Apollo Global Management balked at FTX rescue over missing funds

Court hears of scramble to raise capital in the days before cryptocurrency company’s bankruptcy

FTX founder Sam Bankman-Fried leaves Manhattan federal court in New York after a hearing. Photograph:  Bebeto Matthews/AP
FTX founder Sam Bankman-Fried leaves Manhattan federal court in New York after a hearing. Photograph: Bebeto Matthews/AP

Apollo Global Management balked at a last-minute rescue of FTX after learning billions of dollars in customer funds were unaccounted for and the exchange wasn’t able to provide legal justifications for the shortfall, a former top lawyer at Sam Bankman-Fried’s crypto empire testified.

Can Sun, former general counsel of FTX’s international business, told federal court in New York that despite entreaties from Mr Bankman-Fried, he couldn’t find anything that would explain why the missing customer money had been channelled to Alameda Research, an affiliated hedge fund.

He’d been asked to come up with a possible justification after a call with Apollo occurring just days before both FTX and Alameda filed for bankruptcy.

He broke the news to Mr Bankman-Fried, FTX’s co-founder, that there was no justification while they took a walk a bit later.

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“I was actually expecting a bigger response but it was very muted,” Mr Sun, who joined FTX as a general counsel in August 2021, said at Bankman-Fried’s fraud trial. “He was not surprised at all.”

Apollo quickly pulled out of talks to finance FTX after learning of the exchange’s financial situation. The private equity firm declined to comment on Mr Sun’s testimony.

Days later, the crypto exchange imploded.

Mr Sun revealed during his testimony that he had a non-prosecution agreement with the government. He said he didn’t do anything wrong, but was involved in some transactions that in hindsight could have involved misappropriated customer funds.

The 37-year-old is the latest company insider to testify at the trial, bolstering prosecutors’ allegations that Mr Bankman-Fried oversaw a massive fraud.

Can Sun, former general counsel at FTX Cryptocurrency Derivatives Exchange. Photograph: Stephanie Keith/Bloomberg
Can Sun, former general counsel at FTX Cryptocurrency Derivatives Exchange. Photograph: Stephanie Keith/Bloomberg

Mr Bankman-Fried is facing decades in prison on charges that he directed the transfer of FTX customer money into Alameda for risky investments, political donations and expensive real estate before both companies spiralled into bankruptcy last year. Mr Sun said Thursday that until the company’s final days he was completely in the dark about the misuse of customer funds.

FTX was scrambling to raise capital in the days prior to its bankruptcy so that it could meet an uptick in user withdrawal requests – even asking a rival exchange, Binance Holdings Ltd. for help, a play that ultimately didn’t pan out.

But according to Mr Sun, the firm had also turned to Apollo.

Mr Sun testified that he and another FTX executive in November 2022 got on a call with the firm, which asked for financial statements before making a decision. Mr Sun said he later got a spreadsheet to provide to Apollo from either Mr Bankman-Fried or someone else at FTX. The spreadsheet showed that there was a multibillion-dollar shortfall in customer funds.

Failing to safeguard users’ money went against everything FTX had been telling its customers and regulators about the platform’s policies, Mr Sun said.

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Some customers, including hedge fund Sculptor Capital Management, had even received false promises that their assets would be safe in the event of an insolvency, he testified. Sculptor didn’t return a request for comment.

Mr Sun, who had previously worked at the law firm Fenwick & West, also described interactions he had with Nishad Singh, FTX’s former director of engineering, around that time the company collapsed. His “entire face was pale, grey,” Mr Sun recalled.

Mr Singh also testified against the crypto mogul earlier in the trial as did former Alameda chief executive Caroline Ellison and Gary Wang, FTX co-founder and former chief technology officer. All three have pleaded guilty to criminal charges and are co-operating with prosecutors in hopes of receiving lighter sentences.

Mr Sun said that in August or September 2022 he had learned that Alameda was exempt from a mechanism on the FTX exchange that automatically liquidated customer accounts if they didn’t have enough collateral to cover trading positions. The backstop applied to everyone else that used the platform.

“I was shocked,” he said Thursday. “It went against everything we have told regulators and our users about the relationship between FTX and Alameda.”

Mr Sun said he pushed for the special treatment to be revoked, but was told Mr Bankman-Fried and Mr Singh were opposed. Eventually some tweaks were agreed to: Alameda would be subject to a delayed liquidation rather than a total exemption; other large customers would get access to the same benefit; and regulators and users would be made aware of previous misrepresentations.

FTX filed for bankruptcy before any of those changes saw the light of day.

Mr Sun said that Mr Singh told him in November that that same mechanism exempting Alameda from liquidation also allowed the firm to draw on customer funds.

“In all my conversations with Sam [Bankman-Fried] it has always been represented to me that customer assets were protected and segregated,” Mr Sun testified. – Bloomberg