FTX Counsel: Sam Wanted "Legal Justifications" for Taking Customer Money - SBF on Trial Day 12

All right, y'all, it is day 12 of the Sam Bankman trial.

Today we got testimony from Can Sun; who was the General Counsel of FTX. This was interesting. We heard about a very inauspicious conversation that Can Sun, the general counsel, had with Sam, in which Sam asked Can to come up with legal justifications for the illegal shit he had done. I will tell you all about how that conversation went, how it ended, and where it went from there. It's kind of interesting.

We also heard today from Bob— I don't know how to pronounce his last name— Bob Boroujerdi, who was the managing director at Third Point Ventures, which is a venture fund that invested in FTX. We'll talk briefly about what came out there.

Before we dive into today's episode, I do need to give a huge shout-out and thanks to OpenSea, Ledger, and Web3Sense, who are our sponsors. You can go ahead and check out their stuff in the show notes below. Give them some support as they support me. And with that, I want to get right into today's show.

First up on the stand, as I mentioned, was Can Sun. He was the general counsel for FTX. He joined in August of 2021 and was General Counsel right through November of 2022, when he resigned because they were defrauding customers out of $8 billion. When he joined, one of the first things he worked on was an update to the FTX terms of service. That's right, we finally got to look at the FTX Terms of Service. This is something I've been seeing a lot of chatter about, both in the comments and online. It felt strange that we hadn't actually looked at the Terms of Service yet, but we finally did today.

So here's what you need to know: there was an update to the terms of service that was completed around September of 2021, but it didn't go live until May of 2022. One of the provisions that was added as part of that was very explicit language stating that digital assets were kept safe. When you deposited digital assets to FTX, they were yours. I'm going to read out some of this specific language, but it basically says everything that we intuitively felt to be true: your money deposited on the exchange was yours and was not allowed to be touched according to the terms of service by FTX. Some specific language here says...

The Terms of Service stated things like: "The title to your digital asset will at all times remain with you and will not be transferred to FTX Trading. None of your digital assets in your account are the property of, or shall or may be loaned to, FTX Trading. You control the digital assets in your account. At any time, you may withdraw your assets." These were statements made in the terms of service. 

Now, notably, this pertains to digital assets, which is distinct from fiat. The defense highlighted this in their cross-examination, pointing out a separate section detailing fiat. And it wasn't explicitly stated that when you deposited your fiat, it remained yours which I though was interesting. What Can Sun testified to, however, was that his understanding, and the general consensus, was that any money deposited remained yours and wasn't to be used by FTX. This was the representation made by Sam and others. 

We also examined another document today: the FTX Digital Markets' "Safeguarding of Assets and Digital Token Management" document. I believe this was compiled as they sought regulatory approval in the Bahamas, the US, and Canada. Can Sun testified that this was available to platform users upon request. For instance, if institutional investors or others sought more detailed information, this document was provided to them. 

Here are some things that we mentioned in this document: it says FTX Digital Markets, a subsidiary of FTX Trading. It was the Bahamas subsidiary, housing much of the infrastructure and payment systems that powered FTX. While it was wholly owned by FTX Trading (of which Sam owned the majority), it was technically a separate entity within FTX. For simplicity, I'll refer to it as FDM (FTX Digital Markets). 

"FDM emphasized their stringent commitment to safeguarding customer assets. They stated their responsibility for the safeguarding and segregation of customer assets from FDM assets. An interesting term that appeared multiple times in the document was "ring-fenced." Can Sun testified that this meant customer assets would be kept in separate accounts from FTX's own assets. This ensured that if FTX or FDM went bankrupt, customer assets would remain safe, allowing customers to retrieve their funds. Womp womp. Because FTX did go bankrupt, in case you didn't hear and customers have yet to recover their funds. 

We delved into this because it starkly contrasts with how the exchange was actually operated, revealing wild misrepresentations. We also looked at the margin trading policy within the terms of service. This section detailed provisions where money could be taken from your account if you opted into margin trading and engaged in specific activities using leverage. 

Interestingly, we found a provision around "clawbacks." Which is interesting because this is something that Sam had repeatedly said FTX never did. This is a system, common among crypto exchanges, where traders trading on margin who need to be liquidated can have their losses socialized among profitable traders. And so, a portion of the profits of other traders can be clawed back. And what's so interesting is that Sam was always so adamant that they didn't do claw backs, because they had this insurance fund, which we have spoke about on this show before. And they have these backstop liquidity providers which we have also talked about on this show before. So they had this risk waterfall where basically these BLP's were like the first line of defense in a situation where someone was loosing a lot of money. And then the insurance fund was the second line of defense. And the absolute last line of defense here was this clawback piece.

But Sam would verbally say all the time, we don't do clawbacks, we never do clawbacks, but we did see that there was the possibility for clawbacks in this in this margin trading section of the document. What's so funny about this is like Sam was so adamant they didn't do clawbacks, obviously, because it sounds like it's much better for customers, if your money can't be at risk, if you're profitable, and you can't be at risk for having any of those profits taken away, that obviously makes you feel better as a customer. And then this dude is out there, literally just putting your money into Anthropic; taking the most risks with your money of anybody of any of the exchanges! I mean, I guess we don't know that for sure. Who knows what CZ actually does with customer money, but oh my God!

Anyway, then we talked a little bit about how in August or September of 2022, Can Sun learned about some of the special privileges that Alameda had. So it was about a year into his tenure at FTX. And he was really upset. He learned basically that Alameda was exempt from auto liquidation. And they were the only customer on the exchange that had that exemption. And so he immediately demanded that changes be made that a plan was put in place where Alameda would just have like delays to their liquidation. So they wouldn't, it wouldn't be like that they couldn't get auto liquidated at all, there would just be delays to it. And Can Sun insisted that they then inform regulators about that policy. And all other large market makers on the exchange, get that same policy applied to them. Now Can says he did everything he needed to on the legal side to get all of that in place. But that it was then passed off to the business team to actually execute and implement. And as far as he knows, it was never executed or implemented.

Now, to be fair, FTX blew up two months after these conversations, or three months after this was discovered, and after Can made these demands. So it wasn't like a ton of time to actually make the changes. But obviously, it also seems somewhat likely that the changes never would have been made, because that was actually just the tip of the iceberg for the problems when it came to Alameda and FTX, which Can did not learn about until November of 2022.

Which brings us to what was by far the most interesting part of the testimony today. November of 2022, everything is starting to implode. In early November, Can was on a call with Ramnik Arora who was like he was I think his title is technically head of products. But he was really like head of finance. He did a lot of the investment stuff with Sam, like communicating with investors. So Ramnik Arora and Can Sun, were on a call with Apollo, who they were having a conversation with about potentially investing and specifically about getting basically emergency funding from as things were starting to blow up. And Apollo asked for financial statements from FTX, which Can Sun and Ramnik didn't have. So they then told Sam, and I assume, I don't know exactly the timeframe here, but a few hours later, Sam provides Can with financial statements to be sent to Apollo. And this is where Can testified that he received these financial statements. He was in a room, he was reviewing them in a room with Sam and Nishad, Ramnik Arora, and Joe Bankman, interestingly, and he says that was when he started to realize, Oh my gosh, like we've used customer money, he was reading these financial statements being like this doesn't make any sense. There's this $7 billion hole. Where did this come from? He said he would ask questions about specific line items or ask for more details. And he would either get no answer or he would get these very vague answers and he was like, Oh my gosh, and that's when it really hit him.

It's been interesting hearing from different employees and learning when it first hit them. What was going on like when they first found out like Nishad found out in September a couple months before Can did and it was like, Oh my God, what? So Can finds that out, sends the spreadsheets on to Apollo. And a few hours later, Sam approaches him and says, Hey, Apollo has gotten back to us. And they're asking for the legal justification for the money that's missing. So I need you to come up with a legal justification for why the money is missing. Can obviously didn't say exactly this in court, but was essentially like, What the fuck? What do you mean? Like, what is the actual reason the money is missing? Like, why is this money missing Sam? And of course, Sam didn't have an answer to that.

So a few hours later, Sam and Can go for a walk around their luxury Bahamas apartment. They're walking around the building, apparently. And Can is like, Yeah, dude, there's no legal justification for this. There are some theoretical reasons, some theoretical justifications for why we could have used customer money, but none of them stack up to the reality. And he proceeds to tell him the theoretical justifications, which were, number one, if there had been a prolonged period where FTX couldn't reach a customer, and they were inactive on the exchange, theoretically, FTX could charge a dormancy fee to that customer. Of course, they did not have nearly enough large, inactive customers on the exchange to justify an $8 billion hole.

It's weird, because they kept saying $7 billion today in court, which is why I think I've said it before, but $8 billion, what was missing to customers, I mean, it doesn't really matter to me if it's seven or 8 billion, but that that was kind of a strange thing that they kept saying 7 billion today, I'm going to use them interchangeably for the course for the sake of this episode.

So that was the first reason and he was like, but that doesn't check out at all. Like, clearly, that doesn't work. The second theoretical justification is that they have this borrow/lend program, which is part of this margin trading program. So if a user volunteers to lend money to other users, and they default, that could be a reason to take their money, or when they put up collateral as part of the margin program. They're, they're pledging assets. And so collateral they put up could obviously be taken away. But he had apparently, Can had gone to Nishad, and maybe Gary and a shot and somebody else and ask him to pull records around how many people were participating in the spot margin program. And as we'd heard, in previous testimony, he does not nearly cover all of the assets that were missing. So once again, he told him Sam this is theoretically a reason, but it does not actually hold up at all. And he Can Sun testified that Sam acknowledged that he was like, yep, yep. According to Can Sun, and said, he understood that.

And then finally, this one, Can said that some exchanges don't make it clear what the relationship is between the customer and the money they deposit. Once they've deposited money onto the exchange, basically saying, in theory, there are crypto exchanges that could take that money and say, Hey, we never said we weren't gonna take the money. But that was not the case in FTX, because Can Sun had written these nice buttoned up Terms of Service or had helped to write these nice buttoned up Terms of Service that went live in May of 2022, after Ken was hired as general counsel, because he thought that this is how they were operating. He thought they were on the up and up so he's like, I didn't think there were any problems with the nice up and up terms and service that I read wrote, of course, he didn't actually say that in court, but I'm imagining that's what he's thinking.

And so anyway, so then he says, Look, that would be the third reason but that also doesn't hold up here. And he said that Sam again acknowledged this and Sam seemed very unsurprised by hearing all of this so clearly like none of this was particularly news to him was Can's impression. Can also testify that he went for a walk with Nishad who seemed very nervous about everything. Can testified that during the group meeting that they had all had, he described Nishad as looking like his soul had been plucked from his body. He said Nishad was very pale. He looked like almost grey, like he was not doing well. And, and that he looked like his soul had been plucked from his body. And I know I shouldn't feel too bad for these people who did defraud all these customers, but my heart really goes out to Nishad, who didn't know about this until two months before it all blew up and then says he stuck around because he wanted to try and fix it. And he figured if he was there, that was the best shot at fixing it and making customers whole. And just by every account, this was somebody who felt really, really guilty about everything that was going on.

Okay. In any case, Can Sun proceeds to resign the following day and goes off. Now, what is interesting is we were then in court played a clip from Sam Bankman-Fried. Sam getting interviewed by George Stephanopoulos on Good Morning America. And I don't know if folks remember this or have seen this but it is so cringy and uncomfortable.

So George points out the terms of service to Sam and is like, what you said you weren't going to take their money and then it seems like you took their money. And Sam is very wishy washy and he's like and just seems like he didn't know what he's talking about. And then he's like, we did his borrow/lend program? And Can testified, Yes. That's one of the things I talked to him about as this theoretical explanation that didn't actually make sense. So I'm just imagining Sam having his general counsel tell him yeah, there's this theoretical thing that does not apply at all, in this case, and Sam's brain being like, dope. That's the thing I'm gonna say on national television, to George Stephanopoulos, and many millions of people, we're gonna go with that one, that thing that definitely does not stack up at all to the reality of the situation, according to my own general counsel. Like, what was he thinking, going on this media tour, like, we now played that in court, it makes him look guiltier or to the jury! Whatever, I'm never going to fully understand that the rationale to these things, but in any case, that was Can Sun's testimony.

And then we did also, as I mentioned, hear from Bob Boroujerdi today, whose last name I still don't know how to pronounce. And he was the managing director at Third Point ventures, as I mentioned, his testimony was was pretty brief. He basically talked about how he had had several calls, or at least one call that he had been on with Sam, prior to investing, they invested about $60 million with FTX. And that they had, as part of this conversation talked about the risk engine at FTX. And how it was so unique and special. This was part of that thing I described, like the BLP's is in the insurance fund. And also it was like automated in certain ways. And it was supposed to prevent there from being any sort of biases, because it was automated as opposed to being run by a human.

But of course, not disclosed to them was the fact that Alameda in the code was coded to have special privileges. So yeah, a code was running this thing. But when you code in special privileges, you're still bringing in human bias to the thing. So we testified that he was not told that Alameda had special privileges, but that he they did talk a lot about the risk engine, and how, in theory, nobody was supposed to have special privileges because of the risk engine.

And they also talked about the Alameda relationship with FTX more broadly. And they were told that Alameda was kept at arm's length. And these were two separate businesses and blah, blah, blah, all the usual stuff that we've heard Sam has said many times, apparently.

And of course, he then testified that had he known the reality of the situation had known that Alameda was given a special privilege within the risk engine system, and that they were very intertwined, they would not have invested and they would have not therefore lost their $60 million.

So that was that the cross examination lasted all about maybe five minutes. It was so quick. The defense counsel got up there, asked some question about "Were you aware that related parties could convert..." Well, I didn't even understand it. I was trying to write it down. And I still didn't understand it. And the witness clearly didn't understand it. And he's like, I don't know what you're talking about. Like I was aware that there were banks like Signature that would, you know, be involved in converting to stable coins and blah, blah, blah. And, and the defense counsel was like, that's not what I'm talking about. And the witness was like, I don't know what you're talking about. And I think the goal was just to make it look like the witness was confused by something and hadn't done proper due diligence, and I guess therefore hadn't really been defrauded, because it was just that they didn't understand things. I don't know any case, it lasted, like I said, maybe five minutes.

And then that was the day, just those two, court ended at one today. So we will be back next week.

We actually the court is out of session until next Thursday, but I am going to probably publish some extra little bonus things next week, because there's been so much for this trial, and I can't dive into all of it every day. So I'll probably put out some bonus pieces just diving into other parts of people's testimony that I think are interesting or worth knowing about. So hopefully y'all enjoy those. And I really appreciate all of the likes and comments and subscriptions and please keep that going. I love reading your comments.

And with that. Thank you all so much. I'll see you next week.