Former FTX General Counsel Refused to Approve Client Fund Loan
Almost a year has passed, but the hidden intrigue and secrecy between FTX and its former employees remains intact. Ken Sun, who previously served as general counsel for Sam Bankman-Fried’s FTX, recently testified in the SBF criminal trial. Can Sun held this role from August 2021 until the once-dominant crypto exchange giant’s demise in November 2022.
To give context and understanding, here is a summary of what has happened so far. Sam Bankman-Fried is the founder and former CEO of FTX, a crypto exchange that has significantly dominated the crypto space by offering innovative products and services including tokenized stocks and prediction markets, along with Alameda Research, a sister company of FTX, which is the main Works as qualitatively as form. Cryptocurrency trading firm and liquidity provider, going forward to be one of the most influential crypto trading firms in the world. He was one of the most influential and highly respected individuals in the digital asset industry due to his expertise and knowledge in digital asset trading, as well as his entrepreneurial achievements with FTX and Alameda Research, and his commitment to philanthropy and philanthropy. This empire collapsed after FTX announced and filed for dissolution in November 2022 For Chapter 11 bankruptcy protection in the US.
FTX faced dissolution after a wave of user withdrawals due to growing concerns about the company’s alleged irregularities pushed it into financial turmoil. Confidential financial records were exposed, revealing discrepancies in the management of customer funds and confirming the company’s outstanding debts. FTX’s bankruptcy documents, which span 23 pages, revealed that the exchange had more than 100,000 creditors, with both assets and liabilities worth between $10 billion and $50 billion.
The catalyst behind the company’s crisis was an exposed financial statement that showed that as of June 30, 2022, Alameda, the sister company of FTX and Bankman-Fried’s trading unit, had $14.6 billion in assets against $8 billion in liabilities. . These assets include $3.66 billion of accessible FTT tokens, $2.16 billion labeled as “FTT collateral” and another $3.37 billion labeled as “crypto held.” Additionally, assets include $2 billion in equity securities, $863 million in restricted SOL tokens (the native token of Solana), $292 million in available SOL, and $41 million in SOL collateral. Specifically, the firm’s liabilities were dominated by approximately $292 million in reserved FTT and $7.4 billion in debt.
To make matters worse, the situation worsened on the evening of November 11, when approximately $663 million in crypto disappeared from FTX wallets. At the time, John Jay Ray had just taken over the role of CEO and confirmed the disappointing news, saying there had been “unauthorized access to specific assets.” According to Bitcoin Method journalists, it is believed that the thieves made away with approximately $477 million of the total missing amount, while FTX transferred the remaining amount to cold storage for additional security.
A little over a year later, the ongoing criminal trial against SBF has seen a number of people come forward to testify, including Can Sun – the former General Counsel who took the stand on the 12th day of the criminal fraud trial . Can Sun testified under a non-prosecution agreement, where he explained in detail and said that he was kept in the dark about many things happening within the company, including the company’s funds and how they were being handled.
During the trial, when questioned about whether Almeida authorized the use of FTX client funds, Mr. Sun replied firmly, “Absolutely not.” He also stated his belief, based on discussions with Bankman-Fried, that FTX client funds were separate from the company’s operating funds. Assistant U.S. Attorney Danielle Sassoon presented FTX’s terms of service and other public documents to the Sun, bolstering the Justice Department’s stance that FTX misappropriated customer funds.
Mr. Sun stressed the importance of separating FTX client funds from company funds, calling them “ring-fenced.” He presented records of the loan to FTX and Alameda officials, which conflicted with the DOJ document. He repeatedly explained his lack of awareness that customer funds were used for these loans.
In the spring of 2022, they became aware of Alameda’s North Dimension account, and by August 2022, they discovered Alameda’s exclusive access to FTX, separate from the automated liquidation processes. Sun proposed changing Alameda’s “no-liquidation mechanism” to a “delayed-liquidation mechanism” for the sake of transparency but the idea was never implemented.
Later, through conversations with Nishad Singh, Sun realized that the no-liquidation policy allowed Alameda to access significant FTX funds. Initially, the idea of any FTX client receiving preferential treatment was surprising to Sun, which contradicted the SBF’s public statements.
During the proceedings, Sun revealed a key meeting was scheduled for November 7, 2022, just days before the company’s dissolution. The purpose of this meeting with Apollo Capital was to address FTX’s liquidity concerns related to client withdrawals. When Apollo requested financial data, Sun obtained the necessary documents from FTX officials, which revealed a massive $7 billion loss in customer withdrawals. Concerned, Sun sought clarification from Singh and the SBF. Singh seemed impressed and SBF eventually responded after sharing the relevant spreadsheet with Apollo.
In an effort to gain clarity, Sun and Bankman-Fried discussed the matter during a walk. Sun expressed doubt that any legal argument would justify the absence of funds and Almeida’s involvement. Sun presented some possible explanations to the jury, such as “inactivity fees” for inactive customers and internal lending mechanisms for margin traders, although he acknowledged that these justifications were weak. During his conversation, Sun recalled SBF’s brief confirmation.
Sun’s testimony revealed that he was asked to find legal justification, adding to his suspicion that FTX lacked the funds needed for client withdrawals, with signs pointing to the misuse of these funds by Alameda. Prosecutors allege that Bankman-Fried wired FTX client funds to Alameda, and the hedge fund then loaned $2.2 billion to executives for various purposes.
While Sun documented these loans, he remained unaware of their origin from customer funds. Upon discovering the financial discrepancy, The Sun sought clarification from both Bankman-Fried and FTX’s former engineering head, Nishad Singh, but received no satisfactory answers. Singh’s testimony against Bankman-Fried earlier in the week revealed the extent of the financial irregularities and his emotional turmoil.
During cross-examination by Bankman-Fried’s attorney, Mark Cohen, Sun was questioned about FTX’s terms of service, which mentioned a possible “clawback” of users’ funds to compensate for the losses of others. Cohen also inquired about Sun’s decision to remain with FTX in 2022, particularly after learning of Alameda’s exemption from the auto-liquidation rule for FTX client positions. Sun said he was not aware of the exemption until Singh informed him on the evening of 7 November.
During the trial, host George Stephanopoulos presented an interview with SBF from Good Morning America. He questioned SBF about FTX’s terms of service, which explicitly state that client digital assets cannot be loaned to them, drawing parallels with Can Sun’s earlier arguments.
Stephanopoulos pressed, asking whether Alameda had crossed clear limits by borrowing from FTX depositors. SBF mentioned FTX’s lend-lending feature, although it could not pinpoint its exact location in the terms of service. Stephanopoulos pointed out that users are required to consent to such transactions, suggesting that they did not have consent in this case.
Assistant U.S. Attorney Danielle Sassoon then questioned Sun, asking if he had discussed the November 7, 2022, loan-lending facility with the defendant. The Sun confirmed and said he believed it did not align with the evidence. SBF accepted Sun’s statement. Sassoon concluded his questions by addressing Judge Lewis Kaplan.
The SBF criminal fraud trial is one for the books in the crypto world. That said, it is important to note that apparently the digital asset industry as a whole is functional and sustainable. However, the issues lie and arise with those who have bad intentions and actions that bring a bad name to the industry at large. As the industry grows, given this large-scale testing around FTX and SBF, we are bound to see the establishment of a strict legal framework. The trial is scheduled to proceed and conclude on 26 October 2023 where the prosecution will finalize its arguments.
///ENDS