Unchained - SBF Trial, Day 12: Former FTX General Counsel Speaks Out Against SBF

Episode Date: October 20, 2023

On the 12th day of the SBF Trial, former FTX General Counsel Can Sun testified about a $7 billion deficit in customer funds. Sun, who was responsible for crafting FTX's terms of service, expressed shock at the deficit and revealed that Sam Bankman-Fried had asked him for legal justifications. Sun also mentioned that Nishad Singh, a key witness and former head of engineering at FTX, looked emotionally drained days before the company's collapse. Sun's testimony took a dramatic turn during a meeting with Bankman-Fried and others, where it was confirmed that FTX lacked sufficient funds to cover customer withdrawals. This meeting solidified Sun's suspicions that Alameda Research had misappropriated FTX customer deposits.  The day concluded with Robert Boroujerdi of Third Point stating that Bankman-Fried had omitted significant details that would have altered the firm’s decision to invest $60 million in the now failed crypto exchange. That investment is now worth zero. The trial will resume in a week, adding more suspense to this unfolding legal drama. Catch up on Unchained’s previous coverage:  SBF Trial, Day 1: Possible Witnesses Include FTX Insiders, Big Names in Crypto, and SBF’s Family SBF Trial, Day 2: DOJ Says Sam Bankman-Fried ‘Lied’ While Defense Claims His Actions Were ‘Reasonable’ SBF Trial, Day 3: Why a True Believer in FTX Flipped Once He Learned One Fact SBF Trial, Day 4: SBF’s Lawyers Annoy Judge Kaplan, While Wang Reveals Alameda’s Special Privileges SBF Trial, Day 5: SBF's Defense Finally Found Its Legs, But Can It Counter Caroline Ellison? SBF Trial, Day 6: Caroline Ellison Recalls 'The Worst Week of My Life' SBF Trial, Day 7: In SBF Trial, Did the Defense Lose Its Opportunity With the Star Witness? SBF Trial, Day 8: Former BlockFi CEO Adds Credibility to Fraud Charges SBF Trial, Day 9: Nishad Singh Describes Former FTX CEO as a Bully and Big Spender SBF Trial, Day 10: Defense Struggles to Discredit Nishad Singh's Testimony SBF Trial, Day 11: How Alameda Got FTX Into a $9 Billion Hole Did Sam Bankman-Fried Have Intent to Defraud FTX Investors? Why These Lawyers Say It's Over for SBF-But His Only Hail Mary Is to Testify Here’s How Sam Bankman-Fried’s High-Stakes Trial Could Play Out SBF Trial: How Sam Bankman-Fried’s Lawyers Might Try and Win His Case The High-Stakes Trial of Sam Bankman-Fried Begins: What to Expect Learn more about your ad choices. Visit megaphone.fm/adchoices

Thanks for tuning in to this episode of the Unchained Recap for Day 12 of the SBF Criminal Trial. Directly and dispassionately, the former General Counsel for Failed Crypto Exchange, FtX, KANZUN, 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 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 Neshad Singh,

one of three-star witnesses from Bankman Freed's inner circle, to already testify, quote, looked like his soul had been plugged away from him. Quote, it has been my understanding throughout my time at FTCs 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 SPF's tweets and in congressional testimonies, as well as in private conversations to investors and regulators. Quote, so when there is a $7 billion deficit, an FTCS relied on

Alameda to return the money to be able to plug that hole, I was shocked. Sun told prosecutors when asked about the missing funds. 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 by then. Some of the language Sun worked on was this line that has since become central to the government's case. Quote, title to your digital assets shall at all times remain with you and shall not transfer to FTCS trading. However, Sun testified that this did not represent a change for the exchange, that it was consistent with what FTC's policy had been throughout, as well as consistent with how Bankment-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 published online in May 2022. Sun testified that between August and September 2022, he was surprised to learn about Alamina's exemption from auto liquidation. He said he was told by another employee that Bankman Freed 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 FTCS was insolvent, He became aware of FTCX's misuse of customer funds when he was trying to help FTCS raise money from investment management firm Apollo Capital. In an Albany apartment with Bankman Freed, Singh, FTC's head of product Romnik Aurora, and SVF's father, Joseph Bankman, son poured over a spreadsheet detailing FTCS and Alameda's finances. It showed that FTCS was short $7 billion necessary to cover withdrawals from alarmed customers. And another tab delineated how much money Alameda's finances. 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, quote, vague. He said that Bankman Fried was typing on his computer and sometimes exiting to make calls. Meanwhile, he said, quote, Neshad was sitting there, His entire face was pale, gray. It looked like his soul had been plucked away from him. They sent this spreadsheet to Apollo. A few hours later, just before a meeting SPF was supposed to have with the asset management firm, he asked Sun, quote, for a legal justification as to why the funds were missing and at Alameda. The defendant's question confirmed Sun's suspicion that FTCS didn't have sufficient funds

to cover customer withdrawals and that Alameda had misappropriated FTCS customer to At 7 p.m. just before the meeting, the two took a walk in the Albany luxury community where Bankman-Food lived. Sun presented SPF 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 FTCs 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 it, yep, yep.

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 Aurora pulled numbers, showing that this potential justification would not be supported by the facts. SPF again responded, yep, yep. The last argument would have depended on whether FTCS had ever made clear what the legal relationship is between a.

a user and his or her assets. But Sun explained this justification would not be possible because, quote, FTC'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 Free's reaction to the news there was no legal justification, saying, quote, 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 Freed. The anchor pointed out that the terms of service prohibited FTCs from using customer assets. In the clip, SPF 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 Freed pauses for a moment, repeating Stephanopoulos's words back to himself in a whisper. Then he looks up, pauses again. Then says, quote, there existed a borrow-lend facility. And Stephanopoulos points out that people had to opt in for 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, especially 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. Quote, the terms in any dispute shall be governed by and construed in accordance with English law. Otherwise, testimony for the day ended with Robert Brerogherty. managing director of asset manager third point, who chronicled how Bankman Freed omitted significant details of FTAX'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 early in the trial, is now worthless, marked down to zero. The trial will resume in one week on Thursday, October 27th. That morning, the prosecution expects to rest, and Bankman-Fritz 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 SPF will take the stand. Thanks for tuning in to this recap of the SPF trial, and be sure to check back next Thursday for the first update on the defense.