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- FTX’s former general counsel has revealed that founder Sam Bankman-Fried asked him to come up with “legal justifications” for why the exchange was missing billions.
- This revelation complicates Bankman-Fried’s defense that he believed the appropriation of funds in Alameda Research was justified.
Last week, the former general counsel made a damning revelation about co-founder and former CEO of Sam Bankman-Fried who faces decades in prison if found guilty. Can Sun, FTX’s former general counsel, has testified in front of the jury about the events that followed the wave of withdrawals in November 2022. Sun has revealed that Bank-Fried sought an investment fund from Apollo to be used as emergency capital to cover the overwhelming customer withdrawals.
Apollo Global Management, Inc., an American private equity firm that provides investment management was seemingly interested since Sun said that the firm asked FTX for its balance sheets. This quickly revealed that FTX was missing around $7 billion in customer deposits and that it was owed billions by its sister company Alameda Research.
Sun who was testifying under a non-prosecution agreement in the third week of the trial told the jury that it was after this that Bank-Fried singled out the counselor and asked him to come up with a legal justification for the missing funds. Sun later told the former CEO that he could not come up with any legal justification. In the end, FTX filed for bankruptcy on November 11th.
Sun further testified that Bankman-Fried had told him that the company had kept customer funds and company funds separately, justifying why he was involved in “documenting” loans from Alameda to Bankman-Fried and the other executives.
How Bad is this for the FTX Co-founder?
It is clear that the recent revelation is damning and complicates Bankman’s defense. In part, the co-founder’s defense is that he acted in good faith sending funds to or through Alameda Research. Documents have shown that Bankman-Fried transferred FTX customer funds to Alameda. The hedge fund then lent at least $2.2 billion to Bankman-Fried and other executives who would invest in real estate, make venture investments, and political donations.
His aforementioned question to the former general counsel indicates that he was aware that the money sent to Alameda Research was being misappropriated. Bankman-Fried has pleaded not guilty to two counts of fraud and five counts of conspiracy. If found guilty of these crimes, he faces decades behind bars.
In cross-examination, Bankman-Fried’s lawyer Mark Cohen pressed the counselor on FTX’s terms of service that stated users’ funds could be “clawed back” to cover other users’ losses. The lawyer further questioned Sun on his decision not to quit in the summer of 2022, when he learned that Alameda was exempt from a procedure that automatically liquidated FTX customers’ positions if their trades were losing money. Sun stated he did not know that exemption enabled Alameda to withdraw billions of dollars from FTX, only learning about it from FTX engineering chief Nishad Singh on Nov. 7.
