SBF’s post-collapse media tour came back to bite him in court

FTX’s terms of service could not be used to justify its decision to let sister company Alameda Research borrow billions in customer funds, former FTX general counsel Can Sun testified in the trial of Sam Bankman-Fried on Thursday morning.

Tasked with finding a way to explain FTX’s multibillion-dollar hole to a potential investor last November, Sun found three that could “theoretically” work, he said Thursday, but “none of them was supported by the facts.”

Now in its third week, Bankman-Fried’s trial has featured testimony from several former FTX executives. Cross-examination from defence attorneys has hinted at a couple lines of defence, including that Bankman-Fried’s decision-making relied on advice from company lawyers and that Alameda’s borrowing was technically allowed by FTX’s terms of service.

Sun’s testimony appeared to undermine both.

On the stand Thursday, Sun said he had never blessed FTX’s decision to let Alameda borrow FTX customer’s funds.

“Those funds belong to the customers, they don’t belong to FTX,” he said.

In fact, it wasn’t until August 2022 that Sun became aware of the backdoor in FTX software that allowed Alameda to rack up losses without having its positions closed, nor Alameda’s ability to borrow without limit, features that would eventually sink both companies.

“It went against everything we had told regulators and our users about our relationship to Alameda,” he said.

Sun said he considered resigning, but convinced Bankman-Fried and Zach Dexter, CEO of FTX subsidiary LedgerX, to replace Alameda’s ability to lose money without limit on FTX with a “delayed liquidation mechanism” and to offer the same to other major market makers.

That never happened, according to Sun.

Approaching Apollo

Facing a stampede of customer withdrawals on November 7, 2022, Bankman-Fried scrambled to plug the hole with an infusion of cash from investment firm Apollo Global Management.

Sun, still unaware of the size of the hole or why it was there, contacted Apollo and said FTX had a “liquidity problem” and needed money to honour customer withdrawals.

When Apollo asked for FTX’s financials on Nov. 7, Sun learned that Alameda had availed itself of its ability to borrow without limit, creating the multibillion-dollar shortfall.

“I was shocked,” Sun said Thursday.

Before investing, Apollo wanted to know if there was a “legal justification” for the money’s disappearance. That evening, Sun told Bankman-Fried that he was out of luck: nothing in FTX’s terms of service could explain why Alameda had been able to borrow — and lose — all that money.

Sun resigned the next day. Three days after that, FTX declared bankruptcy and Bankman-Fried relinquished control of the company.

SBF’s media tour

Just a couple weeks later, however, Bankman-Fried went on “Good Morning America” and defended himself using one of the “theoretical arguments” Sun had shared: Alameda was simply using FTX’s “borrow-lend facility,” which let users trade with leverage using other customers’ deposits.

Assistant US attorney Danielle Sassoon played a clip of Bankman-Fried’s “Good Morning America” appearance in court Thursday. In that clip, viewable at the 4:30 mark of the clip below, host George Stephanopoulos challenges Bankman-Fried’s assertion, citing the terms of service. Customers who wished to act as lenders in FTX’s borrow-lend facility had to opt in, according to the terms of service.

Sassoon asked Sun what he had told Bankman-Fried about using the borrow-lend facility to justify FTX’s deficits.

“It was not supported by the facts,” Sun said.

In other business, Bankman-Fried’s attorneys agreed to decide by Tuesday whether they will call witnesses of their own. If they do, they expect their case will last less than a week.

Aleks Gilbert is DL News’ New York-based DeFi Correspondent. Reach out to him with tips at aleks@dlnews.com.