A hot potato: As Sam Bankman-Fried’s trial concludes its second day, we learn that many FTX employees knew that Alameda Research had a backdoor into customers’ wallets. However, when they voiced concerns, their cries went nowhere, and the problem was never fixed.

The Wall Street Journal notes that several anonymous employees who worked for FTX subsidiary Ledger X reported the issue to the company’s Chief Risk Officer, Julie Schoening. Schoening’s response seemed somewhat casual, considering the seriousness of the situation.

“There are less rigid rules [governing crypto], but yeah, we should clean up this sort of stuff,” Schoening said before running it up the chain of command.

Her boss brought it up with FTX Director of Engineering Nishad Singh, and the buck stopped there with no action taken. The backdoor was reportedly a code that allowed Alameda to carry a negative balance with FTX. No other account on the platform could do this. At any time, Alameda could “borrow” up to $65 billion in crypto from customer funds.

“We gave special privileges to Alameda Research to allow it to withdraw unlimited funds [from FTX] and lied about it,” a former FTX exec testified.

Banger coverage today from the @CoinDesk Crüe: @nikhileshde @realDannyNelson and @HeleneBraunn https://t.co/9ySURpwmC5

– m a r c 𧭠(@MarcHochstein) October 5, 2023

Singh was one of three executives arrested in connection with the scam. Alameda’s CEO Caroline Elison and FTX co-founder Gary Wang were the other two. All three signed plea deals agreeing to testify against SBF. Constance Wang, FTX’s COO, also agreed to testify against her former boss, even though she was never charged with a crime, so it’s not looking too good for the former crypto tycoon.

Bankman-Fried recently leaked select portions of Elison’s private journal to The New York Times. Prosecutors claim it was an effort to discredit Elison and taint the jury pool by painting her as a jilted lover. The stunt landed SBF in jail – he was formerly out on bail and under house arrest at his parents’ home.

It was the last straw for the judge, who had previously shown leniency when SBF broke the terms of his bail conditions by contacting former associates to allegedly “get their stories straight.” The judge could have revoked bail then but banned SBF’s online and computer privileges instead.

Prosecutors have hammered SBF during the first couple of days of his trial, and it’s not likely to let up. Meanwhile, defense attorneys are trying to paint SBF as an “MIT math nerd who didn’t drink or party.” The young entrepreneur just got overwhelmed running a company with such skyrocketing growth.

“[It was] like building a plane as you’re flying it,” SBF’s legal team said.

I don’t think that defense is gonna fly.