In a recent development in the ongoing fraud trial of Sam Bankman-Fried, founder of cryptocurrency exchange FTX, the company's former top lawyer, Can Sun, testified that Bankman-Fried had requested him to devise "legal justifications" for the absence of $7 billion in customer funds, merely four days before FTX declared bankruptcy.
Sun, who served as FTX's general counsel, took the stand at Bankman-Fried's trial, revealing that on November 7, 2022, FTX had approached investment fund Apollo for emergency capital to manage a surge in customer withdrawals. Following Apollo's request for FTX's financial statements, Sun received a spreadsheet from either Bankman-Fried or another executive. The document indicated that FTX was billions of dollars short of meeting customer withdrawal demands and was also owed billions by Bankman-Fried's crypto-focused hedge fund, Alameda Research.
"I was shocked," Sun confessed, testifying under a non-prosecution agreement during the third week of the trial held in Manhattan federal court. He further revealed that after sharing the spreadsheet with Apollo, Bankman-Fried had a private conversation with him at his luxury apartment in the Bahamas. During this discussion, Bankman-Fried informed him that Apollo had requested a legal justification for the missing funds.
"He asked me to come up with legal justifications," Sun stated. "It basically confirmed my suspicion that had been rising all day that FTX did not have the funds to satisfy customer withdrawals, and that they had been misappropriated by Alameda."
Sun admitted that he informed Bankman-Fried later that day that he could not identify any legal justifications. FTX declared bankruptcy on November 11, 2022, resulting in customers losing billions of dollars. Apollo declined to comment on the matter on Thursday.
Sun's testimony could potentially disrupt Bankman-Fried's defense that he genuinely believed Alameda's use of FTX customer funds was appropriate. Bankman-Fried is currently facing charges of misappropriating billions of dollars in FTX customer funds for investments, political campaign donations, and supporting Alameda. He has pleaded not guilty to two counts of fraud and five counts of conspiracy. If convicted, he could face decades in prison.
Prosecutors have alleged that Bankman-Fried channeled FTX customer funds to Alameda. The hedge fund then loaned $2.2 billion to Bankman-Fried and other executives, as per a document presented at the trial on Thursday. The executives allegedly used these loans for venture investments, real estate purchases, and political campaign donations.
Sun also testified that Bankman-Fried had assured him that the company had kept its customer funds safe and separate from its own assets, and that he never approved the lending of FTX customer funds to Alameda. Sun confessed that he was involved in "documenting" loans from Alameda to Bankman-Fried and the other executives, but was unaware they originated from customer funds.
Sun also revealed that he had questioned Bankman-Fried and former FTX engineering chief Nishad Singh about the shortfall, but did not receive clear answers. He described Singh as appearing pale during the meeting, while Bankman-Fried was "typing away on his computer."
"It looked like his soul had been plucked away from him," Sun said of Singh, who pleaded guilty to fraud and testified against Bankman-Fried earlier this week.
Singh testified that Bankman-Fried continued his extravagant political spending and venture investing for months after it became apparent that FTX was short billions of dollars. Singh also admitted that he had been suicidal around the time of FTX's collapse.
During cross-examination, Bankman-Fried's lawyer Mark Cohen questioned Sun about a section of FTX's terms of service stating that some users' funds could be "clawed back" to cover other users' losses. Cohen also probed Sun about his decision to stay with the company in the summer of 2022, despite learning that Alameda was exempt from a procedure that automatically liquidated FTX customers' positions if their trades were losing money.
Sun confessed that he was unaware that this exemption allowed Alameda to withdraw billions of dollars from FTX until Singh informed him on the night of November 7.
The trial is set to continue on October 26, with the prosecution expected to rest its case.
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