New Details of FTX’s Back Door Emerge as Bankman-Fried Trial Begins

“Yea we should clean up this sort of stuff”

The first witnesses for the fraud trial of Sam Bankman-Fried, the founder of the fallen crypto exchange FTX, began to testify on Wednesday, as prosecutors and defense lawyers squared off on whether the company failed because of fraud.

But a new report by The Wall Street Journal about employees discovering secretive links between the exchange and an affiliated trading firm raises questions about what FTX’s leaders knew about potentially problematic features that are at the heart of prosecutors’ case.

A so-called back door between FTX and Alameda Research was uncovered in May 2022, months before the exchange collapsed, according to The Journal. The feature allegedly allowed Alameda, a sister trading company which Bankman-Fried also controlled, to withdraw consumer funds and carry a negative balance of up to $65 billion. (Ordinary customers of the exchange weren’t allowed to go negative.)

The employees were so concerned about their discovery — “yea we should clean up this sort of stuff,” one of them, Julie Schoening, wrote in an email — that they flagged it to a senior FTX leader. But while some executives believed the feature had been removed, it hadn’t been, according to The Journal. Schoening was later fired, reportedly for other reasons.

The backdoor feature is a major part of the case against Bankman-Fried, with prosecutors arguing that Alameda abused its special privileges at FTX.

What was said in opening arguments in court:

• Prosecutors argued that Bankman-Fried stole billions in customer funds for his own purposes, a fraud discovered only after FTX blew up last fall. What appeared to be a success “was built on lies,” according to Thane Rehn, an assistant U.S. attorney.

• Bankman-Fried’s counsel said that he was being made out to be a “cartoon villain” and that FTX failed because it operated in a risky industry. “It’s not a crime to run a business,” Mark Cohen, the lead defense lawyer, said.

Witnesses began taking the stand. Up first was Marc-Antoine Julliard, a London-based customer of FTX. Julliard said that he initially did not try to withdraw his money as the exchange began to founder because he believed Bankman-Fried’s assurances that everything was all right. That cost him more than $100,000.

The next witness was Adam Yedidia, a college classmate of Bankman-Fried’s who worked at FTX. Yedidia testified that he resigned when he learned that customer money had gone to pay creditors at Alameda.

More fireworks may be in store this week, with the first of several high-profile witnesses set to testify: Gary Wang, a top FTX lieutenant who is cooperating with prosecutors.

HERE’S WHAT’S HAPPENING

Prominent House Republicans declare their candidacies for speaker. Steve Scalise of Louisiana, the second-ranking House Republican, and Jim Jordan of Ohio are among those seeking to replace Kevin McCarthy after he was ousted from the post by far-right colleagues. It’s unclear whether either lawmaker, both staunch conservatives, can win enough support; Tom Cole of Oklahoma, who is seen as more moderate, has also been mentioned as a contender.

Kaiser Permanente workers go on strike. More than 75,000 unionized employees of the health system walked off the job on Wednesday after they failed to win a new contract in one of the biggest work stoppages in the U.S. health care industry in decades. Doctors and nurses aren’t part of the strike, though Kaiser warned that non-urgent procedures could be postponed.

British regulators examine Amazon and Microsoft’s cloud computing dominance. Ofcom, the country’s media regulator, referred the matter to the Competition and Markets Authority, the antitrust watchdog, after its own inquiry left it “particularly concerned” about the power of the two tech giants. The examination is one of the most serious looks yet at how much control the companies have over the highly lucrative business.

The Ozempic ripple effect

With Halloween around the corner, supermarket chains and food giants are closely watching the snack-food aisles for signs that booming demand for appetite-suppressant drugs like Ozempic and Wegovy is eating into sales.

Walmart is the latest to sound the alarm. “We do see a slight pullback in overall basket,” John Furner, the C.E.O. of Walmart’s U.S. operations, told Bloomberg on Wednesday. “Just less units, slightly less calories.” The retailing behemoth has been using anonymized sales data to see if it can spot whether shoppers who have been prescribed the so-called GLP-1 drugs are cutting back on food purchases.

Kellanova, the makers of Cheez-It and Pringles, is also closely watching for an Ozempic effect.

The drugs can help a person overcome cravings and shed weight quickly. That’s led some researchers to call it a “game-changer” in fighting obesity. Social media influencers and prominent figures, including Elon Musk, have revealed that the drugs helped them lose weight, a viral effect that’s concerning some health officials. Note: There are health risks associated with some GLP-1 drugs, including malnutrition.

The market is huge. About 42 percent of American adults are obese and analysts at Jefferies, the investment bank, estimate the new generation of weight-loss drugs has the potential to grow into a $100 billion market. The early leader is Novo Nordisk. The Danish drugmaker has overtaken LVMH Moët Hennessy Louis Vuitton, Bernard Arnault’s luxury conglomerate, as Europe’s most valuable public company on the strength of Ozempic and Wegovy sales. Demand has also exploded for Eli Lilly’s Mounjaro, a diabetes drug that is widely used for weight loss.

Analysts see a disruptive effect, too. Executives at beauty companies, medical device makers and wellness firms have been peppered with questions about GLP-1 drugs on earnings calls. Shares in Medifast, which makes diet shakes and protein bars, have fallen more than 35 percent this year and its profits are falling.

The impact could be even wider. ​​In a survey of American GLP-1 users, Jefferies found that 42 percent have cut down on dining out and 44 percent reported eating and/or ordering less when they did dine out.

What’s driving Shawn Fain?

The autoworkers’ strike is set to enter a fourth week and the big three carmakers are girding for a long fight, despite reports of some progress in negotiations. General Motors on Wednesday secured a $6 billion credit line after saying the labor action would cost it $200 million in lost production, and Ford laid off more workers.

But the boss of the United Automobile Workers shows little sign of pulling back from his tough tactics as the companies try to accelerate their shift to electric vehicles and Chinese rivals gain market share.

Shawn Fain is fighting a class war. The U.A.W. chief became the union boss in March and is pursuing a high-stakes strategy fueled by fiery rhetoric, writes the Times’s David Streitfeld. The union wants a 40 percent wage increase and other benefits and has hit Detroit’s big three simultaneously for the first time.

Fain has been slamming the companies and the rich. “Billionaires in my opinion don’t have a right to exist,” he said. When President Biden visited a picket line last week, he compared the carmakers to the Axis powers of World War II. “Today, the enemy isn’t some foreign country miles away — it’s right here in our own area,” Fain said. “It’s corporate greed.”

The carmakers accuse the union of showmanship. G.M. denounced the “rhetoric and theatrics.” Ford said the U.A.W. should focus on talks rather than “strikes and P.R. events.”

The companies also face a big overseas threat. Chinese carmakers dominate the global E.V. industry and exports have risen more than ninefold in the past three years. The turnaround of Nio, a Chinese carmaker that almost collapsed in 2020 until a government rescue, is instructive, writes the Times’s Keith Bradsher. One of its factories employs just 30 technicians but makes 300,000 E.V.s a year. The company lost $835 million in the second quarter, or $35,000 for each car it sold.

Western officials are increasingly worried. Most of China’s E.V. exports have been to Europe, rattling the continent’s carmakers. The European Commission on Wednesday started an investigation into whether Beijing is subsidizing manufacturers — a move that could see Brussels impose tariffs.

Lina Khan talks to creators about A.I. fears

Creative workers are pushing back against tech giants that they say are building generative artificial intelligence tools with “stolen goods” — the books, screenplays, songs and other works they produce — and are lobbying policymakers for help.

They have found an open door at the F.T.C., which held its first roundtable discussion on Wednesday with representatives for writers, actors, models, musicians.

Lina Khan, the F.T.C.’s chair, wants to shape A.I. through regulation. While “there is no A.I. exemption to laws on the books,” she said during the online meeting, the agency is watching how the new tools affect competition, fraud and more, and she warned companies to be on alert.

As policymakers debate how to regulate the technology, Khan’s approach is tied to an expansive view on antitrust law that has led her to take on Amazon and other tech giants. She said it’s still possible to shape how A.I. and society evolve with regulations: “It’s important to not assume there’s an inevitable endpoint.”

Creative groups say they need government help, even after having some wins. The Writers Guild of America, for instance, won guardrails on the use of A.I. in a tentative labor agreement with Hollywood studios. But the writers and others they have no sway with tech companies that scrape data from the web and use so-called shadow libraries to train their A.I. models. “The fight for protection of our craft and livelihood doesn’t stop at the bargaining table,” John August, a negotiator for the WGA West, said at the meeting.

Umair Kazi, director of policy at the Authors Guild, which sued OpenAI last month for copyright infringement, spelled out the group’s wish list. This included requiring tech companies to get permission to use content and to compensate creators for it, and a ban on copyright protection for A.I.-generated works. “There is widespread and real concern that A.I. will decimate the writers’ profession,” Kazi said.

THE SPEED READ

Deals

• AT&T is reportedly weighing options for its 70 percent stake in DirecTV, including bringing on a new investor or selling the holding altogether. (Bloomberg)

• How Norway’s sovereign wealth fund became a major player in this year’s big I.P.O.s like those of Birkenstock and Instacart. (Bloomberg)

Policy

• President Biden canceled $9 billion in additional student debt, affecting 125,000 borrowers, as repayments restarted this month. (NYT)

• Donald Trump raised $45.5 million in the third quarter, his presidential campaign announced, far outstripping hauls by rivals including Ron DeSantis. (NYT)

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