What exactly did FTX do wrong?

Agree, I suspect most people downvoted it because they inferred it was a leading question.

According to the guy who wrote the 2nd book on FTX, it was a fraud from mid-’21, when:

1. FTX lost $1B when a trader took advantage of a software bug using a token called MobileCoin. The loss would’ve wiped out all the revenue FTX had ever made. SBF told employees to count the loss as Alameda's. This concealment enabled FTX to raise ~$1B from VCs.
2. Even with that VC money, Alameda then borrowed more from FTX (especially for the Binance buyout). “We don’t really have the money for this,” Ellison testified that she told SBF.
3. Then even before SBF’s spending spree really got going, Ellison warned him that Alameda’s debts were risky. But SBF asked her to invest an additional $3B in VC, even though Alameda had already helped itself to ~$2B from FTX users and borrowed $9B from other lenders. Alamada’s biggest asset was crypto that FTX had either created himself or was pushing (FTT, etc.) and without those, FTX owed ~$3B more than it had. She testified telling SBF that if they made the investments, and the market crashed and lending firms asked for their money back, Alameda would go broke and FTX would fail. Which then happened.

archive.is/FYMhv#selection-1959.0-1962.0 

If they can now pay back user due to the Anthropic investment, that’s ex post luck.

I'd note that DOJ chose to present a relatively simple pathway to conviction for the jury. That was smart when you have to convince 12 semi-random U.S. citizens to vote for conviction. Advocating for more complex ways in which the conduct also violated the law merely would have allowed the defense to present smokescreens. Therefore, I would be careful not to equate "USAO/SDNY chose not to argue X" with "USAO/SDNY didn't think SBF committed fraud due to X."

I'm not so sure about:

Again, my understanding is that FTX's actions here per se were not criminal, the crime came because they lied about what they were doing. If SBF had just not made public statements beyond "read the terms of service", there would be no fraud.

"FTX's terms of service did not prohibit it" != FTX was allowed to do it.

As the Government argued:

With respect to the Government’s theory that the defendant and his co-conspirators misappropriated FTX’s customers’ funds, the defendant suggests that to establish misappropriation, the Government must establish a “violation of the terms of a contract,” here the FTX Terms of Service. Dkt. No. 321 at 3. That is incorrect: misappropriation occurs when a party breaches a “fiduciary duty or similar relationship of trust and confidence,” which includes not just a “trustee and trust beneficiary,” but also several other relationships such as when a beneficiary “entrust[s] the fiduciary with custody over property.” United States v. Chestman, 947 F.2d 551, 569 (2d Cir. 1991).

[ . . . .]

Indeed, the Second Circuit recently reversed a district court’s granting of a Rule 29 motion in a wire fraud case where the defendants had argued that their misappropriation of funds received pursuant to a contract was not criminal if they had fulfilled the literal terms of their “contractual bargain.” United States v. Jabar, 19 F.4th 66, 79 (2d Cir. 2021). The Second Circuit held that the district court should not have overturned the jury’s verdict, which took into account the overall pattern of the “defendants’ fraudulent acts with respect to the rest of the bargain.” Id. 

SBF et al. would have needed to run FTX in a way that didn't create a “fiduciary duty or similar relationship of trust and confidence" and then breach it. That's a lot harder to pull off than merely declining to comment about Alameda-related matters.

I broadly agree with all of this.

A few points of (minor) potential disagreement

Alameda research (AR) did a bunch of bad trades, and ended up owing FTX a lot of money....AR's net position was positive, it's just that many of the assets weren't kept on FTX itself and were illiquid

As far as the backdoor is concerned, it looks like the defense challenges this: "SBF had not been under the impression that Alameda did not need to secure its borrowing with on-exchange collateral: “‘You permitted Alameda to borrow without requiring that it post collateral to the exchange?’ . . . SBF: ‘That was not my understanding’” (Bloomberg). However, he did know of another customer who was not required to: “Can you name any customers that were allowed to pledge outside investments as collateral for withdrawing money on FTX apart from Alameda? . . . [SBF:] I believe that we did that with a firm called Crypto Lotus, and I believe that we considered that with Three Arrows” (BitMEX)....SBF testified that he had always been “aware of roughly the amount . . . that it was borrowing” via its FTX credit line, which was “millions in 2019 . . . and then by 2022, my understanding was that it was around $2 billion on average of borrowing through the info@ account”, clarifying that Alameda’s balance on FTX was still “Overall positive, but negative in some assets.” Singh similarly testified that, prior to June 2022, he “thought Alameda had positive balances on FTX, that it was borrowing lots in some places but that overall they had more money than they didn't.” He emphasized the internal transparency of Alameda’s borrowing via the margin lending program — in contrast to the popular narrative of a secret “backdoor” known only to an “inner circle”, Singh reported that “Alameda's main accounts balance, is a front-and-center number in all of Alameda's trading systems. It's the sort of thing from my time at Alameda I couldn't imagine being missed or ignored by anyone there”." (from here)

In June 2022, this bug was discovered, and FTX execs realized AR had been investing fiat which wasn't theirs

This realization seems to have been spread over several months.  In June 2022, they realized AR owed FTX $8B more than they thought it had, but they didn't yet understand why.  The FT reported, "However, not all elements of the prosecution narrative line up neatly. Singh said he left the crucial June meeting still thinking things were OK and did not realise customer funds were being raided until September”.  SBF claims that he didn't piece everything together until September/October.  It's not clear even at that point if they thought of what they had done as illegal, or if they thought that continuing to work on raising liquidity for AR to rectify the mistake rather than announcing to the world that AR had accidentally invested $8B that they hadn't intended to, was illegal, or if they'd even decided how to proceed before the run on FTX in early November.

My impression is that these valuations were wrong

I don't think either the CFTC or the team handling the bankruptcy have offered any evidence that this was the case and SBF continues to maintain that AR had sufficient assets to meet its liability.  The fact that customers are probably going to be made whole with much (I think billions?) to spare, is always attributed to SBF having made some "lucky" investments that are now doing very well, but to my knowledge, no one has presented any evidence to support this as the sole explanation.

Again, my understanding is that FTX's actions here per se were not criminal, the crime came because they lied about what they were doing. If SBF had just not made public statements beyond "read the terms of service", there would be no fraud.

Is it a lie if you yourself believe it?  Regardless, I personally haven't yet come across any statements that seem to be claiming anything other than "FTX itself doesn't invest customer deposits" or "AR is not front running other customers on FTX."

Expanding on some of your points

SBF thought AR was following the risk management policy as published

Yes, as far as I'm aware, no one testified that SBF told his team to create a "backdoor" or to "stop Alameda getting liquidated."  SBF and the people who created the "backdoor" only testified that SBF asked them to make sure Alameda wasn't erroneously liquidated (as it almost was once, which would have been disastrous not only for Alameda, but for FTX and FTX customers in general, because before FTX was successful enough to attract other backstop liquidity providers, it was very reliant on Alameda as a backstop liquidity provider.)  SBF wasn't a coder himself, but he suggested something like "an alert or a delay," so that engineers could check if the triggered liquidation was erroneous i.e. triggered as a result of Alameda's role as a backstop liquidity provider, or valid i.e. triggered as a result of Alameda's role as a customer.  Gary and Nishad chose to implement SBF's instruction by turning off auto-liquidation for Alameda's account.

consider that FTX's poor risk management should reflect negatively on them, even if it doesn't qualify as criminal behavior on behalf of any individual

For what it's worth, SBF appears to have always taken responsibility and expressed great remorse for the mistakes he made regarding poor risk management, even if he does continue to deny criminal activity.

Great summary!

You probably base “Even though this use of funds was unintentional and sounds extremely sketchy, FTX's general counsel testified that FTX's terms of service did not prohibit it” on:

The government didn’t want to focus you on that. Why? Again, the only witness who said he had read the terms of service was Can Sun, the general counsel who had helped to draft it. Even though he was very careful in what he told you, he admitted that nowhere do the terms of service contain language that prevents FTX from loaning customer fiat deposits to Alameda or anyone else.

Can Sun didn't think so. (Unless I misunderstand something.) He said that there was the margin lending program that did allow that but that had a few hundred million USD in it, so by far not enough to explain Alameda's borrowing. He didn't think that FTX or Alameda could've borrowed from capital outside the margin lending program because it was owned by the customers.

So I think what the defense lawyer is trying to do here is to say that the ToS did not explicitly prohibit such borrowing, but he omits that the borrowing is still implicitly prohibited just like it is generally prohibited to borrow other people's fund without their permission.

Note that the linked document was written by the prosecution, and is therefore presumably a biased summary of the evidence.^[1] The defense equivalent (presumably with the opposite bias) can be found here.

1. ^{^}

   Jason comments on this here to argue that it probably isn't that biased.

I want to quickly address a couple of points of disagreement I have with Jason's take.  (Please don't take this to mean that I accept the rest -- there's a lot I disagree with -- I just don't have time to respond to it all right now.)

For instance, at one point SBF directed Ellison “to use FTX customer funds to repay loans" (her words)

This is misleading.  The complete line from Ellison is, "I understood that he was telling me to use FTX customer funds to repay our loans," then she proceeds to explain how she inferred this.

At no point in the trial does she say that he explicitly instructed her to touch customer fiat deposits.

About $4.5B more in customer funds was used to pay Alameda's lenders as a result

The defense doesn't seem to think so. "Caroline testified to you that what happened was, Alameda ‘would have to take the money from our line of credit to pay the lenders.’ And that's at transcript page 763. And I asked her, Well, if that's true, if the lenders were being repaid off the line of credit, wouldn't the amount of the line of credit go up? She said, Yes, it would. And I said, How much did it go up by? Oh, 5 to 10 billion. But when you look at the actual data that was pulled by Dr. Pimbley——and that's Defendant's Exhibit 617——you see that in fact the line of credit did not go up during the period when the loans were being repaid. In fact, it went down for much of the period."