Apollo Global Management’s hesitation to rescue FTX became evident when they uncovered billions in unaccounted-for customer funds, coupled with the exchange’s inability to provide legal explanations for the shortfall. In a federal court in New York, Can Sun, a former top lawyer in Sam Bankman-Fried’s cryptocurrency empire, revealed this development. Despite pleas from Bankman-Fried, Sun couldn’t discover any rationale for the diversion of customer funds to Alameda Research, an associated hedge fund. This revelation occurred shortly after a call with Apollo, just days before both FTX and Alameda declared bankruptcy. Sun broke the news to Bankman-Fried, FTX’s co-founder, during a later walk, and was surprised by Bankman-Fried’s nonchalant response. Following this disclosure, Apollo withdrew from discussions to finance FTX, opting not to comment on Sun’s testimony. A few days later, FTX collapsed.
During his testimony, Sun disclosed a non-prosecution agreement with the government. He maintained his innocence but acknowledged involvement in transactions that might have involved misappropriated customer funds in hindsight. Sun, 37, became the latest company insider to testify, bolstering prosecutors’ allegations that Bankman-Fried oversaw a significant fraud. Bankman-Fried is facing potential decades in prison, accused of directing the transfer of FTX customer funds to Alameda for high-risk investments, political contributions, and expensive real estate, ultimately leading both companies into bankruptcy. Sun clarified that he remained in the dark about the misuse of customer funds until the company’s final days. FTX was scrambling to raise capital in the days preceding its bankruptcy to address a surge in user withdrawal requests. They even reached out to rival exchange Binance Holdings Ltd. for assistance, although this effort didn’t yield results. In Sun’s testimony, it was revealed that they also approached Apollo. Sun testified that in November 2022, he and another FTX executive held a call with Apollo, which requested financial statements before making a decision.
Subsequently, Sun received a spreadsheet from either Bankman-Fried or another FTX representative, indicating a multi-billion-dollar customer fund deficit. Failing to protect users’ funds contradicted the platform’s representations to customers and regulators, according to Sun. Some customers, including Sculptor Capital Management, received false assurances about the safety of their assets in case of insolvency. Sun recounted interactions with Nishad Singh, FTX’s former director of engineering, around the time of the company’s collapse. Singh appeared visibly distressed during these encounters.
Additionally, Singh, former Alameda CEO Caroline Ellison, and FTX co-founder and former CTO Gary Wang, all testified against the cryptocurrency mogul, having pleaded guilty to criminal charges and cooperating with prosecutors in the hopes of receiving lighter sentences. Sun disclosed that he learned in August or September 2022 that Alameda enjoyed an exemption from a mechanism on the FTX exchange that automatically liquidated customer accounts lacking sufficient collateral. This exemption wasn’t extended to other users of the platform, leaving Sun shocked at the disparity between their representations to regulators and users regarding FTX’s relationship with Alameda. Sun attempted to have the special treatment for Alameda revoked but encountered opposition from Bankman-Fried and Singh. Eventually, some adjustments were made: Alameda would face delayed liquidation rather than total exemption, other significant customers would gain access to this benefit, and regulators and users would be informed of past misrepresentations.
However, FTX declared bankruptcy before implementing these changes. In November, Sun learned that the same mechanism exempting Alameda from liquidation also allowed the firm to access customer funds, contradicting the assurances he received from Sam Bankman-Fried in their previous conversations regarding the protection and segregation of customer assets.
