Bankman-Fried sought ‘legal justifications’ for missing $7bn, former lawyer testifies

New York — Cryptocurrency exchange FTX’s former top lawyer testified on Thursday that its founder Sam Bankman-Fried asked him to come up with “legal justifications” for why it was missing $7bn in customer funds four days before the company declared bankruptcy.

Can Sun, FTX’s former general counsel, testified at Bankman-Fried’s fraud trial that the company on November 7 2022, asked investment fund Apollo for emergency capital to cover a wave of customer withdrawals.

After Apollo requested FTX’s financial statements, Sun testified, either Bankman-Fried or another executive sent him a spreadsheet indicating the cryptocurrency exchange was billions of dollars short of being able to satisfy customer withdrawals and that it also was owed billions of dollars by Bankman-Fried’s crypto-focused hedge fund Alameda Research.

“I was shocked,” said Sun, who testified under a non-prosecution agreement in the third week of the trial in Manhattan federal court.

Sun told jurors that after FTX shared the spreadsheet with Apollo, Bankman-Fried pulled him aside at the Bahamas luxury apartment complex where the 31-year-old former billionaire lived and told him Apollo had asked for a legal justification for the missing funds.

“He asked me to come up with legal justifications,” Sun testified. “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 said he told Bankman-Fried later that day that he could not identify any legal justifications. FTX declared bankruptcy on November 11 2022, leaving customers with billions of dollars of losses.

Apollo on Thursday declined to comment.

Sun’s testimony could complicate Bankman-Fried’s defence that he had a good-faith belief that Alameda’s use of FTX customer funds was appropriate.

Bankman-Fried stands accused of looting billions of dollars in FTX customer funds to make investments, donate to US political campaigns and prop up Alameda. Bankman-Fried has pleaded not guilty to two counts of fraud and five counts of conspiracy. He could spend decades in prison if convicted.

Prosecutors have said Bankman-Fried funnelled FTX customer funds to Alameda. The hedge fund then lent $2.2bn to Bankman-Fried and other executives, according to a document shown at trial on Thursday. The executives used those loans to make venture investments, buy real estate and donate to US political campaigns, according to prosecutors.

Sun also testified that Bankman-Fried told 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 said he was involved in “documenting” loans from Alameda to Bankman-Fried and the other executives, but he did not know they came from customer funds.

Sun said that after learning of the shortfall he questioned Bankman-Fried and former FTX engineering chief Nishad Singh about it, but did not receive straight answers. Sun said Bankman-Fried was “typing away on his computer” during the meeting, while Singh appeared pale.

“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 on Monday and Tuesday.

Singh testified that Bankman-Fried kept up profligate political spending and venture investing for months after it became clear FTX was short billions of dollars. Singh said he had been suicidal around the time of FTX’s collapse.

In cross-examination, Bankman-Fried’s lawyer Mark Cohen asked 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 pressed Sun on his decision not to quit in the summer of 2022, when he learnt Alameda was exempt from a procedure that automatically liquidated FTX customers’ positions if their trades were losing money.

Sun said he did not know that exemption was what enabled Alameda to withdraw billions of dollars from FTX until Singh told him on the night of November 7.

The trial is due to resume on October 26, when the prosecution is expected to rest its case.

Reuters