine claimed that the fraud was not in how the money ended up at Alameda, but in how FTX claimed to be safe. I think that’s wrong since the “allow_negative” flag looks fraudulent in itself. It just looks like something you’d use to implement embezzlement in computer code.
For what it’s worth, Levine’s account of what the prosecution is trying to claim in the trial also seems wrong. He claims that the prosecution agrees with him, but their opening statement in the trial sounds much more like the version of the story he claims is wrong than the version he claims is correct.
Alameda had secret access to FTX assets. Once Alameda had it, the defendant could spend it as he pleased. How did he do it? Two ways. First, customers sometimes deposits dollars on FTX, the company would tell them it was in their accounts.
But it never made it to FTX. He set up a bank account linked to Alameda. He lied to a bank to set up an Alameda bank account. Then he lied to the customers. He took billions of dollars, the customers had no way to know.
Here’s the second way. He took customers’ crypto. Accounts that hold crypto are called digital wallets. He gave Alameda the ability to withdraw—he made sure it was written right into the computer code.
The fact that Levine is wrong is made even clearer in Ellison’s testimony. Again from @innercitypress:
AUSA: What makes you guilty?
Ellison: Alameda took several billions of dollars from FTX customers and used it for investments.
Note that she said “Alameda took several billions of dollars from FTX customers” is what makes her guilty, not “FTX lied to customers about how good their risk engine was.”
This is not at all what happened. Alameda’s “borrows” were not made via the normal margin lending program. You can see Caroline Ellison admitting so in a contemporaneous meeting that was recorded and played in court. Nishad Singh and Gary Wang explicitly wrote code to allow Alameda specifically to take customer funds from FTX via the “allow_negative” flag, according to their own sworn testimonies. It seems like Matt Levine is confusing this collapse with the Mango Markets collapse that happened around the same time, his description fits Mango much better than FTX.
Alameda also lied to investors, as Caroline Ellison testified during the trial and pleaded guilty to doing. According to her sworn testimony, it was SBF who directed her to do so.
“In the ordinary course of business” is doing a lot of work in Levine’s account. The allow_negative flag sure doesn’t sound ordinary to me.
I also think some of the wording focuses more than I would on affirmative lies. I don’t think Levine is wrong in his wording, but I’ve seen a few people get the impression that SBF could do anything with the money as long as the TOS didn’t explicitly forbid it.
That’s kind of like saying a mechanic doesn’t convert his repair clients’ cars when he secretly rents them out to teenagers for joyrides after repairing them. The repair contract didn’t explicitly say he couldn’t...
“[T]he words ‘to defraud’ in the mail fraud statute [which is interpreted analogously] have the ‘common understanding’ of ‘”wrongdoing one in his property rights by dishonest methods or schemes,” and “usually signify the deprivation of something of value by trick, chicane, or overreaching.”‘” “The concept of ‘fraud’ includes the act of embezzlement, which is ‘”the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s own care by another.”’”
https://www.justice.gov/archives/jm/criminal-resource-manual-942-scheme-and-artifice-defraud (citations omitted, cleaned up, brackets added) (citing appellate decisions).
The fact that Alameda could and did “borrow” (much) more than any other account on FTX due to the allow_negative flag is consistent with Levine’s description, but I agree a fuller accounting of events would include this piece of information and the accusations you cite.
Could you say a bit more about why the allow_negative flag, which was unique to Alameda accounts, is consistent with Levine’s references to borrowing “in the ordinary course of business . . . based on their crypto positions”? A special exception for a customer owned by FTX’s CEO, which allowed said customer to go over $10B in the red when no other customer was allowed a similar privilege, does not sound “in the ordinary course of business” to me. That doesn’t sound “based on their crypto positions” either.
Source for over $10B: this summary of recent testimony by an accounting professor in the trial. Also from the same source: “The main takeaway: from January 2021 all the way up until FTX’s (and Alameda’s) collapse on Nov. 11, 2022, all of Alameda’s “allow negative”-enabled accounts on the exchange were massively in the red. And despite this woeful state of affairs, it didn’t stop Alameda from paying out billions to meet its obligations.”
Levine claimed that the fraud was not in how the money ended up at Alameda, but in how FTX claimed to be safe. I think that’s wrong since the “allow_negative” flag looks fraudulent in itself. It just looks like something you’d use to implement embezzlement in computer code.
For what it’s worth, Levine’s account of what the prosecution is trying to claim in the trial also seems wrong. He claims that the prosecution agrees with him, but their opening statement in the trial sounds much more like the version of the story he claims is wrong than the version he claims is correct.
See, for example, the prosecution’s opening statements (summarized by @innercitypress):
The fact that Levine is wrong is made even clearer in Ellison’s testimony. Again from @innercitypress:
Note that she said “Alameda took several billions of dollars from FTX customers” is what makes her guilty, not “FTX lied to customers about how good their risk engine was.”