NEW YORK – Directly and dispassionately, the former general counsel for failed crypto exchange FTX, Can Sun, testified Thursday at the trial of Sam Bankman-Fried that the ex-CEO had asked Sun to legally justify why the firm was short $7 billion needed to cover surging customer withdrawals in early November 2022 just before its implosion.
Sun, who served in his role for 14 months until the firm’s collapse, testified that the night before FTX revealed its insolvency, former Head of Engineering Nishad Singh, one of three star witnesses from Bankman-Fried’s inner circle to already testify “looked like his soul had been plucked away from him.”
“It has been my understanding throughout my time at FTX that FTX has safeguarded, segregated customer assets, that we do not misuse, we do not touch customer assets,” he testified, adding that this message was relayed everywhere—in public, such as on SBF’s tweets and in Congressional testimonies, as well as in private conversations to investors and regulators.
“So when there is a $7 billion deficit and FTX relied on Alameda to return the money to be able to plug in that hole, I was shocked,” Sun told prosecutors when asked about the missing funds.
Bankman-Fried faces seven felony charges, including wire fraud, conspiracy to commit money laundering and campaign finance violations. Prosecutors allege that Bankman-Fried knowingly misused customers’ funds to prop up Alameda.
Segregated and safeguarded
Sun joined FTX in August 2021 and began working on an updated Terms of Service, more befitting the size of the company that FTX had grown into.
Some of the language Sun worked on was this line that has since become central to the government’s case: “Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading.”
However, Sun testified that this did not represent a change for the exchange, that it was consistent with what FTX’s policy had been throughout as well as consistent with how Bankman-Fried described user assets being segregated from the business’s own assets. The revision of the Terms of Service was just to make it clear to users. The language was finalized in September 2021 and the fully revised Terms of Service were published online in May 2022.
An inkling of wrongdoing
Sun testified that between August and September 2022, he was surprised to learn about Alameda’s exemption from auto-liquidation. He said he was told by another employee that Bankman-Fried and Singh wanted to maintain Alameda’s immunity to liquidation. Sun pushed for it to be changed to a delayed-liquidation mechanism that would be available to all market makers and to clarify to all regulators and users that this was in place and had been misrepresented in the past.
The processes for these changes were still in motion until early November 2022 when customers started withdrawing their assets from the platform en masse.
According to Sun, on November 7, 2022, the day before it was revealed that FTX was insolvent, he became aware of FTX’s misuse of customer assets when he was trying to help FTX raise money from investment management firm Apollo Capital.
In an Albany apartment with Bankman-Fried, Singh, FTX head of product Ramnik Arora, and SBF’s father, Joseph Bankman, Sun pored over a spreadsheet detailing FTX and Alameda’s finances. It showed that FTX was short $7 billion necessary to cover withdrawals from alarmed customers, and another tab delineated how much money Alameda had on hand to cover those potential withdrawals. Because Sun had thought Alameda and FTX were separate entities, he was shocked.
He testified that he asked about the arithmetic behind the calculations, and often, in response to his questions, he would receive no response. Other times, he received only occasional responses and those were “vague.” He said that Bankman-Fried was typing on his computer and sometimes exiting to make calls.
Meanwhile, he said, “Nishad was sitting there. His entire face was pale, gray. It looked like his soul had been plucked away from him.”
They sent the spreadsheet to Apollo.
No legal justifications
A few hours later, just before a meeting SBF was supposed to have with the asset management firm, he asked Sun “for a legal justification as to why the funds were missing and…at Alameda.” The defendant’s question confirmed Sun’s suspicion that FTX didn’t have sufficient funds to cover customer withdrawals and that Alameda had misappropriated FTX customer deposits.
At 7 pm, just before the meeting, the two took a walk in the Albany luxury community where Bankman-Fried lived. Sun presented SBF with three theoretical arguments to account for the deficit but then also explained why each argument was either insufficient or invalid.
The first theoretical legal justification was the dormancy fee that FTX charged to customers who still had funds on the exchange but were inactive. However, that explanation would not work because the amounts tied to these accounts were so small. Bankman-Fried acknowledged Sun’s explanation with a “yup, yup.”
The second possible justification was based on how, when a user voluntarily lends out their crypto to another user, the borrower could default. But Sun said that Singh and Arora pulled numbers showing that this potential justification would not be supported by the facts. SBF again responded, “yup, yup.”
The last argument would have depended on whether FTX had ever made clear what the legal relationship is between a user and his or her assets. But Sun explained this justification would not be possible, because FTX’s “terms of service make it clear that when a user deposits assets onto the exchange, those assets continue to belong to the user.”
Sun described Bankman-Fried’s reaction to the news there was no legal justification, saying, “I was actually expecting a bigger response, but it was very muted. Sam basically said something like, ‘Got it.’ He was not surprised at all.”
After this, the prosecution played a short clip from a Good Morning America segment in which George Stephanopoulos interviewed Bankman-Fried. The anchor pointed out that the Terms of Service prohibited FTX from using customer assets. In the clip, SBF launches into an explanation of how borrowing and lending can be part of the program. Stephanopoulos reads aloud the language from the Terms of Service that the funds cannot be loaned out. Bankman-Fried pauses a moment, repeating Stephanopoulos’s words back to himself in a whisper, looks up, pauses again, then says, “there existed a borrow/lend facility,” and Stephanopoulos points out that people had to opt in to that. In the courtroom, hearing SBF’s defense back in the days shortly after the collapse gave a foreshadowing of what a cross-examination might be like for him if he were to testify.
The cross examination of Sun landed a few points. Defense Attorney Mark Cohen pulled up the Terms of Service for fiat currency, which were not as clear as the terms of service for digital assets when it comes to who owns title. But the lawyer asked only cursory questions about this. The next point in the Terms of Service that the defense lawyer went to ask about garnered a warning from Judge Kaplan: It stated that the terms would be governed by English law. Cohen opted to just ask Sun to read the sentence aloud: “The terms and any dispute shall be governed by, and construed in accordance with, English law.”
Otherwise, testimony for the day ended with Robert Boroujerdi, managing director of asset manager Third Point, who chronicled how Bankman-Fried omitted significant details of FTX’s operations that would have changed Third Point’s decision to sink $60 million into the company. The value of that investment, similar to one by venture capital firm Paradigm, whose managing partner Matt Huang testified earlier in the trial, is now worthless – marked down to zero. The trial will resume in a week, on Thursday, October 27.
That morning, the prosecution expects to rest, and Bankman-Fried’s lawyers have requested to begin their defense after lunch that day. The big question that hangs in the air over the next week is whether or not SBF will take the stand.