The Howling of Ghosts

SBF, Criminal Intent, and the Spookiest Spreadsheet of All Time

“If you look too long at this spreadsheet, you will go insane,” promised Matt Levine in his November 14th, 2022 issue of his daily finance newsletter Money Stuff.  “It’s an Excel file full of the howling of ghosts and the shrieks of tortured souls.”  The file in question belonged to Sam Bankman-Fried, CEO of the once ascendant, now profoundly troubled crypto exchange FTX.  SBF sent out this spreadsheet, which he described as a “rough guess” of FTX’s assets and liabilities at the time, to potential rescue investors, in a desperate attempt to raise enough capital to ward off imminent bankruptcy.  This effort failed, because even a rough guess of FTX’s finances were really really bad. 

The spreadsheet described a company with $9 billion of liabilities compared with less than $1 billion of liquid assets, $5 billion in outgoing customer withdrawals from a single day, and most hauntingly, an entry with a balance of negative $8 billion called “hidden, poorly internally labeled fiat@ account.”  No sane investor could see this balance sheet and conclude that this was a salvageable company, and none of them did.  In fact, the level of incoherence and negligence exhibited in the balance sheet was so extreme that it pointed to criminal intent.  “You cannot apply ordinary arithmetic to numbers in a cell labeled ‘HIDDEN POORLY INTERNALLY LABELED ACCOUNT.’” Levine wrote.  “The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison.”

Almost exactly a year later, SBF’s trial for seven counts of fraud and money laundering is wrapping up this week, and the howling ghosts of FTX’s balance sheet have played a starring role.  On her first day of testimony, ex-Alameda CEO turned government cooperator Caroline Ellison recounted a conversation with SBF about sending a balance sheet to its lender Gemini.  “He suggested I prepare some alternative ways of presenting the information and send it to him,” she testified.  “I understood him to be directing me to come up with ways to conceal things in our balance sheet that we both agreed would look bad.”  Ellison testified that she produced seven “alternative” balance sheets, and that SBF told her to send the seventh one, “alt 7.”  

This, of course, is bad.  Definitionally, it is fraud to knowingly send your lenders a false balance sheet to make your finances look better.  But even the existence of “alternative” balance sheets is bad.  “The proper number of balance sheets is one,” Levine wrote the next day.  If you have eight balance sheets that all say different things, seven of them must be fraudulent.  If you name seven of the eight “alternatives,” that shows that you know that they are the fraudulent ones.

Of course, Ellison may have been lying.  After all, she is a government cooperator, who has pled guilty to basically all of the charges SBF faces.  The extent of her punishment depends on the degree to which she helps the prosecution convict SBF.  Her testimony alone is extremely prejudiced, and cannot be taken as fact.  But the prosecution also has hard evidence that cannot be explained away so easily.  During her testimony, they displayed the seven alternative spreadsheets as exhibits, along with metadata that shows that SBF’s email account opened them at a specific time.  And they showed the Signal chats, in which SBF tells her to “go with alt 7.”  

I was there on the day Ellison gave this testimony, and it seemed incredibly damaging.  I watched from a packed overflow room, which stayed silent through most of the proceedings, but when the prosecution displayed the spreadsheets as exhibits, a few people let out audible “woah”s, and everyone looked around incredulously.  In addition to being damning evidence of criminal intent, the spreadsheets looked hilariously amateurish, full of question marks, conversational labels like “liquid stuff” and “less liquid stuff,” and aesthetically questionable formatting choices.  “Those are some of the worst spreadsheets I’ve ever seen,” a crypto reporter gleefully told the packed elevator during lunch break, eliciting laughs and smirks.  “I can’t believe they ran a multibillion dollar company off of those.”

The howling ghosts of alt 7 are the closest thing the prosecution has to a kill shot.  It seems to show conspiracy to defraud lenders, point blank.  And as Assistant US Attorney Nicolas Roos argued in his closing statement on Wednesday, it shows much more.  Remember, defrauding lenders is perhaps the least bad thing SBF is accused of.  Lying to a sophisticated financial counterparty in order to do a deal is illegal, and it should be, but it’s also standard procedure for most maverick startup disruptors.  Gemini, the crypto bank that received the fraudulent “alt 7” spreadsheet, is not a particularly sympathetic victim.  They were a billion dollar company, shouldn’t they have been more careful about who they loaned money to?

Lying and defrauding customers, however, is very bad.  These are everyday civilians, perhaps uncouth, terminally online ones, but civilians all the same, and they lost their life savings.  The trial of SBF is front page news, with packed overflow rooms and slews of daily recap podcasts, because of this charge.  If he’s guilty of stealing customer money, then SBF is not just a rogue tech disruptor, he’s a pure scammer, on the level of Bernie Madoff.  He’d probably go to prison for life.

 Alt 7, Roos argued, also demonstrates criminal intent to defraud customers, because it was the one alternative balance sheet of the seven that omitted Alameda’s billions of dollars of debt to FTX.  If SBF saw these balance sheets in June 2022, they would have told him that Alameda had taken billions from FTX’s customers.  And if he selected alt 7, that means he sought to hide this information because he knew it looked bad.  That, Roos argued, demonstrates criminal intent, the knowledge that he was doing something illegal (stealing customer money) and an effort to hide it so that he could continue doing it.  Alt 7 shows that SBF knew customer money was being taken, that he knew it looked bad, and that he tried to keep it a secret.

In his closing statement, SBF’s lawyer Mark Cohen claimed that, despite the metadata that shows he opened it, SBF never actually saw the alt 7 spreadsheet.  The spreadsheet had multiple tabs, SBF had explained during his testimony.  The metadata doesn’t show he opened the relevant tab.  Cohen expanded on SBF’s thinking in the closing statement:  “If you think about it, he got a balance sheet that looked normal and familiar, he was very busy working 22 hours a day, and it makes sense that he would trust Caroline.”  

This almost works.  All the jury needs is a shred of reasonable doubt that SBF saw this spreadsheet in order for this line of prosecution to fall apart.  And in a case that has been portrayed as such a slam-dunk for the prosecution (“200-1 they convict,” reviled SBF apologist Michael Lewis predicted on his podcast), I found much of Roos’s closing surprisingly speculative.  At one point, he alleged that SBF must have been the person to execute all transfers between Alameda and FTX because he was the only person who worked at both.   At another, he seized on a message between SBF and close colleague Nishad Singh, where Singh mentioned that he didn’t want people to think he was the one “orchestrating it.”  The use of vague innuendo, Roos claimed, was a clear sign of criminal conspiracy.  In both cases, I agreed that Roos’s explanation was the most logical, but if you have to speculate using logic, you likely haven’t proved something beyond a reasonable doubt.  Singh could plausibly have been talking about orchestrating any number of things, and someone else could have transferred money between two companies even if they didn’t work there.  The org chart of both companies was famously vague and constantly in flux.  If you squint, there is just enough daylight for SBF to wriggle free of most of this speculation.

But there’s no daylight with Alt 7.  If he saw it, chose it, and sent it, as Caroline says, he’s guilty of everything.  And Cohen’s defense falls apart completely when you scrutinize his second sentence: “he thought it looked normal and familiar.”

Nope.  Sorry.  No one could look at that, or any other FTX balance sheet, and think it looked normal.  They all look terrible.  They immediately scream “there has been a brutal, gruesome crime here, you need to call your lawyer and plead guilty to everything right this second.” 

Maybe someone on the jury will be more credulous than me.  But Roos’s version of events seems like the only plausible one:  SBF received a balance sheet from Caroline.  It was full of ghosts, a total horror show.  They tried their best to exorcize them, to massage the data, create alternatives, omit $8 billion debts they owed their customers without telling them.  But simply deleting them from the balance sheet was not enough.  The ghosts lingered in the other seven balance sheets, and in every other balance sheet FTX made from them until their demise five months later.  Now, their howls and shrieks have rattled around the courtroom.  In a few hours, we will see if they are enough to condemn SBF to life in prison.