Ep. 90: [PILOT] SBF Trial Briefing, Day 8: Zac Prince, former CEO of BlockFi, testifies

[00:00] . [00:01] Hey, this is Boys Club. Day three of reporting on the SBF trial in New York City. Back on the beat. Back on the beat. Hey, Natasha, if someone wants to get into crypto or is looking for a better way to trade, where should they go? Oh, Dina, I'm so glad you asked. The place to be is Kraken. It's more than a crypto platform. [00:31] easy to use. From degen to day trader, first timer to full timer, make your trades in just a few clicks. Go to kraken.com backslash boys club, sign up in just a few minutes, and you can even get started with as little as $10. We love you, Kraken. [00:45] How was your day in court? It was really quiet, way quieter than the courthouse. Caroline Allison has left the building. That's changing the vibe. It's less of a spectacle, I think, at this point. Also, New York City... [00:56] is down bad today and people are laying low and not going out. And so I think that was also a part of it is like, people didn't want to go to the courthouse. So the room was, was pretty dead. And then at one point, [01:08] a group of what looked like law students or they look too young for that like like nyu undergrads came in sat for like 10 minutes and then left i feel like this is boring wow they couldn't even keep the attention of the nyu under exactly they're like i'd rather go back to class the vibe was very different today it was just me and wall street journal yeah yeah going through some

[01:32] The testimony today was Zach Prince, who is the previous CEO of BlockFi. Well, he was the CEO. I don't believe that they have a CEO anymore. Yes, exactly. Nobody is the CEO of BlockFi. For listeners, BlockFi has gone on. It's gone. Yes, it's dead. It's no longer around, which is a lot of what we talked about today in court. [01:56] The main takeaway for me is that I will not be working in finance anytime soon. And that was actually a big part of, I think, the story of today is that Zach Prince is your classic finance dude. Just square peg, square hole finance finance. I'm looking at his photo here and yeah, we got a finance broski. Yeah, he's... On our hands. [02:20] Personally, not my cup of tea. Unlikable as a person. I am HO. Who would play him in a movie? [02:26] I would say like if you watched Wolf of Wall Street, all the guys that wanted to be Leonardo DiCaprio's character, but weren't, that's kind of who he reads as. I'm checking. I'm checking this. Yeah. And in being a classic finance guy, he's, [02:41] constantly using abbreviations, constantly using acronyms, [02:45] using language that like is not layman's terms and clearly the average person like can't follow or track and [02:52] This is all for the jury. And so the judge continued to interrupt him and was like, can you explain that? Can you explain that? In layman's terms, the judge would repeat it back to him, be like, is this what you're trying to say? Why was he there? Okay. So two things relating to FTX and BlockFi. BlockFi had two sides of their business. One side that was the retail side for retail investors, and they were not a crypto exchange. They were a trading product. They were not an exchange.

[03:18] And so when you as a retail investor put your money in there, you knew that they would be trading your funds. It wasn't like FTX where you thought it was essentially a bank that was holding your funds. And then they had an institutional side of the business, which was for institutional corporations and companies to lend money to them. So... [03:40] Their relationship, there were two aspects of their relationship. One is that BlockFi was a lender to Alameda Research. So Alameda Research was getting money from BlockFi to do their trading. And then the second was in the end of their relationship, it was looking like FTX, US, was going to buy BlockFi, acquire the business. So there's an evolution of their relationship over time. [04:10] his experience is because for several days leading up to this with Caroline Ellison's testimony, she was speaking to the falsified documents that she made, the fake balance sheets that she had been putting together. And he is a recipient of those fake balance sheets. Additionally, BlockFi lost two massive chunks of money to FTX and Alameda Research, $600 million in loans and $350 million of capital that they had on FTX that they were trading with. And they were using it as an [04:40] both for their own investments and for their retail funds. They were double screwed. They were double screwed. BlockFi provides capital to...

[04:48] Other financial institutions. That's their business model. Exactly. Part of their business model. And so one of their clients was Alameda Research. Yes. And they were in a lending-lendor relationship with that. Exactly. Entity. And so they lost that money. Yes. Presumably. And then they also lost money in FTX. They also lost money in FTX because there was about $350 million that they had on the FTX exchange. Just sitting there? Yes. Half of that was... [05:18] collateral that Alameda Research had put up for their loans. [05:24] Okay. And, or I don't know if it was exactly half a portion of it was that. [05:28] The other portion of it was... [05:30] retail investor capital that had been deposited into BlockFi to be traded by BlockFi. [05:38] And they were using FTX as the exchange to do that trading. [05:42] - Oof. - So, [05:44] Screwed. Doubly. They got screwed. Yes. Yeah. Real bad. [05:47] the main reason that the prosecutor had him on the stand is to demonstrate that [05:51] what the lender fraud [05:54] was, [05:55] And all of the actions that Caroline Ellison had taken and described and talked about, the other side of that, who was receiving those balance sheets, who was making... [06:06] decisions about massive amounts of capital because of those balance sheets and how inaccurate the changes that she made to those balance sheets, how that actually affected the decisions downstream. And then starting to build the case around who was actually affected by the exchange imploding and the fact that they were using customer funds like BlockFi's funds that had been deposited as their own piggy bank. So it's not only all of FTX's

[06:34] retail investors. [06:36] that [06:37] But also all of BlockFi's retail and institutional investors that were collateral damage in this whole event. Exactly. It's like the layers of who was affected. So general vibe of Zach... [06:50] is... [06:52] A real know-it-all. If he wasn't here, like, testifying about his business imploding and the bad decisions that he and his company made, he would be... [07:01] a guy at the bar that you just cannot stand talking to. Like, I hate to talk about this person because he is a real person in the world, but he's not for me. [07:10] And yeah, no time, no time, no time for him. And I also think he was really defensive on the stand because you're basically talking about how you went bankrupt and the bad decisions that you made. [07:23] I am sympathetic to [07:26] Some of it because... [07:27] he was given fake, like false information. He was given fake documentation and made decisions based on inaccurate information. [07:35] I'm sympathetic on that front. But I think what it illuminated to me is that the reason this entire bear market happened is because people were being so irresponsible and gambling, like gambling with people. [07:51] So much money. And a huge part of the story was talking about the FTT token. [07:56] And leading up to this, we all know that the FTT token was used as collateral for a lot of loans that Alameda Research received. When you really dig into it, it's such circular thinking. He used this example actually on the stand because the judge pressed him to explain it. Okay, if I'm a lender and I'm giving a loan from Apple...

[08:13] And the collateral that Apple is putting up for that loan is Apple stock. That is a common practice in the financial system. But what they would flag it as is wrong way risk, which is what they talked about today, where essentially your collateral is dependent on the value of that company. So if that company goes under, your collateral goes under, even though it can be a common practice. [08:43] visual was, you know, one of those like search protectors that has like multiple outlets and then, and it's like the, the outlet part of it is plugged into it. [08:52] which is like really brought it to my experience. It's exactly right. That's exactly right. So my main takeaway from the day was like, wow, our entire financial system is so fragile. And all of these people that are making all of these decisions are just betting in crypto and in traditional financial institutions. And it's all going to come crumbling down. Oh, man. Prosecutor closes, cross-examination happens. They really press him on them using FTT as collateral and [09:22] that they have over collateralized with an asset that is, he should have known, he should have known better. And then he tries, he should have known better. Yeah. And it's crazy because all of the documentation they showed, they did, they had these reports that were them doing risk analysis as a business block by, and they did these with the balance sheet that had been provided to them, which was inaccurate and a lie, did these exercises of, okay, if FTT token goes to zero,

[09:52] all the way down by 75%, what position would they be in? And it was still healthy. It was still that Alameda Research would have $600 million in assets and be in a healthy position. So they had done exercises to do that, but the rest of the books were completely inaccurate. So they knew that there was a huge risk in taking on FTT collateral, but it was also such common practice in that time that people would use these tokens that had circular thinking to justify taking out [10:22] which they knew was a massive risk. So my main takeaway is everybody's gambling and I hope, and I do think that the prosecutor will bring, [10:32] retail investors to the stand because these broskies are not sympathetic. You don't feel bad for them. Like, totally. He was gambling too. And he made some bad bets and that all came crumbling down and you don't feel a lot of sympathy. That's kind of mean take, but... [10:49] One thing I just want to make really clear is I was present today and actually at the end of Caroline's testimony of like, [10:57] Why don't I find her to be a sympathetic character? [11:00] There's something about most of the people who are taking the stand that I've seen so far where... [11:06] They're so desensitized and detached to the amount of money that they're talking about. [11:11] They don't understand what $30,000 could mean to somebody. When somebody's like, I put all my life savings into FTX and that was $35,000 and it's gone the next day.

[11:23] They don't understand that. They don't have a connection to money like that. And it's really upsetting to witness that. And it's really frustrating to feel like you're hearing these people talk about these sums of money that are... [11:34] are stupid and... [11:36] we're doing stupid things to make even more money and you're present to a [11:41] retail investors who were like really, really screwed over by the decisions of these people. And it's dark, really dark. So that was my day in court. Oh, I know we're at time, but there was one thing that really brightened my day because I left feeling... [11:57] really bummed out and... [12:00] upset. [12:01] I can feel it. Yeah. And I was just like, I don't want to be here. I don't want to like give these people air. And I took the elevator down and there was like a whole family. And I was like, oh, are they like here for a court case? And they were like so cute. And everybody was dressed up. And I was like, oh, this is like kind of sad too. Like, are they here for something? [12:18] You don't imagine people are in court for something good. And then I went and I got my phone because you have to check your phone in. [12:24] And it was really busy. There was a ton of people, which was sort of weird because I was leaving at like a weird time. And he gives me my phone and he was like, congratulations. And I was like, congratulations. And I was like, oh, is this a wedding? But like it's not a courthouse. Like that's not the kind of courthouse it is. I was like, what? And then I walked outside and there were all of these people standing on the steps taking pictures with little American flags. All of these people who were there to get their... [12:50] citizenship get their citizenship and they were all taking pictures and they were so happy and they were like waving their flags and taking pictures and I was like man this is so this is such a happy story for all of these people and it was really wholesome and yeah it was what I needed to be like okay okay there's some joy in humanity yeah I believe in humanity and these people are having a great day

[13:13] And I can leech off of that vibe a little bit. Let's close it up. [13:43] year. This is a true story. I've actually hit them up a few times with very dumb questions about our account and they were so nice and so patient. It just takes a few minutes to get started today at kraken.com backslash boys club.