1.Can Sun — Direct/Cross/Redirect
1,417 linesUNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------x UNITED STATES OF AMERICA, v. 22 CR 673 (LAK) SAMUEL BANKMAN-FRIED, Defendant. Trial
New York, N.Y. October 19, 2023 9:32 a.m. Before: HON. LEWIS A. KAPLAN, District Judge APPEARANCES DAMIAN WILLIAMS United States Attorney for the Southern District of New York BY: DANIELLE R. SASSOON NICOLAS ROOS DANIELLE KUDLA SAMUEL RAYMOND THANE REHN Assistant United States Attorneys COHEN & GRESSER, LLP Attorneys for Defendant BY: MARK S. COHEN CHRISTIAN R. EVERDELL SRI K. KUEHNLENZ DAVID F. LISNER Also Present: Luke Booth, FBI Kristin Allain, FBI Arjun Ahuja, USAO Paralegal Specialist Grant Bianco, USAO Paralegal Specialist Anthony Imperato, USAO Paralegal Specialist
(In open court; jury not present)
JUDGE KAPLAN: Good morning, everyone.
MS. SASSOON: Good morning.
COURT CLERK: Please be seated.
JUDGE KAPLAN: Just before we get the jury, Andy. Did you work out an arrangement?
JUDGE KAPLAN: Yes. And notice to each other?
MR. COHEN: Yes, your Honor.
JUDGE KAPLAN: So what's the schedule?
MR. COHEN: There's one piece to it that we need to obviously——well, your Honor has to approve everything, but we now believe that if there's a defense case at all, your Honor, it will be one week or less. In light of that, we would——I think the government agrees with us that we will give them any rebuttal expert disclosures on October 23rd, and that we will disclose our other witnesses to them two days before they testify. The current status is that the trial will resume on October 26th, and I guess the government has some witnesses for that day. Our request for the Court is that if we could begin any defense case on the morning of the 27th. If the Court was okay with that, we would make our disclosures to the defense on the 25th.
JUDGE KAPLAN: What's the government's point of view about this?
MR. ROOS: So we oppose starting the next day, and the reason is, the government currently has three potential witnesses, were we to call any of them, for the 26th. One is an FBI Agent, and we proposed a stipulation to just eliminate him. One is an investor witness. The length of the first investor witness in this case was 30 minutes. One is a customer witness. The length of the last customer witness was about 20 minutes. So were the government to put on all three of those folks, I could see it being an hour and ten minutes. So I think it's wasteful to take a whole day, after we've had a break, to have the jury come in and then go home.
JUDGE KAPLAN: Look, ordinarily, Mr. Cohen, I would accommodate what you've asked except that you have almost a full week with no court here preceding the government's brief presentation on the 26th, and in those circumstances, I'm going to hold you to what you said last night, which was that you would be ready to start with any defense case as soon as the government rests. Obviously we have to deal with motions, but——so that's what we're going to do.
And I would appreciate it if counsel on both sides kept my chambers posted as you post each other about what disclosures have been made and witnesses that you intend to call and the like so that I know what is going to be happening on the 26th.
MR. COHEN: Your Honor, might I ask, if it's going to be the 26th, that we not be required to start any defense case until after the lunch break so we have——
JUDGE KAPLAN: That's okay.
MR. COHEN: ——a time certain.
JUDGE KAPLAN: That's okay.
Okay. Let's get the jury.
MR. ROOS: Judge, one other thing. You earlier in the week asked for our letters on jury instructions today by the close of business, and not to be cute about it, but I was wondering what time the close of business is.
JUDGE KAPLAN: 5:00.
JUDGE KAPLAN: And if they're going to be submitted in the form of a whole new set of proposed instructions, as opposed to——
COURT CLERK: Jury entering.
JUDGE KAPLAN: ——specific proposed changes, I'm going to have to have a redline with it, from whichever side does it that way.
JUDGE KAPLAN: All right.
(Continued on next page)
(Jury present)
JUDGE KAPLAN: Good morning, everyone.
The record will reflect that the defendant and the jurors all are present.
Members of the jury, I talked to you a little bit about the schedule yesterday. My current best estimate——subject to change always——is that the taking of testimony in the case will finish not later than November 3rd. If it were to finish on November 3rd, of course we would be into the beginning of the next week for your deliberations and the like, but we're now moving along a little faster than I had hoped.
Okay. Next witness for the government.
MS. SASSOON: The government calls Can Sun.
COURT CLERK: Sir, if you could please step around and raise your right hand.
(Witness sworn)
COURT CLERK: Thank you. Please be seated.
If you could please state your name and spell your first and last names for the record.
JUDGE KAPLAN: You may proceed.
MS. SASSOON: Thank you, your Honor. CAN SUN, called as a witness by the Government, having been duly sworn, testified as follows:
DIRECT EXAMINATION BY MS. SASSOON:
MS. SASSOON: Good morning, Mr. Sun. What is your profession?
MS. SASSOON: Where did you grow up?
MS. SASSOON: And I'll just ask you to slow down a bit.
Where did you go to law school?
MS. SASSOON: And what did you do after Yale Law School?
CAN SUN: First I worked at a boutique firm in DC doing human rights work; after that, I worked at Davis Polk here in New York; and after that, moved to Fenwick & West in Seattle.
MS. SASSOON: What kind of legal work did you do at these law firms?
CAN SUN: At the first boutique firm in DC I did human rights work; and at Davis Polk, I did corporate mergers, acquisitions, IPO work; and at Fenwick, I did startup and blockchain, crypto-related work.
MS. SASSOON: At any of these jobs did you practice criminal law?
MS. SASSOON: Did there come a time when you left the law firms for a different type of job?
MS. SASSOON: I believe you said, but can you just repeat when you joined FTX.
MS. SASSOON: What was your position when you joined FTX?
MS. SASSOON: What were your general responsibilities as general counsel at FTX?
MS. SASSOON: And what types of duties did that involve?
CAN SUN: Included licensing regulatory strategy, internal corporate work, everything from fundraising, cap tables, employment agreements, stuff like that.
MS. SASSOON: As part of your responsibilities as general counsel, were you involved in any work related to how FTX treated and dealt with customer assets?
MS. SASSOON: At any time as general counsel, did you approve lending FTX customer money to Alameda Research?
MR. COHEN: Objection.
JUDGE KAPLAN: What's the objection?
MR. COHEN: Leading.
JUDGE KAPLAN: Sustained.
MS. SASSOON: At any time as general counsel, Mr. Sun, what, if anything, did you approve related to lending FTX customer money to Alameda?
MR. COHEN: Same objection.
JUDGE KAPLAN: Overruled.
MS. SASSOON: And if you could just speak up a little bit, Mr. Sun. I want to make sure the jury can hear you.
MS. SASSOON: While you worked at FTX, did you have conversations with the defendant about how FTX treated its customer assets?
MS. SASSOON: And what, if anything, did the defendant tell you about how FTX received customer fiat or dollar deposits?
CAN SUN: That they were received, safeguarded, and segregated from FTX's customer funds——sorry——from FTX's proprietary funds.
MS. SASSOON: And you mentioned that the defendant told you that customer funds were segregated from FTX proprietary funds. What did you mean by FTX proprietary funds?
CAN SUN: So FTX's own funds as a company, funds that it uses to pay for bills, to pay for, you know, website services, pay vendors, those were FTX's own funds. FTX customers' funds were always separated from those.
MS. SASSOON: And you referred to the defendant telling you that FTX customer funds were segregated from proprietary funds. What does "segregated" mean?
MS. SASSOON: What did you understand was the purpose of segregating customer funds from FTX proprietary funds?
MS. SASSOON: And when you say "misappropriated," what do you mean by that?
MS. SASSOON: Did you at any time observe public statements by the defendant about how FTX treated customer assets?
MS. SASSOON: In what forums?
CAN SUN: On Sam's tweets; his public congressional testimonies; his, you know, statements to investors; to regulators; other conversations.
MS. SASSOON: And what kinds of things do you recall observing the defendant say publicly about how FTX treated customer assets?
MS. SASSOON: You talked about customer dollar or fiat deposits. What, if anything, did the defendant tell you about how cryptocurrency deposits were received at FTX?
CAN SUN: They were received and kept in an omnibus wallet for all customer funds that was separated from FTX's own proprietary funds as well.
MS. SASSOON: And just to be clear, is that what the defendant told you?
MS. SASSOON: And you mentioned——
JUDGE KAPLAN: I didn't hear that. I'm sorry. I didn't hear an answer.
JUDGE KAPLAN: Thank you.
MS. SASSOON: You mentioned that the defendant described an omnibus wallet for customers. What do you mean by an omnibus wallet?
CAN SUN: Right. So say if two customers each had one Bitcoin and they deposit it into the platform. We would not have one Bitcoin wallet for each customer; instead, we would keep both of those customers' assets into one combined wallet, so that one wallet would have two Bitcoins, but that is all customer assets and it is separated from all of the remaining FTX proprietary assets.
MS. SASSOON: As general counsel of FTX, were you familiar with something called the key principles of FTX?
MS. SASSOON: And what were those?
MS. SASSOON: So before you recite them, can you explain what we're talking about when we talk about the key principles.
CAN SUN: Sure. So Sam was on a movement to create a sensible regulatory framework for regulating the crypto industry, and so as part of that framework, FTX had a list of five investor——sorry——key principles for investor protection, things like market manipulation, things like market integrity, prevention of financial crimes, safeguarding of customer assets, and I can't remember the last one off the top right now.
MS. SASSOON: And these principles, were they documented?
MS. SASSOON: How were they documented?
CAN SUN: It was on FTX policies website; it was in Sam's testimony to Congress; and we also described it in various forums with regulators we were working with around the world.
MS. SASSOON: And so based on your work with the defendant, what's your understanding of his role in crafting and disseminating these key principles?
MS. SASSOON: And what do you recall, at a general level, about what these key principles said about the treatment of customer assets?
MS. SASSOON: As general counsel of FTX, did you get questions from regulators about how FTX handled customer deposits?
MS. SASSOON: And what about from FTX customers?
MS. SASSOON: And did you respond to those inquiries?
MS. SASSOON: And how did you get the information to respond to those inquiries?
CAN SUN: Based on the information that Sam gave me, based on information I got from other management at FTX, from the finance team, and obviously all of the public statements that we had talked about earlier.
MS. SASSOON: And so what types of things were you saying to regulators and customers about how FTX treated customer assets?
MS. SASSOON: Did you personally verify how customer dollar or crypto deposits were treated by FTX?
MS. SASSOON: Were you involved in any way in monitoring FTX's bank accounts?
MS. SASSOON: Did you have login access to the bank accounts or the wallets?
MS. SASSOON: You've talked about how assets were received. What, if anything, did the defendant tell you about how customer deposits were treated upon being received into FTX's accounts or wallets?
MS. SASSOON: Why don't we start with fiat.
CAN SUN: So fiat, it would be transferred into what we call FBO bank accounts held by FTX at various financial institutions and, again, separated from FTX's own proprietary assets.
For crypto assets, they would come in to what we call a sweep wallet and then combined into an omnibus wallet and also separated and segregated from FTX's own proprietary assets.
MS. SASSOON: You mentioned a term called an FBO account. What does that mean?
CAN SUN: For the benefit of. Basically where a bank account is owned in the name of one entity but that entity does not actually have beneficial ownership of the funds in that account, and the funds in that account are actually held for the benefit of others——in this case, FTX's customers.
MS. SASSOON: Yes or no: In your role as FTX's general counsel, did you have expectations about how customer assets should be treated?
MS. SASSOON: And if you could just speak up. I see you're nodding, but——
MS. SASSOON: And what were the expectations you had about how customer assets should be treated based on?
CAN SUN: What is it based on? So my understanding is FTX protects, safeguards customer assets a hundred percent, and it was based on, you know, my conversations with Sam, conversations with other management, conversations with the finance team, FTX's general standing in the industry, our regulatory requirements, Sam's public statements. Everything was unequivocably that FTX protects customer assets a hundred percent.
MS. SASSOON: Did you believe that FTX customer deposits could permissibly be commingled with other funds of the business?
MS. SASSOON: And why not?
MS. SASSOON: Based on your conversations with the defendant, what was your understanding about how, if at all, FTX could use customer assets?
MS. SASSOON: And what does that mean?
CAN SUN: So if the customer wants to trade it, they can trade it; if they want to withdraw it, they can withdraw it; but nothing else.
MS. SASSOON: And what was your understanding as to whether FTX could borrow customer money without express authorization?
MS. SASSOON: What about whether Alameda could borrow customer money without express authorization?
MS. SASSOON: When you say "none whatsoever," what do you mean?
CAN SUN: So there's——there's none. There's none. There's, you know, there's a borrow-lending program. If a user wants to voluntarily, affirmatively choose to lend out their assets on the platform, Alameda or other borrowers could borrow it, but without express authorization from the user that they want to, let's say, lend out their funds, neither FTX, Alameda, or anyone had any rights to those assets because it belongs to the user.
MS. SASSOON: While you worked at FTX, were you aware of an entity called North Dimension?
MS. SASSOON: What did you know about North Dimension based on your work at FTX?
CAN SUN: First time I saw it I think was in the spring of '22. I was putting together an organization chart showing the different FTX and Alameda entities. I saw that entity, wasn't sure what it did, asked our finance team, and they mentioned that it made some payments on behalf of FTX——of Alameda.
MS. SASSOON: Were you aware whether North Dimension was receiving customer deposits of FTX into its bank account?
MS. SASSOON: And were you aware, prior to November 2022, of Alameda receiving FTX customer deposits into its bank accounts?
MS. SASSOON: As general counsel, would you have approved of Alameda receiving FTX customer deposits?
MR. COHEN: Objection.
JUDGE KAPLAN: Sustained.
MS. SASSOON: If you had been told that Alameda was receiving FTX customer deposits, would that have raised concerns for you as general counsel of FTX?
MR. COHEN: Same objection.
JUDGE KAPLAN: What is it? What is the objection?
MR. COHEN: Calls for speculation and hypothetical.
MS. SASSOON: Your Honor, he was the general counsel.
JUDGE KAPLAN: Yes, I understand.
MR. COHEN: The phrase begins "If you had been told."
JUDGE KAPLAN: Sustained.
BY MS. SASSOON:
MS. SASSOON: While you worked as general counsel at FTX, were you aware of an account within the FTX database called the fiat@ftx.com account?
MS. SASSOON: Did there come a time when you started working on terms of service for FTX?
MS. SASSOON: What are terms of service?
CAN SUN: It is a legal document that sets out the rights and responsibilities of FTX and our users, how they relate to each other.
MS. SASSOON: As you understood it, were the terms of service the only place where FTX spelled out the company's obligations to customers?
MS. SASSOON: Where else did the company spell out its obligations to customers?
CAN SUN: FTX had a variety of other documents. For instance, on our Zendesk help page, there was literally dozens of articles spelling out how our liquidation program works, how market maker program works, and obviously that's in addition to public statements made by Sam, his tweets, his congressional testimonies, and stuff like that.
MS. SASSOON: As far as you know, were the terms of service accessible on the FTX website?
MS. SASSOON: And can we please pull up Government Exhibit 587, which is in evidence.
MS. SASSOON: Do you recognize this?
MS. SASSOON: What is it?
MS. SASSOON: And as far as you know, did a customer have to agree to the terms of service to open an account?
JUDGE KAPLAN: Well, I'm going to strike the answer and ask you to rephrase the question, because "as far as you know" leaves this pretty delphic.
MS. SASSOON: Yes.
MS. SASSOON: Were you familiar with how this page operated in terms of setting up an account?
CAN SUN: Yes. So the user has to type in an email, a proposed password, and click to agree to the FTX terms of service in order to create the account.
MS. SASSOON: How do you know that?
MS. SASSOON: Around when did you work on the terms of service?
MS. SASSOON: And what was the status of FTX's terms of service when you started working on them?
MS. SASSOON: And just to be clear, were there terms of service already in place for the company at that time?
MS. SASSOON: And so the terms of service that you were working on, how did they relate to the preexisting terms of service?
MS. SASSOON: And why were the existing terms of service being replaced?
CAN SUN: We were getting licensed in the Bahamas, and in order to comply with regulatory requirements. And also, the older terms of service, which I did not draft, as I understand it, was more of a, you know——more for a startup company. As we were growing bigger, we wanted a more robust set of terms and conditions.
MS. SASSOON: What was the defendant's role, if any, in finalizing these terms of service that you reviewed?
MS. SASSOON: How did the defendant approve those terms of service?
CAN SUN: When we were going to go live with the terms of service in May of '22, we created a——a chat group, and I notified everyone in the group, including Sam, that basically we were going to go live with the new terms of service, we were going to move all customers to FTX Bahamas, and he approved of it.
MS. SASSOON: You said that the terms of service were going live in May of 2022. When was the language of these terms of service actually finalized?
MS. SASSOON: Did the terms of service that you reviewed have a provision on the use of customer assets?
MS. SASSOON: Or the treatment of FTX customer digital assets.
MS. SASSOON: At this time the government offers Government Exhibit 558 pursuant to stipulation 2000, which the parties have stipulated is FTX terms of service dated May 13, 2022. The government is not offering this document or the statements in it for their truth but for their effect, if any, on readers of the terms of service.
MR. COHEN: No objection, your Honor.
JUDGE KAPLAN: Received on a limited basis stated by counsel.
(Government's Exhibit 558 received in evidence)
MS. SASSOON: Can we publish Government Exhibit 558, please.
MR. COHEN: Your Honor, may we briefly be heard at sidebar?
JUDGE KAPLAN: Yes.
(Continued on next page)
(At the sidebar)
MR. COHEN: Your Honor, we would also ask that they be admitted as a verbal act and not just for the effect on the listener. It's something I'd like to cover in my exam, and I figured we could deal with it now since it's been put in, your Honor.
JUDGE KAPLAN: What exactly do you mean and what significance would doing or not doing what you ask have?
MR. COHEN: Well, what we plan to do——I don't know what counsel is going to do, but I assume she's going to call out certain sections of the terms of service and ask the witness about them, and we would like to do the same thing, not to say that what the sections relate to was actually done but that——
JUDGE KAPLAN: Not to say that the sections?
MR. COHEN: In other words, not that the contract terms——calling out the contract terms means the performance was actually made or not made but simply that this is what they say.
MS. SASSOON: Two things, your Honor.
One, it's the government's direct exam right now so if the defense wants to admit an exhibit or for another purpose, it's not the appropriate time.
But two, what counsel described is also not a purpose for the document's truth, as I understood his explanation, and so the limited purpose of not offering it for its truth is not undermined by what counsel just described.
JUDGE KAPLAN: I'll leave this for cross.
MR. COHEN: Okay.
JUDGE KAPLAN: If there's anything to do here, I'm puzzled by what you're doing with this, but that's another matter.
MS. SASSOON: With the terms of service?
JUDGE KAPLAN: Yes. But I'll listen.
MR. COHEN: Okay.
JUDGE KAPLAN: I mean, counsel, I trust you understand my ruling that legal import of the terms of service is, in all likelihood, a question of law for me, it's not a jury question.
MS. SASSOON: Yes, your Honor. I do think, to the extent that this was disseminated to users of FTX, what's in there is potentially relevant for its effect on the listener. To the extent the defendant was aware of certain provisions, it will be relevant to his state of mind, and to the extent that these provisions are consistent with discussions that the witness had with the defendant, that's also relevant to the defendant's state of mind. So Mr. Sun reviewed these terms of service, he thought that the provisions about the treatment of customer digital assets was consistent with company policy, and he therefore approved this terms of service.
JUDGE KAPLAN: Okay. You have a different view, Mr. Cohen?
MR. COHEN: I'm going to listen to the direct, your Honor.
JUDGE KAPLAN: Okay.
MS. SASSOON: One more thing, your Honor, just for clarity. We also plan to ask this witness about a provision that the defense highlighted in its opening because they opened on it, they're making an argument about a provision here, and so we want to contextualize it.
JUDGE KAPLAN: I'll listen.
(Continued on next page)
(In open court)
MS. SASSOON: Mr. Imperato, if we could publish Government Exhibit 558.
BY MS. SASSOON:
MS. SASSOON: Mr. Sun, what is this? And just make sure the mic is positioned so that we can all hear you.
MS. SASSOON: And which version of the terms of service?
MS. SASSOON: And are these the terms of service you described the defendant approving?
MS. SASSOON: If we could go to page 10, and look at provision 8.2.6.
MS. SASSOON: Mr. Sun, is this a provision that you reviewed in the course of finalizing the terms of service?
MS. SASSOON: I want to direct your attention to (A), which says, "Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading."
First of all, what is FTX Trading?
MS. SASSOON: And so how does this entity relate to ftx.com, the international exchange?
MS. SASSOON: And where it says, "Title to your Digital Assets shall at all times remain with you," what did you understand that to mean?
CAN SUN: It means when a user deposits their assets onto the exchange, they continue to own those assets.
MS. SASSOON: Directing your attention to provision (B), do you see where it says, "None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading"?
MS. SASSOON: How does the language there correspond to discussions you had with the defendant about the treatment of FTX customer assets?
MS. SASSOON: How so?
CAN SUN: That customer assets, when deposited onto the platform, continued to belong to the customers and FTX has no rights to customers' assets.
MS. SASSOON: No. (C), it says, "You control the Digital Assets held in your Account." What does it mean to control the digital assets in your account?
CAN SUN: You can choose to do whatever you want with the assets; you can withdraw it, trade it, lend it, you know, do whatever you want with it.
MS. SASSOON: "Digital Assets," what does that mean?
MS. SASSOON: So this paragraph does not mention fiat currency. Did you understand fiat currency to be treated differently by the exchange?
MS. SASSOON: As far as you know, did this provision, 8.2.6, regarding Digital Assets, exist in prior versions of FTX's terms of service?
MS. SASSOON: And in your view as general counsel, did the addition of this exact language represent a change in FTX policy?
MR. COHEN: Objection.
JUDGE KAPLAN: Overruled.
MS. SASSOON: And so how do you explain the addition of this provision?
CAN SUN: Again, it was fully consistent with FTX's policy throughout. I like to make everything clear so the user knows, you know, that assets deposited on the exchange continued to be owned by them.
MS. SASSOON: So when was this language in the terms of service actually finalized?
MS. SASSOON: And at that point, in September 2021, did you consider the obligations set out here to be an existing FTX policy?
MS. SASSOON: Okay. We can take this zoom-out down and go to page 16.
MS. SASSOON: And I want to direct your attention to what is titled Section 16. Do you see where it says "MARGIN TRADING"?
MS. SASSOON: And do you see at the top, 16.1 says, "This Section 16 applies only to the extent you are permitted to engage in margin trading on the Platform"?
So if a customer was not doing margin trading on FTX, did this section apply to that customer?
MS. SASSOON: Let's go to a subsection of Section 16, MARGIN TRADING, on page 17, provision 16.4.
So first of all, is 16.4 within the Section 16 called MARGIN TRADING?
MS. SASSOON: And so does this provision apply only to people doing margin trading?
MS. SASSOON: Are you familiar with this provision?
MS. SASSOON: Just looking at the first sentence, it says, "Under certain market conditions, it may become difficult or impossible to liquidate a position."
As general counsel, did you hear the defendant describe FTX's liquidation protocols?
MS. SASSOON: And based on what the defendant described, what did you understand to be the procedure for liquidating positions on the FTX exchange?
CAN SUN: So it is a multistep process. The first step happens is, if your collateral——if the value of your account on the exchange starts to decrease and it hits 3 percent of your position size, that's when FTX's trading engine starts to liquidate you on the market. If the market moves further adversely to you, it goes further down. Let's say your collateral, your value of your account drops to 1.5 percent of your total position, notional size, then what happens is, your positions are now moved to what we call backstop liquidity providers, which are basically large market makers on the exchange who signed up to accept these positions. Now if it goes even further negative and the backstop liquidity program is not able to actually take on these positions, then there's an insurance fund that kicks in, which is basically money that is set aside specifically for the purpose of covering these losses that cannot be satisfied on the platform. And if that insurance fund gets depleted, runs out, then there would be, you know, socialized losses. But it has been FTX's consistent position that they have never depleted the insurance fund, we have never clawed back users, and we have no intention of clawing back users as well. It was one of FTX's main marketing and selling points.
MS. SASSOON: So what you just described, are those things that you heard the defendant talk about?
MS. SASSOON: And where did you hear the defendant describing FTX's liquidation engine and the selling points of that engine?
CAN SUN: So it comes up in conversations with regulators, our regulators around the world who asks us about our liquidation and margin programs; it comes up in questions from our users who asks about, you know, how our liquidation waterfall works; it's something that a lot of large traders are very much focused on because many other crypto exchanges do not have a good liquidation program, and FTX won a lot of customers because, you know, we marketed it as having a really good program, you have an insurance fund that's never been depleted, we've never done clawbacks.
MS. SASSOON: I want to break that down a little bit.
First of all, you said this was a selling point for the exchange. Why was this a selling point?
CAN SUN: So other crypto exchanges have had a lot of these losses in the past basically where you have positions stuck in the system that are in the negative that they have not been able to liquidate, and so what other exchanges do——and there's a whole, you know, variety of ways as to how they do them——is they would take people who make money in those markets and give it to the people who lost money, to cover the losses. That is typically known as a clawback——people who make money had their profits taken away from them. And you can imagine that this is not something that traders like. And so FTX prided itself on the lowest rate of liquidations, on having an insurance fund, has never been depleted, and not doing clawbacks.
MS. SASSOON: You talked about an insurance fund. Based on the defendant's statements, what did you understand was the insurance fund?
CAN SUN: I understand that it was $250 million sitting on the ftx.com exchange and made readily available to cover losses.
MS. SASSOON: And I think you said earlier that you understood that the insurance fund was money that was set aside. Why did you understand that that money had been set aside?
CAN SUN: Sorry. Why did I understand that money had been set aside? It was a program created specifically for that purpose.
MS. SASSOON: And what, if anything, did the defendant tell you about how the insurance fund had been used over time?
CAN SUN: It started small, obviously, but it, you know, it grew as FTX grew, and one of the key things I remember is that the maximum drawdown from the insurance fund, meaning payouts to cover losses from the insurance fund, is less than the profits made by FTX on that day.
JUDGE KAPLAN: And just for the sake of clarification, this insurance fund did not involve any insurance in the normal sense of buying a policy from MetLife or John Hancock or Fireman's Fund; is that right?
JUDGE KAPLAN: Thank you.
BY MS. SASSOON:
MS. SASSOON: And just to be clear, your understanding that——can you repeat your understanding about the drawdowns from the insurance fund and explain that.
CAN SUN: Sure. So when there are these losses that couldn't be liquidated into the system, there would be payouts from the insurance fund to cover those losses, and, you know, what I learned is that the maximum payout from the insurance fund on any given day, since FTX started, is less than the amount of money that FTX made on that day.
MS. SASSOON: And just to be clear, where did you learn that from?
CAN SUN: From Sam; it was written on our FTX policy website; it was in a lot of our regulator communications.
MS. SASSOON: Did you personally verify that?
MS. SASSOON: And if we could pull this exhibit back up and look at——zoom in on 16.4, please.
MS. SASSOON: The last sentence here says, "In addition, even if you have not suffered any liquidations or losses, your Account balance may be subject to clawback due to losses suffered by other Users."
In your conversations with the defendant, what, if anything, did he say to you about clawbacks?
CAN SUN: So I've not discussed the specific provision, to my recollection, with Sam, but when I talked to Sam about clawbacks, he's always made it clear that FTX does not claw back money from users.
MS. SASSOON: And what, if anything, are you aware of that the defendant said publicly about clawbacks?
MS. SASSOON: And so you said that you don't recall discussing this provision with the defendant. Did he ever say anything to you that suggested he was aware of this provision?
MR. COHEN: Objection, leading.
JUDGE KAPLAN: Sustained.
MS. SASSOON: In your discussions with the defendant, what, if anything, did he ever say to you about this provision, specifically?
MS. SASSOON: And how does this last sentence in 16.4 compare to the defendant's public statements about clawbacks?
MR. COHEN: Objection.
JUDGE KAPLAN: Sustained.
MS. SASSOON: Your Honor, he described hearing public statements about clawbacks.
JUDGE KAPLAN: I understand, and he told us what he heard.
MS. SASSOON: Okay. Now we can take this down.
BY MS. SASSOON:
MS. SASSOON: You talked about liquidations. Did there come a time when you learned that Alameda Research was exempted from auto-liquidation?
MS. SASSOON: When was that?
MS. SASSOON: And when you learned this, what was your recollection to that?
CAN SUN: I was shocked. It was——it went against everything we had told regulators, told our users about the relationship between FTX and Alameda, and I asked for it to be removed.
MS. SASSOON: When you asked for Alameda's exemption from auto-liquidation to be removed, what were you told?
CAN SUN: I was told that the no-liquidation carveout for Alameda had never been triggered and——but Sam and Nishad did not want to remove it.
MS. SASSOON: And how did you know that Sam and Nishad did not want to remove it?
MS. SASSOON: And what did you understand happened next?
CAN SUN: I pushed for it to be removed, continuously, and we got them to agree to remove it and do a couple things: (1) it would be replaced by a delayed-liquidation mechanism instead of a no-liquidation mechanism; (2) we were going to make it clear to all of the regulators, all of our users who had been, you know, misrepresented in the past, that this program is in place; and (3) we were going to offer the program on a nondiscretionary basis to all large market makers on the platform.
MS. SASSOON: And as far as you know, were those changes actually implemented prior to November of 2022?
CAN SUN: I had done everything on the legal side of things to make it happen, but as I understand it, it was stuck on the business side of things.
MS. SASSOON: So is that a no?
CAN SUN: No. Yes. So it didn't——as far as I know, it was not put in place by the time FTX collapsed in November.
MS. SASSOON: And at that point did you have any indication that as a result of the exemption from auto-liquidation that Alameda was using FTX customer funds?
MR. COHEN: Objection.
JUDGE KAPLAN: Sustained, at least as to form.
MS. SASSOON: Now, Mr. Sun, if Alameda was exempted from auto-liquidation, would that have been relevant to your views about the risks associated with potential losses on the exchange?
MS. SASSOON: How so?
CAN SUN: So when losses occur, if you have a margin-leveraged trading system, the way to prevent these losses is to liquidate the user before their account value goes negative. So just to maybe use a basic example, you have $10,000, you get a 20,000 Bitcoin position. Bitcoin falls from 20,000 down to 5,000, you know, normally you would have a minus 5,000 account balance. Now if you're just trading on the exchange and you have a minus 5,000 account balance, you're not going to bring your assets from out of the exchange onto the exchange just to cover that hole, so the way to prevent that from happening is before your account goes even a single dollar negative, when you're at 1.5 percent, you would liquidate that position by basically selling it to other people. Now if Alameda is exempt from this no liquidation——it's exempt from liquidation, that would mean that Alameda could go infinitely negative and there would be nothing to prevent those losses from being, you know, stuck on the system.
MS. SASSOON: Now at that point when you learned about this exemption, what, if anything, were you aware of with respect to Alameda using customer funds?
MR. COHEN: Objection.
JUDGE KAPLAN: What's the objection?
MR. COHEN: Leading.
JUDGE KAPLAN: Overruled.
MS. SASSOON: And as far as you know, were customers ever informed that Alameda had been exempted from auto-liquidation?
MS. SASSOON: Once the terms of service that we looked at went live in May of 2022, what did you do with the terms of service?
CAN SUN: It was uploaded onto our website. It replaced the prior terms of service. We notified our institutional investors of the change in the terms of service, and since then, between May and November, when FTX collapsed, we made a few more updates to comply with local regulatory requirements.
MS. SASSOON: You mentioned institutional investors. Are those customers of the exchange?
MS. SASSOON: And what's an institutional customer?
CAN SUN: So there are two types of customers on the exchange. One is, you know, a natural person, so like an individual; the other one is like corporate entity, and we typically refer to those as institutional customers.
MS. SASSOON: And did your job responsibilities include some communication with institutional customers of FTX?
MS. SASSOON: What is Sculptor?
CAN SUN: Sculptor is one of the institutional customers on the exchange who requested changes to our terms of service.
MS. SASSOON: Mr. Imperato, can you please show the witness what's been marked as Government Exhibit 326.
MS. SASSOON: And do you recognize this email?
MS. SASSOON: Are you on this email exchange?
MS. SASSOON: And who are you communicating with on this email?
MS. SASSOON: The government offers Government Exhibit 326.
JUDGE KAPLAN: Received.
(Government's Exhibit 326 received in evidence)
MR. COHEN: Your Honor, can we have a limiting instruction as to, other than Mr. Sun, the speakers.
JUDGE KAPLAN: Give me a moment to read it.
Can you enlarge it, please.
MS. SASSOON: None of this is being offered for the truth, your Honor, but just for the fact that it was said to Sculptor.
JUDGE KAPLAN: That resolves your objection, doesn't it, Mr. Cohen?
MR. COHEN: It does, your Honor. Thank you.
JUDGE KAPLAN: Okay. Received on that basis.
BY MS. SASSOON:
MS. SASSOON: Mr. Sun, do you——
MS. SASSOON: Mr. Imperato, can you please publish Government Exhibit 326.
MS. SASSOON: And Mr. Sun, do you see that this is an email thread on May 13, 2022?
MS. SASSOON: And who generally are the participants in this email exchange?
CAN SUN: So generally speaking, when a customer requests modifications to our terms of service, they would reach out to our institutional BD team, who would then refer it either to myself or someone else on the legal team.
MS. SASSOON: And so are you on this email exchange?
MS. SASSOON: And are there representatives of Sculptor on this email exchange?
MS. SASSOON: May 13, 2022, what happened on that date?
CAN SUN: Our new terms of service was published that became the governing terms of service going forward.
MS. SASSOON: And if I could direct your attention to the bottom email from cansun@ftx.com. On May 13, 2022, you wrote, "Hi, Elise." Where did Elise work?
MS. SASSOON: And in this email, you wrote, "Our new terms of service just went online today." And what is the link that you included there?
MS. SASSOON: And we can take that down.
At this time, Mr. Imperato, can you show the witness what's marked as Government Exhibit 514.
MS. SASSOON: Who are the participants in this email exchange, Mr. Sun?
MS. SASSOON: Your Honor, the government offers Government Exhibit 514, not for its truth.
MR. COHEN: May we be heard at the sidebar, your Honor?
JUDGE KAPLAN: Yes. But somebody please bring up a hard copy.
(Continued on next page)
(At the sidebar)
JUDGE KAPLAN: What's the issue here?
MR. COHEN: Your Honor, we would object to this, the admission of Government Exhibit 514. It's very different from the one that was just admitted, 326. Mr. Sun is not on this document at all. And there may well be, and I think there are, hearsay issues as to it, but more importantly——
JUDGE KAPLAN: It's not offered for the truth. That was the first thing.
MR. COHEN: Okay. But more importantly, your Honor, this is about a different set of policies issued by a different entity, FDM.
JUDGE KAPLAN: A different entity?
MR. COHEN: There was a newly created Bahamas entity called FDM, which was not FTX International, the company we've been talking about in this case. These were different policies issued by a different entity that——and it's an email chain which Mr. Sun is not on. I believe the government is going to try to argue that these policies also should be considered either construing the set of policies we just looked at or on their own, and we submit that under 403 it would be both confusing for the jury to be dealing with policies issued by different corporate entities perhaps for a different purpose that Mr. Sun was——on an email he wasn't on, and also substantially prejudicial to my client. So that's the objection.
MS. SASSOON: Your Honor, FTX Digital Markets was the Bahamian entity created with respect to the ftx.com exchange. Sculptor is a customer of the ftx.com exchange. These are statements by representatives of FTX to a customer referring to policies that Mr. Sun will be able to explain what they are. He's not on this email, but all I'm going to ask him are about what these policies are, and I'm going to show him those policies, and those were policies that governed the ftx.com exchange.
MR. COHEN: They were policies that governed the new company, your Honor, as to which there's been no testimony as to the existence or relationship of.
JUDGE KAPLAN: I just heard a proffer that he's going to testify that they're on the ftx.com exchange.
MS. SASSOON: That was FTX Trading. But before we admit it, I can ask him what's FTX Digital Markets, and based on his answer, if your Honor is satisfied, then we can offer this exhibit.
JUDGE KAPLAN: Well, let's take it a step at a time.
MR. COHEN: This exchange points out how confusing this is under 403. So——
JUDGE KAPLAN: I'm not confused yet.
MR. COHEN: You're not confused, your Honor, but I think the rest of us are.
JUDGE KAPLAN: Okay.
(Continued on next page)
(In open court)
JUDGE KAPLAN: Proceed.
MS. SASSOON: Mr. Imperato, let's pull back up Government Exhibit 326 just for a moment.
BY MS. SASSOON:
MS. SASSOON: And Mr. Sun, I want to direct your attention to your email at the bottom. And in this email to Sculptor on May 13, 2022, you wrote, "we've actually just changed the operating entity for ftx.com to our Bahamas DARE Act-licensed entity FTX Digital Markets Ltd." So can you explain what FTX Digital Markets Ltd. was.
CAN SUN: It's our Bahamian subsidiary that was licensed under the Bahamian DARE Act. Under the new terms of service, that was going to be the default and predominant entity that serviced our customers going forward.
MS. SASSOON: So just to be clear, how did FTX Digital Markets relate to ftx.com?
CAN SUN: It is the entity providing the bulk of the services that are available to users on ftx.com.
MS. SASSOON: We can pull that down now.
And Mr. Imperato, can you pull back up Government Exhibit 514, just for the witness.
And at this time the government offers Government Exhibit 514.
MR. COHEN: Same objection.
JUDGE KAPLAN: Overruled.
(Government's Exhibit 514 received in evidence)
MS. SASSOON: Mr. Imperato, can you please publish this exhibit for the jury.
BY MS. SASSOON:
MS. SASSOON: Now just to be clear, Mr. Sun, are you on this email exchange?
MS. SASSOON: Who is Adrian Guye?
MS. SASSOON: And Elise Knaus, does she work at Sculptor?
MS. SASSOON: And do you see in Adrian's June 23, 2022, email to Elise, he wrote, "Please find attached the FTX Digital Markets policies that I can share with you," and a little farther down, he wrote, "as reflected in the attached safeguarding of assets policy"?
MS. SASSOON: Were you familiar with the safeguarding of assets policy?
MS. SASSOON: And what was it?
CAN SUN: It's one of the policies that we put together and was required to be bound by under our Bahamian license to safeguard and protect customer assets.
MS. SASSOON: And do you see at the end of that paragraph Adrian Guye wrote, "As further reflected in this policy under safeguarding and segregation, in the unlikely event that FDM becomes insolvent, customer funds will be ring-fenced from such insolvency"? First of all, what does FDM stand for?
MS. SASSOON: What does it mean to ring-fence customers from insolvency?
CAN SUN: Keep it separate and segregated so in the event of an insolvency in FTX Digital Markets, FTX Digital Markets's customers will be able to receive their funds back.
(Continued on next page)
MS. SASSOON: Just to be clear, when you say FDM's customers, how does that relate to FTX.com's customers?
MS. SASSOON: Now you are not on this email, but is that sentence there, how does that relate to what your understanding was about --
MR. COHEN: Objection.
JUDGE KAPLAN: Sustained.
MS. SASSOON: What, if any, understanding did you have, separate and apart from this email, about what would happen to customer funds in the event of insolvency?
MS. SASSOON: We can take that down. Mr. Imperato, if you can pull up for the witness.
JUDGE KAPLAN: I'm sorry. Let me just --
Was that true in your mind with respect to FTX Digital Markets, FTX.com, or both?
CAN SUN: It would be both. If FDM -- FTX Digital Markets, the payment subsidiary, provides the bulk of the services that are available on FTX.com.
JUDGE KAPLAN: Explain what that means to the jury.
CAN SUN: There are a number of services available on FTX.com. Not all of them are provided by FTX Digital Markets Limited. We are a Bahamian subsidiary. For instance, if you are from Japan or Australia and you were trading on FTX.com, you were not serviced by FTX Digital Markets. You were serviced by our Japan and Australian subsidiaries.
JUDGE KAPLAN: Would it be fair to say that the legal department that dealt with all of this dealt with it for all these FTX companies?
JUDGE KAPLAN: Local law meaning, for example, the Bahamas.
JUDGE KAPLAN: Were the people supervising the services provided by these various entities the same?
CAN SUN: For the most part, we have in each jurisdiction wherever you are licensed a local team as well to make sure that whatever we do locally is also in compliance with local laws.
JUDGE KAPLAN: Go ahead.
MS. SASSOON: Mr. Imperato, can you please pull up Government Exhibit 340 for the witness.
MS. SASSOON: Do you recognize this?
MS. SASSOON: What is it?
MS. SASSOON: Did this apply to FTX.com?
MS. SASSOON: As general counsel, did you review this?
MS. SASSOON: And did this document go through an approval process?
MS. SASSOON: For what purpose?
CAN SUN: This was one of the documents for our Bahamian license application, so it had to be approved by the CEO and typically approved by the board as well.
MS. SASSOON: When you say it had to be approved by the CEO, who was the CEO?
MS. SASSOON: What about the board, who was on the board?
CAN SUN: It was Ryan, Sam. I think we might have added Nishad later down the road, but I can't remember exactly when.
MS. SASSOON: But Sam Bankman-Fried was on the board that would approve these policies?
MR. COHEN: Objection. Leading.
JUDGE KAPLAN: Sustained in that form.
MS. SASSOON: When you said Sam was on the board, which Sam are you referring to?
MS. SASSOON: The government offers Government Exhibit 340.
MR. COHEN: Same objections as made at the sidebar, your Honor.
JUDGE KAPLAN: Overruled. It's received.
(Government Exhibit 340 received in evidence)
MS. SASSOON: I just want to clarify. You said Ryan Salame was CEO. CEO of what entity?
MS. SASSOON: Mr. Imperato --
JUDGE KAPLAN: Excuse me.
Who owned the shares of digital markets, the Bahamian subsidiary?
JUDGE KAPLAN: Who owned the shares of that entity?
JUDGE KAPLAN: Thank you.
Let's go on.
MS. SASSOON: Mr. Imperato, can you publish Government Exhibit 340.
MS. SASSOON: Looking at this cover page, can you read the title of this document.
CAN SUN: FTX Digital Markets Limited, safeguarding of assets and digital token management policy.
MS. SASSOON: At a high level, what is this document?
CAN SUN: This sets out the policies and processes by which FTX Digital Markets Limited safeguards customer assets.
MS. SASSOON: Was this a document that was shared with FTX customers?
CAN SUN: Not to my knowledge. So there are some cases where an investor -- sorry -- a user could potentially ask, but it is not a document that is generally made available to users.
MS. SASSOON: Just to be clear, was it sometimes made available to users?
MS. SASSOON: Let's go to page 4.
MS. SASSOON: Can you read the first sentence beneath introduction.
MS. SASSOON: Under the objectives section, what is the first bullet point under this policy's objectives are to?
CAN SUN: Emphasize our stringent commitment to safeguarding assets belonging to both FDM and its customers.
MS. SASSOON: Let's go to page 5.
MS. SASSOON: Do you see where it says FDM's responsibilities?
MS. SASSOON: What does it say beneath that?
CAN SUN: Appropriately account for the difference between its own assets and its customers' assets.
MS. SASSOON: Sorry. The sentence right beneath the header, FDM's responsibilities.
MS. SASSOON: Do you see beneath that it says: FDM's key roles and responsibilities in relation to safeguarding of assets are outlined below.
Now, can you read the first bullet beneath that.
CAN SUN: Appropriately account for the difference between its own assets and its customers' assets.
MS. SASSOON: And can you read the third bullet.
MS. SASSOON: What does it mean for assets to be held in trust?
CAN SUN: It means that you hold them, that you are not the beneficial owner of them, and you are holding it for the benefit of someone else; in this case, customers.
MS. SASSOON: Let's go to page 7.
MS. SASSOON: Do you see the section entitled safeguarding and segregation?
MS. SASSOON: Can you please, Mr. Imperato, zoom in.
MS. SASSOON: Mr. Sun, can you read the first sentence below that heading.
CAN SUN: FDM has a responsibility to ensure that customer assets are appropriately safeguarded and segregated from its own funds.
MS. SASSOON: Can you read the first bullet, please.
MS. SASSOON: Can you highlight, Mr. Imperato, the sentence after the bolded words SCB where it says: Customer accounts will be designated as such, and the money contained therein will be appropriately ring-fenced and protected from claims against FDM.
MS. SASSOON: Can you remind us what it means to appropriately ring-fenced assets from claims against FDM?
CAN SUN: Sure. Customer assets belongs to the customer. When they come in, they are kept in separate accounts, protected and separate from FDM OR FTX's own assets, so that if FTX or FDM has a bankruptcy event, customer assets, which belongs to the customer, does not belong to FTX, will be returned to customers.
MS. SASSOON: What, if any, conversations did you have with the defendant about the subject matters that we have just been looking at related to protection of customer assets?
CAN SUN: In all my conversations with Sam, it has always been represented to me that customer assets are protected, segregated, as set out in the policy.
MS. SASSOON: You can take that down.
Mr. Imperato, can you please show the witness Government Exhibit 26. Can you go to the series B tab.
MS. SASSOON: Do you recognize this spreadsheet, Mr. Sun?
MS. SASSOON: What is it?
CAN SUN: This is a spreadsheet that was maintained in connection with our fundraisers. So each of the tabs, series B, B1, C, C1, those are different rounds of fundraising that we have been doing, and in each of these tabs it lists the name of the investor, their contact information, and so on and so forth.
MS. SASSOON: As general counsel, did you review the spreadsheet?
MS. SASSOON: And were you familiar with the content?
MS. SASSOON: The government offers Government Exhibit 26.
MR. COHEN: No objection.
JUDGE KAPLAN: Received.
(Government Exhibit 26 received in evidence)
MS. SASSOON: Mr. Imperato, if we can publish this to the jury and stay on the series B tab where you have it.
MS. SASSOON: Now that the jury has the benefit of seeing the spreadsheet, can you explain what series B refers to.
CAN SUN: So series B was our fundraising round that was completed in July of 2021, before I joined. So this is basically a fundraising event whereby investors invest money into FTX and in return get shares in the company.
MS. SASSOON: Do you see the column A that says name?
MS. SASSOON: What is listed under name?
MS. SASSOON: Can you just read the first nine names there.
CAN SUN: Sequoia, Paradigm Capital, Thoma Bravo, Soft Bank, Third Point LLC, Insight Partners, Robbitt Capital, Lightspeed Venture Partners.
MS. SASSOON: You can stop there.
Were the names you read and the ones following investors in FTX?
MS. SASSOON: If we can scroll to column R.
MS. SASSOON: Do you see this column where it says amount?
MS. SASSOON: What does this refer to?
MS. SASSOON: The next tab is called series B1. What does that refer to?
MS. SASSOON: And the first name here is OTPP. What does that stand for?
MS. SASSOON: Can you read the name of the investor in row 5.
MS. SASSOON: There is another tab here called series C. What does that refer to?
MS. SASSOON: So here the first two names are Paradigm and Temasek, which we saw in earlier tabs. What does that mean that they are reappearing here?
MS. SASSOON: You see that there is a tab called series C1. What is that?
CAN SUN: That is -- that was a round that we started in, I think, late summer and fall of 2022, but it never closed.
MS. SASSOON: When you say it never closed, what does that mean?
MS. SASSOON: As general counsel, did you participate in any conversations with FTX investors?
MS. SASSOON: And what, if anything, did you tell investors about the relationship between FTX and Alameda?
MR. COHEN: Objection.
JUDGE KAPLAN: Ground.
MR. COHEN: Hearsay.
MS. SASSOON: Not offered for its truth, your Honor.
JUDGE KAPLAN: Of course. Overruled.
CAN SUN: Consistently told our investors that FTX and Alameda are two fully independent and separate companies.
MS. SASSOON: Where did you get that information from when you told investors that FTX and Alameda were two separate companies?
MS. SASSOON: I want to talk about investments for a moment. What involvement, if any, did you have with venture investments by the defendant?
CAN SUN: From time to time, there would be investments that needed legal support, and sometimes I was brought in to help to review investment negotiation investment agreements.
MS. SASSOON: At all times prior to November 2022, what did you believe about where the money came from for these investments?
MS. SASSOON: What, if anything, did anyone ever tell you about whether the investments involved customer money?
MS. SASSOON: And what role, if any, did you have with any loans from Alameda to parties related to the company of FTX?
MS. SASSOON: Can you describe what you did.
MR. COHEN: Can we have a time frame, your Honor?
JUDGE KAPLAN: Yes.
MS. SASSOON: Over what time period did you document loans for Sam and others?
CAN SUN: From the time when I joined FTX in late August '21 until the collapse in November '22, throughout my time there.
MS. SASSOON: Throughout your time there, can you describe your involvement in documenting loans?
CAN SUN: Sure. These loans typically come up in two ways.
One way is, if I were working on a transaction myself, such as an acquisition, and we needed certain funds in order to close the transaction, I would go to Sam or other members of management and say, hey, we need a capital injection in order to close this transaction.
The second way it comes up is, if there is a transaction that I'm not working on but apparently needs a capital injection, then Sam or someone will pull me aside and say, hey, we need to put X amount of dollars of a capital injection into one of these companies.
MS. SASSOON: What were you told, if anything, about why these investments were being funded through loans to the defendant and others?
CAN SUN: So the way that these loans were structured was in place when I joined, and even after I joined we had worked with outside counsel on structuring these loans. So all of the loans I worked on came -- the lender was Alameda and the borrower was typically Sam, Gary, Nishad.
So what would happen is, let's say there is a need for a $250 million injection into FTX.US, which was the case in December '21, when FTX.US needed that for its CFTC margin application, I would discuss with Sam how to make the capital injection, and the preferred way of doing it is to have Alameda make a personal loan to each of the founders, Sam, Gary, and Nishad, and then they would actually invest the funds into FTX US in the form of an investment.
MS. SASSOON: What was your view of this practice that you were involved in?
CAN SUN: I had no idea that customer funds were being used. We had worked with outside counsel on structuring these transactions.
Sorry. Your question?
MS. SASSOON: Can you describe what was your view of just the practice of using loans to the defendant to fund investments?
CAN SUN: Under the circumstances, back then, we did not know it was customer funds, and we worked with outside counsel on it, and we thought it was legal and it was fine to do that.
MS. SASSOON: Did you have any views beyond that?
CAN SUN: Yes. It was probably -- from an optics perspective, it was probably not the most transparent, but under those circumstances back then we did not know it was customer funds.
MS. SASSOON: Your Honor, at this time I would ask permission to hand the witness a binder which has within it Government Exhibits 211, 225, 236 through 242, and what's already in evidence as Defense Exhibits 15, 16, 20, 22 through 24, 34, 184, and 211.
JUDGE KAPLAN: You can hand him the binder.
MS. SASSOON: Thank you.
MS. SASSOON: Mr. Sun, do you recognize this binder?
MS. SASSOON: How do you recognize it?
MS. SASSOON: What's inside this binder?
MS. SASSOON: The government offers Government Exhibits 211, 225 and 236 through 242.
JUDGE KAPLAN: Received.
(Government Exhibits 211, 225 and 236-242 received in evidence)
MS. SASSOON: Let's just take one example.
Mr. Imperato, can you please pull up Government Exhibit 236. If you can zoom to the first paragraph and everything above that.
MS. SASSOON: You see here it says promissory note. Is that a loan?
MS. SASSOON: What's the date of this loan?
MS. SASSOON: Who is the recipient?
MS. SASSOON: What's the amount of this loan from Alameda to Sam Bankman-Fried?
MS. SASSOON: Is this an example of a loan that you were involved in documenting while general counsel?
MS. SASSOON: You mentioned a few times not knowing anything about use of customer funds. Would you have documented loans that involved the use of customer funds?
MR. COHEN: Objection.
JUDGE KAPLAN: I will allow that. Overruled.
MS. SASSOON: What awareness, if any, did you have of loans to Ryan Salame?
MS. SASSOON: Apart from three loans that you documented to Ryan Salame, were you told anything about any other loans to Ryan Salame?
MS. SASSOON: Can we show the witness what's been marked as Government Exhibit 79.
MS. SASSOON: Do you recognize this?
MS. SASSOON: What is it?
MS. SASSOON: Did you maintain this as the loans were being documented?
MS. SASSOON: The government offers Government Exhibit 79.
MR. COHEN: No objection.
JUDGE KAPLAN: Received.
(Government Exhibit 79 received in evidence)
MS. SASSOON: Mr. Imperato, if you can publish this, please.
MS. SASSOON: Now that the jury can see it, can you explain what this spreadsheet is.
CAN SUN: Sure. So this includes -- on a row-by-row basis every single row is a loan that I documented. The amount of the loan is in column D. The borrower is column B. The lender in all of these was Alameda. And the purpose of each loan is described in column A.
MS. SASSOON: If we could scroll down to see how many rows are here. This goes down to row 35.
MS. SASSOON: How does the content here relate to the total loans that you were involved in documenting?
CAN SUN: So all of the loans that came through my desk that I handled is documented on these except for two personal loans that was part of a management incentive program for two employees, including myself, to purchase property in the Bahamas, but everything else is on here.
MS. SASSOON: Apart from those loans that you just mentioned that are not on here, does this spreadsheet reflect the total amount of the loans that you were involved in documenting?
MS. SASSOON: And where is that?
MS. SASSOON: Apart from these loans that you were involved in documenting, were you informed of other loans to Gary, Nishad, and Sam?
MS. SASSOON: We can take that down.
At this time the government offers Government Exhibit 141A, which the parties have stipulated is an excerpt from the Alameda Research general ledger, dated November 13, 2022.
MR. COHEN: No objection.
JUDGE KAPLAN: Received.
(Government Exhibit 141A received in evidence)
MS. SASSOON: Mr. Imperato, if you can publish that, please.
MS. SASSOON: Mr. Sun, prior to your meetings with the government, had you seen this document before?
MS. SASSOON: Mr. Imperato, if you can zoom in on the top half.
MS. SASSOON: Do you see a number of transaction types labeled expense that are described as outgoing money transfers to Samuel Bankman-Fried?
MS. SASSOON: In your time as general counsel, had you been aware of these transfers?
MS. SASSOON: Do you see the column called amount?
MS. SASSOON: Just taking an example, do you see a September 16, 2022 transfer to Sam Bankman-Fried in the amount of $4 million?
MS. SASSOON: And were you aware of that transfer?
MS. SASSOON: As far as you know, were any of these transfers documented in any form of promissory note or loan?
MS. SASSOON: If we could zoom in on the bottom half of this document.
MS. SASSOON: Do you see here a number of transfers to Ryan Salame in the millions of dollars?
MS. SASSOON: Do any of these look familiar to you?
MS. SASSOON: We can take that down.
MS. SASSOON: Mr. Sun, did you personally get any loans from Alameda? I think you mentioned one.
MS. SASSOON: And besides that one, did you receive any others?
MS. SASSOON: What was the amount of that loan?
MS. SASSOON: And for what purpose did you receive that loan?
CAN SUN: As part of a management incentive program to incentivize employees to move to the Bahamas. A hundred percent of it was used for the purchase of a house in the Bahamas.
MS. SASSOON: When you got that loan, where did you think that money was coming from?
MS. SASSOON: Mr. Sun, did you enter any agreements with the government prior to your testimony today?
MS. SASSOON: What type of agreement?
MS. SASSOON: What's your understanding of your obligations under the nonprosecution agreement?
MS. SASSOON: What, if anything, do you understand the agreement to provide in return?
MS. SASSOON: Did you request a nonprosecution agreement from the government?
MS. SASSOON: Why?
CAN SUN: I had no idea that customer funds were being used. I didn't do anything wrong. As general counsel I was involved in transactions that now, in hindsight, may have involved the misappropriation of customer funds, so, out of an abundance of caution, I asked the government for protection.
MS. SASSOON: Your Honor, I have one more section. I can continue and finish and then we can take a break, or we can take a break now, whatever you prefer.
JUDGE KAPLAN: How long a section is it?
MS. SASSOON: Maybe 15 minutes.
JUDGE KAPLAN: Let's get it done.
MS. SASSOON: I want to talk to you about November of 2022, Mr. Sun.
Did there come a time in November 2022 when you assisted in efforts to raise capital for FTX?
MS. SASSOON: Who did you try to raise capital from?
MS. SASSOON: What is Apollo Capital?
MS. SASSOON: What was your role in discussions with Apollo about raising money for FTX?
CAN SUN: So it was on the afternoon of November 7, at around 1 p.m., I was asked to join a call with Apollo without much context. There was myself and Ramnik, our head of product, and they asked for Apollo -- for them to invest in FTX to help solve a liquidity problem that FTX had for customer withdrawals.
MS. SASSOON: Did your discussions with Apollo involve reference to any documents?
CAN SUN: Yes. So on the call with Apollo that we had, they asked for a copy of FTX's financial statements describing FTX's financial condition. Neither Ramnik for myself had that information, so we took that offline and prepared that after the call.
MS. SASSOON: And so was a spreadsheet prepared with some financial information?
CAN SUN: Yes. So what happened after the call is, neither Ramnik nor myself had that information. We sat down in a room and asked for that information. After about 30, 45 minutes or so, I got a spreadsheet from either Sam or Ramnik that included various financial information relating to FTX and Alameda.
MS. SASSOON: Where were you when you received this spreadsheet with information about FTX and Alameda?
MS. SASSOON: Just to be clear, you said you were in an apartment in Albany. What's Albany?
MS. SASSOON: Who were you with you when you received the spreadsheet at the apartment in Albany?
MS. SASSOON: Did you review the spreadsheet in the presence of those individuals?
MS. SASSOON: What, if anything, did you learn in looking at this spreadsheet?
CAN SUN: I was shocked because it showed that FTX was short $7 billion to satisfy customer withdrawals, and there was a separate tab in that spreadsheet that showed the amounts of money that Alameda could return to FTX to satisfy customer withdrawals.
MS. SASSOON: Why did that information shock you?
CAN SUN: Because as we have talked about, it has been my understanding throughout my time at FTX that FTX has safeguarded, segregated customer assets, that we do not misuse, we do not touch customer assets. So -- and not just Alameda, but anyone. So when there is a $7 billion deficit and FTX relied on Alameda to return money to be able to plug in that hole, I was shocked.
MS. SASSOON: So as you are reviewing this spreadsheet in the Albany with Sam, Nishad, and others, what, if anything, were you saying?
CAN SUN: I was asking questions. I was asking questions about how the arithmetic was calculated. The way that the Excel spreadsheet was set up was not straightforward. I asked about different line items, how those were calculated. But I did not get straight responses.
MS. SASSOON: You said you were not getting straight responses. How, if at all, was anyone responding to you?
CAN SUN: Most often I was throwing a question out there and no one was responding. And sometimes when I asked a question about, for instance, whether this line item is inclusive or exclusive of certain other line items, I would get a very vague answer.
MS. SASSOON: What was the defendant doing while you were asking these questions about the spreadsheet?
CAN SUN: Sam was in a room, he was typing away on his computer, and after a while he stepped out to make some calls.
MS. SASSOON: What about Nishad?
CAN SUN: Nishad was sitting there. His entire face was pale, gray. It looked like his soul had been plucked away from him.
MS. SASSOON: What did you conclude from reviewing this spreadsheet?
MR. COHEN: Objection.
JUDGE KAPLAN: Sustained at least as to form.
MS. SASSOON: What views, if any, did you form in reviewing the spreadsheet?
CAN SUN: I had a growing suspicion that FTX did not have the customer money and that it had been misappropriated most likely by Alameda.
MS. SASSOON: Did you share this information with Apollo?
MS. SASSOON: What happened after that?
CAN SUN: About an hour or two after we sent out the spreadsheet, Sam pulls me aside and he says he heard an update from Apollo. They asked him for a legal justification as to why the funds were missing and were at Alameda, and he asked me to come up with legal justifications.
MS. SASSOON: Once the defendant asked you to come up with legal justifications about the missing funds, what do you understand had happened to the customer funds?
CAN SUN: I mean, basically confirmed my suspicion that had been rising all day that FTX did not have the funds to satisfy customer withdrawals and that they had been misappropriated by Alameda.
MS. SASSOON: And this conversation with the defendant where he asked you to come up with a legal justification, where did it take place?
MS. SASSOON: And in that conversation did the defendant identify any legal justifications that he was aware of?
MS. SASSOON: And in that moment did either of you provide a legal justification?
MS. SASSOON: What, if anything, did the defendant tell you in that conversation had actually happened with the customer money?
MS. SASSOON: After this conversation where the defendant asked you to come up with a legal justification, did you explore possible legal justifications for the missing customer money?
MS. SASSOON: And did you come to any conclusions?
MS. SASSOON: Did you have a subsequent discussion with the defendant about those conclusions?
MS. SASSOON: Where did that conversation take place?
CAN SUN: So it was right around 7:00 that evening, November 7. It was still in the same Albany apartment. And Sam pulls me aside and says he is talking to Apollo in 10, 15 minutes. He asked me to go on a walk with him. I go on a walk with him and basically tell him that there was no legal justification for the funds being missing and taken by Alameda. I did tell him that there were theoretical arguments, but none of them was supported by the facts.
MS. SASSOON: You just testified that you told the defendant there were some theoretical arguments but none were supported by the facts. Did you walk through those theoretical arguments with the defendant during this walk?
MS. SASSOON: And what was the first one that you spelled out for the defendant?
CAN SUN: The first argument is section 9 of our terms of service which deals with dormancy, or otherwise known as abandoned property.
What happens is, if there is a prolonged period of time where FTX is not able to contact the customer, then in that scenario FTX would be able to charge a dormancy fee for administering the user's funds.
MS. SASSOON: What, if anything, did you tell the defendant about whether this was an adequate legal justification?
MS. SASSOON: Why not?
CAN SUN: The amount of active users on the exchange was very few, and FTX had only been around since 2019, so the amount of funds that we could even call dormant is very little.
MS. SASSOON: I just want to be clear. When you said certain users or very few, did you say active or inactive?
MS. SASSOON: Were what?
MS. SASSOON: How did the defendant respond to what you said?
MS. SASSOON: How did he acknowledge it?
MS. SASSOON: I'm sorry. When you just went yup, yup, is that what he was saying?
MS. SASSOON: And did you raise any other potential arguments with the defendant on this walk?
CAN SUN: Yes. The second theoretical argument is section 16 of our terms of service, which provides that if a user voluntarily affirmatively chooses to lend out their money to other users on the platform, then if the borrower then defaults and unable to return the money, then the lender's money is gone.
Alternatively, also under section 16 of our terms of service, if a user decides to take his assets and use it as collateral to trade on leverage, then he is pledging those collateral -- pledging his assets as collateral to trade on margin, and if he or she is liquidated, then those assets will be taken away as well.
MS. SASSOON: What, if anything, did you explain to the defendant about whether this argument was supported by the facts?
CAN SUN: I had previewed this argument with Nishad and Ramnik before the walk, and they had pulled some numbers that showed that it was not supported by the facts as well.
MS. SASSOON: Did you relay that to the defendant?
MS. SASSOON: And how did he respond to that?
MS. SASSOON: How did he acknowledge it?
MS. SASSOON: Were there any other theoretical arguments you described to the defendant?
CAN SUN: Yes. There was a third one, which is some crypto exchanges do not make it clear what is the relationship between a user when they deposit funds onto the exchange and the exchange. I told him that unfortunately that is not even feasible for us because our terms of service make it very clear that when a user deposits assets onto the exchange, those assets continue to belong to the user.
MS. SASSOON: Did the defendant respond to this explanation?
MS. SASSOON: Did you offer any other theoretical arguments, or was it primarily those three?
MS. SASSOON: Once you walked through those three arguments on this walk, how did the defendant react to what you had told him?
CAN SUN: I was actually expecting a bigger response, but it was very muted. Sam basically said something like, got it. He was not surprised at all.
MS. SASSOON: Did the defendant push back on what you said?
MS. SASSOON: I couldn't hear you.
MR. COHEN: Objection.
JUDGE KAPLAN: Couldn't hear the answer.
JUDGE KAPLAN: Overruled, Mr. Cohen.
MS. SASSOON: During this discussion, what, if any, of his own justifications did the defendant provide?
MS. SASSOON: That same day did you have any conversations with Nishad Singh?
MS. SASSOON: What do you recall about that?
CAN SUN: It was later that evening, around 11 p.m., Nishad pulled me aside, and we went for a quick walk around the building as well. Nishad basically asked me about his personal exposure, about the loans he had taken from FTX, about the bonuses that he had received. The one thing he had mentioned as well is that the no-liquidation mechanism that Alameda had is also the same mechanism by which Alameda was able to withdraw customer assets from the exchange.
MS. SASSOON: Had you known that before this conversation with Nishad?
MS. SASSOON: What, if anything, did Nishad tell you about his prior conversations with the defendant?
CAN SUN: Yes. He said that he found out about the hole, basically that Alameda was taking FTX customer assets in late summer of '22, so August or September of 2022. He said that he talked to -- he confronted Sam directly about it, and Sam told him back then that it is what it is and there is nothing we can do about it. The only thing we can do is to grow the company and fill in the hole.
MS. SASSOON: When did you leave FTX?
MS. SASSOON: Under what circumstances?
MS. SASSOON: At this time the government offers Government Exhibit 923B, which the parties have stipulated is an excerpt from a Good Morning America interview with Sam Bankman-Fried, dated December 1, 2022.
JUDGE KAPLAN: Received.
(Government Exhibit 923B received in evidence)
MS. SASSOON: Mr. Imperato, if you can please play this interview excerpt from December 1, 2022 for the jury.
(Video played)
MS. SASSOON: Mr. Sun, the demeanor of the defendant that you observed on this video, how does that compare to your interactions with him?
MR. COHEN: Objection.
JUDGE KAPLAN: Sustained.
MS. SASSOON: How would you generally describe the defendant's demeanor during your interactions with him?
MR. COHEN: Same objection.
JUDGE KAPLAN: Overruled.
MS. SASSOON: And on this video did you hear the defendant mention a borrow-lend facility on FTX?
MS. SASSOON: And was the borrow-lend facility one of the potential justifications you had discussed --
MR. COHEN: Objection. Leading.
JUDGE KAPLAN: Overruled.
MS. SASSOON: Was the borrow-lend facility a potential justification that you had discussed with the defendant on November 7, 2022?
MS. SASSOON: And what had you said to the defendant about that?
MS. SASSOON: And what was his response?
MS. SASSOON: No further questions.
JUDGE KAPLAN: Thank you.
We will take a 15-minute break.
(Recess)
(Continued on next page)
(In open court; jury not present)
MS. SASSOON: Your Honor, it seems unlikely to arise, but as I mentioned yesterday, we do have lawyers from the FTX debtors here.
JUDGE KAPLAN: Understood. Thank you.
(Continued on next page)
(Jury present)
JUDGE KAPLAN: The defendant and the jurors all are present, as they have been throughout.
COURT CLERK: Please be seated, everyone.
JUDGE KAPLAN: The witness is reminded he's still under oath.
JUDGE KAPLAN: Mr. Cohen, cross-examination, please.
MR. COHEN: Thank you, your Honor.
CROSS EXAMINATION BY MR. COHEN:
MR. COHEN: Good morning, Mr. Sun.
MR. COHEN: Now you testified earlier today that you went to Yale Law School; is that correct?
MR. COHEN: Before that you took a degree from the University of Toronto in electrical engineering?
MR. COHEN: And then you did a PhD program at Princeton; is that correct?
MR. COHEN: And after graduating from Yale Law School you worked for a firm called Davis Polk in New York.
MR. COHEN: And you became admitted to the New York bar?
MR. COHEN: And you're still admitted to the New York bar.
MR. COHEN: Okay. Davis Polk is one of the premier financial law firms in the world?
MR. COHEN: And then you went from there to——you moved out to Seattle and you worked for Fenwick & West, correct?
MR. COHEN: And they're also a major law firm, correct?
MR. COHEN: Specializing in startup companies?
MR. COHEN: And when you were at Fenwick, Alameda and then FTX were clients of Fenwick, correct?
MR. COHEN: And they remained clients of Fenwick during the time you were there.
MR. COHEN: And then after you moved over to FTX, Fenwick continued to provide legal work for FTX and Alameda.
MR. COHEN: And that's called outside counsel?
MR. COHEN: Now I think you told us you began at FTX in August of 2021 and you were there through November 2022; is that correct?
MR. COHEN: And at first, when you first started at FTX, where were you physically located?
CAN SUN: I was in Hong Kong. I flew to Hong Kong. So before that I was in Seattle. I flew to Hong Kong to start the job.
MR. COHEN: And there came a time when you decided to move to the Bahamas, correct?
MR. COHEN: And that was to be in the FTX corporate headquarters.
MR. COHEN: And that was the end of 2021?
MR. COHEN: Okay. September 2021. And you mentioned that you received a management incentive compensation loan to buy a house in the Bahamas. Do you recall that?
MR. COHEN: Okay. Let's call out for identification, for the witness only, Defendant's Exhibit 268, please.
MR. COHEN: So the first question, Mr. Sun, is: Take a moment to look through this document and let me ask you if you recognize it.
MR. COHEN: And is this the promissory note that you entered into in connection with the loan?
MR. COHEN: Your Honor, we offer Defendant's Exhibit 268.
MS. SASSOON: No objection.
JUDGE KAPLAN: Received.
(Defendant's Exhibit 268 received in evidence)
MR. COHEN: Now if you can see at the top, sir, this is——you're the borrower and you're receiving a loan of $2.34 million, correct?
MR. COHEN: And this was the loan you were going to use to buy the house in the Bahamas.
MR. COHEN: If we could scroll down to the next paragraph. Can you call out those terms.
If you look at the first——the first sentence is on the first to occur. If we can go from there all the way down to maturity date.
MR. COHEN: And just to simplify this, Mr. Sun——correct me if I'm wrong——you didn't have to start paying back the loan right away, correct?
MR. COHEN: Take as much time as you need.
MR. COHEN: Right. So there was a maturity date five years out, correct?
MR. COHEN: So unless——well, let me go through it. You didn't have to pay back the loan for five years unless the property was sold or you ceased to work for the company, correct?
MR. COHEN: Okay. Continuing on to the next——the next entry, Brian, next paragraph, "Interest shall accrue."
MR. COHEN: "Interest shall accrue on any unpaid principal based on a simple interest rate of the midterm AFR." Do you see that, sir?
MR. COHEN: And my question simply is: What does "Interest shall accrue" mean?
MR. COHEN: Did it mean you had to make monthly interest payments?
MR. COHEN: So the principal and the interest were deferred until some future date, correct?
MR. COHEN: Now you then moved to the Bahamas in September, you said?
MR. COHEN: Okay. You can take that down, Brian.
MR. COHEN: And you purchased the home, correct?
MR. COHEN: Okay. And is it fair to say that in January of 2022, you received a bonus?
MR. COHEN: Also for $2.3 million.
MR. COHEN: And what was the purpose of receiving that bonus?
CAN SUN: To——to incentivize me to join the company as well as bonus for the work I had done at FTX.
MR. COHEN: And you had been at FTX since August.
MR. COHEN: So six months, and you received a $3.5 million bonus after signing a promissory note to pay back 2.3; is that correct?
MR. COHEN: You didn't see them connected at all.
CAN SUN: So depends on what you mean by connected. Now one of them is obviously related to my employment, and, you know, the house——the payment terms we just went through is also related to my employment.
MR. COHEN: So you believe that the loan to buy the house was a valid loan.
MR. COHEN: Now you described some of your duties as the general counsel at FTX, so I don't want to go through all of them, but let me just ask you: General counsel is the chief legal officer of the company, correct?
CAN SUN: Generally, yes. I would just note that Dan Friedberg was also, so I was reporting to both him and Sam.
MR. COHEN: Okay.
MR. COHEN: So Dan Friedberg was someone you had known at Fenwick & West, correct?
MR. COHEN: You had both been attorneys at Fenwick?
MR. COHEN: And you both came in-house to work for FTX.
MR. COHEN: Okay. With the exception of Mr. Friedberg and the relationship you just described, were you the senior-most legal officer at FTX?
MS. SASSOON: Objection, form.
JUDGE KAPLAN: Sustained.
MR. COHEN: Did you supervise other attorneys at FTX?
MR. COHEN: Okay. Who supervised you?
MR. COHEN: And I think you mentioned that one of the projects you took on at the beginning was trying to get licenses for FTX. Do you recall that, sir?
MR. COHEN: And can you explain to the jury what you meant by that.
CAN SUN: Sure. So in the summer of 2021, a lot of FTX's competitors were getting hit by fines, investigations, subpoenas, by regulators around the world, and when I joined FTX, one of my main mandates was——FTX was unregulated at that time, and one of my main mandates was to help FTX get regulated and licensed in as many countries as possible.
MR. COHEN: And you worked on that.
MR. COHEN: With other attorneys in the legal department.
MR. COHEN: About how large was the legal department?
MS. SASSOON: Objection.
JUDGE KAPLAN: What's the objection?
MS. SASSOON: Relevance.
JUDGE KAPLAN: Sustained.
MR. COHEN: Were there other attorneys in the legal department besides you and Mr. Friedberg?
MS. SASSOON: Objection.
JUDGE KAPLAN: Sustained.
He already testified he supervised other attorneys.
MR. COHEN: Okay. I understand, Judge. I'll move on.
MR. COHEN: And were you successful in obtaining those licenses?
CAN SUN: Yes, we got a good number of licenses over the course of the year, year and two months I was there.
MR. COHEN: Okay. Now I believe you testified that another project you took on was handling the corporate structure, corporate setup of the company, correct?
MR. COHEN: And when you got there, your view was that the corporate housekeeping was sort of a mess, correct?
MR. COHEN: So you had to organize many different companies that had up to that point not been organized properly, in your view, correct?
MR. COHEN: Now if we could turn to another topic, Mr. Sun.
Do you recall giving testimony earlier this morning about various loans that were made to Sam, Gary, and others?
MR. COHEN: And you kept track of them you said on a spreadsheet that you kept.
MR. COHEN: And Ms. Sassoon went over that spreadsheet with you. There was about 15 to 20 of them, correct?
MS. SASSOON: Objection, form.
JUDGE KAPLAN: Sustained.
MR. COHEN: How many loans, to your recollection——we can always bring it up, but how many loans were there?
MR. COHEN: Okay. And you told us that you worked with others on how the loans should be structured as a legal matter; is that correct?
MR. COHEN: Did the others include Fenwick & West?
MR. COHEN: Who else worked on the loans?
CAN SUN: Myself, Dan, Fenwick, we also had valuation consultants, and our tax and accounting firms were also brought in from time to time.
MR. COHEN: Okay. Just so we're clear, what's a valuation consultant?
CAN SUN: Sure. So it's a company that tries to calculate the value of the shares of the company. So unlike a public company where, you know, shares are traded, there's always a price for it, for a private company that's not gone public yet, the valuation firm tries to guesstimate as best as they can what the valuation of the shares are.
MR. COHEN: Valuation, tax attorneys. Okay.
Now let's talk about Sam and Gary. They were the owners of Alameda, correct?
MR. COHEN: Now they could have taken these funds out as dividends, correct?
MS. SASSOON: Objection.
JUDGE KAPLAN: What's the objection?
MS. SASSOON: Form and speculative.
JUDGE KAPLAN: Sustained.
MR. COHEN: As a general counsel of FTX, did you have a view as to whether Sam and Gary could have received these funds in a different form than a loan?
CAN SUN: Yes. There were probably different ways——again, the fundamental assumption we were working under is that Alameda was owned 90 percent by Sam, 10 percent by Gary, and that all of the money that was at Alameda, because of their ownership, belonged to them. We were not aware that they were customer money.
MR. COHEN: And in terms of structure, there were other ways, in alternative to the loan structure, correct?
MR. COHEN: But after the process you just described, the loan structure was selected, correct?
CAN SUN: So the loan structure was actually in place at the time that I joined FTX. It was——it was one that I inherited. But, you know, throughout my time there, we worked with outside consultants to identify potential issues with it and to take, you know, measures to mitigate those risks.
MR. COHEN: So you inherited this structure.
MR. COHEN: But as you took it over, you didn't change it.
MR. COHEN: Okay.
CAN SUN: That's right. For the most part. So there were a few changes that we, you know, worked with outside consultants to make.
MR. COHEN: All right. Let's move to another topic, Mr. Sun.
MR. COHEN: If we could pull up Government Exhibit 558 in evidence.
MR. COHEN: These are the May 13, 2020 terms of service. Do you recall giving testimony about these this morning?
MS. SASSOON: Objection. It's not 2020.
MR. COHEN: 2022. I apologize.
MR. COHEN: Too many twos.
MR. COHEN: Okay. And I believe you told us that when you came on board, they were 80 to 90 percent drafted?
MR. COHEN: Who had drafted them?
CAN SUN: So this was part of a Bahamian license application. I know that we had hired an external consultant working with Dan, Adrian, and our outside counsels, Fenwick and Herbert Smith.
MR. COHEN: And Herbert Smith is a different law firm than Fenwick?
MR. COHEN: And that's headquartered in London, correct?
MR. COHEN: Which office of Herbert Smith were you working with?
MR. COHEN: So basically you took the draft that they had started and then you brought it to the——brought it to conclusion.
JUDGE KAPLAN: Sustained as to form. Who's "they"?
MR. COHEN: Let me start again, your Honor.
MR. COHEN: So you mentioned that the two law firms that had worked on it, to your knowledge, were Fenwick & West and Herbert Smith; is that correct?
MR. COHEN: Okay. And then is it your testimony, sir, that you then completed the work?
MR. COHEN: And I believe you told us that what you were trying to do in the terms of service was to lay out the obligations of FTX and its customers, correct?
MR. COHEN: Okay. Why don't we take a look at the terms of service.
MR. COHEN: Let's take a look at page 10 at the bottom, please.
Okay. If you can go, Brian, up to the top, 8.2.
MR. COHEN: That section is headed Digital Assets. Do you see that, sir?
MR. COHEN: And you testified about that this morning on your direct, correct?
MR. COHEN: Okay. And if we could go down to 8.2.6. Do you see that?
MR. COHEN: And you told us that this provision related to digital assets and title to digital assets and all the other things laid out in A, B, and C. I'm not going to go through it again. Is that correct?
MR. COHEN: Now is it fair to say, Mr. Sun, that fiat was addressed in different sections of the terms of service?
MR. COHEN: Okay. Fiat is something different than digital assets, correct?
MR. COHEN: Okay. If we could look to the next page, page 11, bottom of the page. Call out 8.3.
MR. COHEN: This is a section called "Fiat currency," correct, sir?
MR. COHEN: And it called out whatever the obligations that FTX and the customers had with regard to fiat, correct?
MR. COHEN: All right. Continuing in the document, if we could go to page 27.
MR. COHEN: Top of the page. Do you see that section, sir? What does that relate to?
MS. SASSOON: Objection.
JUDGE KAPLAN: Well, it says what it says, and the agreement is in evidence, but I would suggest caution.
MR. COHEN: I'm just going to ask one question.
MR. COHEN: Could you read that out, sir.
CAN SUN: "The terms and any dispute shall be governed by, and construed in accordance with, English law."
MR. COHEN: Okay. Thank you, sir.
MR. COHEN: Now if we could go back to page 17. Excuse me. 16. And go to the heading 16.
And Brian, if you could highlight 16, just the heading.
MR. COHEN: That refers to the section about margin trading, correct, sir?
MR. COHEN: And you told us earlier there was an entire section devoted to margin trading.
MR. COHEN: Based on your experience working at FTX, did you have a view about what percentage of the assets were participating in the margin trading program?
MS. SASSOON: Objection, foundation.
JUDGE KAPLAN: Sustained.
MR. COHEN: In connection with your work at FTX, did you ever——did you ever look into how many——how many users took advantage of the margin trading program?
MS. SASSOON: Objection. Also vague as to time frame.
MR. COHEN: During the time you were the general counsel.
MR. COHEN: Okay. Before we——well, let me——before we move on, if you could look at Section 16.4.
Do you recall giving testimony about that today, sir?
MR. COHEN: And if I might go through it with you.
MR. COHEN: At the top of the first——if you could highlight the first sentence.
MR. COHEN: It says, "Under certain market conditions, it may become difficult or impossible to liquidate a position."
And then you described for us, sir, how, if there was a difficulty liquidating a customer's account, the backstop liquidity providers might have to be brought into it, correct?
MR. COHEN: And let's continue on.
MR. COHEN: If you could go, Brian, to the sentence that begins, "In such an event." Right here. Highlight that sentence.
MR. COHEN: "In the event that the customers did not have sufficient assets, in such event, our backstop liquidity provider program may come into play, but there is no assurance or guarantee that any such program activities will be sufficient or effective in liquidating your position." Do you see that, sir?
MR. COHEN: That was the next step you described to us earlier.
MR. COHEN: Okay. And then to complete that, "as a result, you may lose all of your assets or incur a negative balance in your account. In addition, even if you have not suffered any liquidations or losses, your account balance may be subject to clawback due to losses suffered by other users."
So is that——let me not try to——let me just ask you your understanding of those sentences, sir.
CAN SUN: So as it described, this is——describes our liquidation waterfall. I would just maybe caveat by saying this is a very shortened version that is drafted mostly for disclaimer purposes. There is a much more detailed description of our liquidation and risk engine on our help desk web page and also, as I mentioned earlier today, that, you know, this does not actually describe the insurance fund, which is something that we have, and as I mentioned earlier today, my understanding is that our insurance fund has never been depleted.
MR. COHEN: You said this was describing, at least in part, something you called the liquidation waterfall. What do you mean by that?
MR. COHEN: Okay. And so at least according to this provision, there could be a time when, even if a customer had not suffered any losses of their own, their balances could be subject to clawback due to losses suffered by other users; is that correct, sir?
MS. SASSOON: Objection.
JUDGE KAPLAN: Sustained. It says what it says and we've been over this at least twice.
MR. COHEN: Your Honor, he's the author of the document.
MS. SASSOON: Objection. No, he's not.
JUDGE KAPLAN: He's not the author of the document. He's somebody who participated, starting at a point where it was 80 to 90 percent finished, and in any case, the words are on the page, and it doesn't help to read them six times.
MR. COHEN: Okay. I won't go for six, your Honor.
BY MR. COHEN:
MR. COHEN: Mr. Sun, have you ever heard of the term "auto-deleveraging"?
MR. COHEN: What's your understanding of that?
CAN SUN: It means that when there is significant volatility in the market that could lead to losses, leveraged positions will be automatically closed out as part of the liquidation mechanism.
MR. COHEN: And in your understanding, sir, are there times when auto-liquidation occurs when one customer's assets could be used to cover the losses of another customer's assets?
MS. SASSOON: Objection.
JUDGE KAPLAN: What's the objection?
MS. SASSOON: Confusing and foundation.
MR. COHEN: He just said he knew it.
JUDGE KAPLAN: Give me a moment.
MS. SASSOON: Your Honor, the previous question was about auto-deleveraging.
JUDGE KAPLAN: Yes, it was, and this question is about something called auto-liquidation. Sustained. Let's try again.
MR. COHEN: I'm sorry. Let's have the last question read back, please. Two questions ago.
(Record read)
MR. COHEN: Okay. I take his Honor's point. I will move on.
BY MR. COHEN:
MR. COHEN: Now you were asked some questions about something called segregation of assets. Do you recall that, Mr. Sun?
MR. COHEN: Can you describe for us what your understanding of segregation of assets was.
CAN SUN: Sure. Which is when FTX receives assets of customers, whether it's fiat or crypto, that they will hold those assets in segregated bank accounts or crypto wallets separate and apart from FTX's own assets.
MR. COHEN: So I want to just go through a couple things here.
You were talking about separation of FTX's operational assets. I think you gave the example of payroll, for example, for customer assets, correct?
MR. COHEN: Now that's a different concept than separation of customer A's assets versus customer B's assets, correct?
MR. COHEN: And I think you said at FTX, with customer A, B, and so on's deposited assets, they were all held in one account.
MR. COHEN: And that was called an omnibus account, or omnibus wallet.
CAN SUN: Yes. So we hold all customer assets in, you know, these combined wallets, which we refer to as omnibus accounts.
MR. COHEN: Okay.
JUDGE KAPLAN: Was that true generally or with respect only to crypto assets?
JUDGE KAPLAN: Thank you.
BY MR. COHEN:
MR. COHEN: Now let me move forward in time, Mr. Sun.
I think you described a situation in August of 2022 when you learned about Alameda having certain privileges on the FTX exchange. Do you recall telling us about that?
MR. COHEN: And how did you learn of that?
MR. COHEN: And this was about——this was in about——in or about August of 2022?
MR. COHEN: Okay. Did you discuss this with anyone else besides Mr. Dexter and Mr. Miller around that time?
MR. COHEN: And I believe you told us that when you first learned of this, you were shocked.
MR. COHEN: And the take-away was that this was going to be changed to a delayed liquidation?
CAN SUN: Yes. After some back-and-forths, the take-away is that they will change it to a delayed liquidation mechanism, make it known to our users and our regulators, and also offer it on a nondiscretionary basis to all large market makers.
MR. COHEN: And that was going to be implemented sometime after August of 2022, correct?
MR. COHEN: Okay. And I think you said that you were not aware of whether that was ever implemented, correct?
MR. COHEN: Did you follow up?
CAN SUN: So as I understand it, I had completed everything on the legal front to implement that. It was passed on to the business team, and they were stuck in a process of discussing what other nondiscretionary terms that we were to offer to other market makers on the exchange.
MR. COHEN: So it never got implemented.
MR. COHEN: And you left it to the business team.
MR. COHEN: Did you think about resigning over it?
MR. COHEN: But you didn't.
CAN SUN: That's right. And the difference is, when I first heard about it in August of 2022, there was——I did not know that that was the same mechanism that Alameda used to withdraw customer assets until Nishad told me around 11 p.m. on November 7.
Second, Nishad had assured me that that mechanism had never been triggered.
And three, as we've discussed, you know, we had a path to actually get rid of it.
MR. COHEN: Okay, sir. Let me move to a different topic.
In your experience, have you ever heard the term "document protection policies"?
MR. COHEN: Or "data protection policies."
JUDGE KAPLAN: Which one are you asking about?
MR. COHEN: The second one, your Honor; data protection policies. A. So again, if you could be a bit more specific, it would be helpful. It could be——
MR. COHEN: Sure. Have you ever heard of policies that companies use to decide what data to keep or not keep?
MR. COHEN: What do you——how do you think of them? What term do you use?
MS. SASSOON: Objection.
JUDGE KAPLAN: What's the objection?
MS. SASSOON: The "how do you think of them" seemed vague, but if he's just asking for terminology, I'll withdraw it.
JUDGE KAPLAN: Are you just asking for terminology?
MR. COHEN: For now, yes.
JUDGE KAPLAN: All right.
CAN SUN: So——so yeah. So companies have policies to help guide them as to their, you know, data retention, protection policies.
MR. COHEN: Okay. Based on your experience at FTX, did FTX have such policies?
CAN SUN: So again, data protection policies can cover a very wide range of things, from user privacy to, you know, separate security, to, you know, document retention. I can't say that FTX had all of them, but it had some of them.
MR. COHEN: Did you ever participate in reviewing or drafting such policies?
MS. SASSOON: Objection, vague. Which——
JUDGE KAPLAN: Sustained.
MR. COHEN: I'll break it down.
Did you ever participate in reviewing such policies at FTX?
MS. SASSOON: Objection. It's still vague. What such policies? He just said it could be 20 different things.
JUDGE KAPLAN: Sustained, form.
MR. COHEN: Okay. Let's break this down even more, Mr. Sun.
To your knowledge did FTX have any documentation that dealt with data retention?
MS. SASSOON: Objection, form.
JUDGE KAPLAN: Overruled.
MR. COHEN: Nothing comes to mind.
JUDGE KAPLAN: That's what he said.
MR. COHEN: Answer the next questions yes or no, please.
Did you ever talk with Dan Friedberg about data retention issues?
MR. COHEN: Answer this question yes or no, please: Did you ever talk to anyone at Fenwick & West about data retention issues?
MS. SASSOON: Objection.
JUDGE KAPLAN: What's the objection?
MS. SASSOON: 401, 403, raised before trial.
JUDGE KAPLAN: Sustained, on all grounds.
MR. COHEN: During the time you were the general counsel of FTX, did FTX ever receive subpoenas?
MR. COHEN: Did you participate in responding to those subpoenas?
MR. COHEN: In connection with responding to those subpoenas, did you——answer this yes or no——did you have to deal with data retention issues?
MR. COHEN: Have you ever heard of communications called Signal and Slack?
MR. COHEN: What are they?
MR. COHEN: And were they used at FTX?
MR. COHEN: Were they used by the legal department?
MR. COHEN: Let's move on, Mr. Sun.
MR. COHEN: If we could go back to Government Exhibit 326 in evidence.
MR. COHEN: Do you recall giving testimony about this document, sir?
MR. COHEN: And if we look at the bottom of the page. If you can highlight, Brian, the "from" and the "sent."
MR. COHEN: So this is an email sent by you. Were you can@ftx.com?
MR. COHEN: And the date is Friday, May 13, 2022, correct?
MR. COHEN: And go to the body of the email. And if you can highlight the text of that, Brian, the first paragraph.
The whole first paragraph.
MR. COHEN: You are providing to Ms. Knaus the new terms of service, correct?
MR. COHEN: And then you give a place for her to click on. That's the document we were just looking at as Government Exhibit 558, isn't it, sir?
MR. COHEN: Take that down.
MR. COHEN: By the way, FDM was a different entity than FTX International, correct?
CAN SUN: So FTX International wasn't an entity by itself. It was——you know, we had one parent holding company and we had maybe 2,000 operating entities below.
MR. COHEN: Thank you, sir.
Now do you recall giving testimony about some events in November of 2022?
MR. COHEN: Okay. And you gave——you described a meeting you were in with Sam and others where you went over a spreadsheet. Do you recall that, sir?
MR. COHEN: And one of the things you took away from this meeting was that in your view, the spreadsheet reflected a $7 billion hole, I believe you told us.
MR. COHEN: And as you understood it, Mr. Bankman-Fried was talking to investors at the time, correct?
MR. COHEN: And this spreadsheet got sent to Apollo; that's one of the investors you were mentioning at the time.
MR. COHEN: The spreadsheet with the hole in it got sent to Apollo.
MR. COHEN: And then you told us you went, you had a discussion with Mr. Bankman-Fried, and I think you said you went on a walk with him; is that correct?
MR. COHEN: Okay. And you went over possible justification for what happened, correct?
MR. COHEN: And then after that, Mr. Bankman-Fried had a call with Apollo?
MR. COHEN: And I take it you weren't on that call.
MR. COHEN: You also mentioned that during the same period, that during that same week, you had a conversation with Nishad Singh. Do you recall that?
MR. COHEN: And he told you he was concerned about the loans he had received from the company.
MR. COHEN: Did he tell you they weren't really his loans?
MR. COHEN: Did he tell you he wasn't really on the hook for them?
CAN SUN: That he was not really on the hook for them. I think his conversation with me was he was worried about his ability to repay those loans and what was going to happen to those loans.
MR. COHEN: Okay. Understood.
Okay. Now one more topic, Mr. Sun.
You mentioned that you're here today pursuant to a non-prosecution agreement.
MR. COHEN: Okay. Can we pull up Government Exhibit 12 in evidence.
Oh, I'm sorry. I'm sorry. It's 3524-012 in evidence.
MS. SASSOON: This is not in evidence, your Honor.
MR. COHEN: Oh, it's not in? I'm sorry. I thought you moved it in. Well, then let's do this. Just show it to the witness.
JUDGE KAPLAN: I'm still not clear what it is you're proposing to show to the witness. What exhibit?
MR. COHEN: 3524-012. It's in the 3500, your Honor.
JUDGE KAPLAN: And is it a government exhibit, is it a defense exhibit, or has nobody bothered to mark it?
MR. COHEN: It's not marked outside of that, your Honor. We could mark it.
JUDGE KAPLAN: Let's mark it.
MR. COHEN: Okay. What is the next DX number?
MS. SASSOON: Your Honor, I think yesterday we marked it using the same number but adding a DX, so to keep with the convention——
JUDGE KAPLAN: That's fine. So it will be Defendant's Exhibit 3524-012 for identification.
BY MR. COHEN:
MR. COHEN: Take a look at this document, sir, and my question is whether you recognize it.
MR. COHEN: What is it?
MR. COHEN: And if you can turn to the second page.
Is that your signature?
MR. COHEN: Your Honor, we offer DX 3524-012.
MS. SASSOON: No objection.
JUDGE KAPLAN: Received.
(Defendant's Exhibit 3524-012 received in evidence)
MR. COHEN: So this is a document you are——you mentioned you're testifying here pursuant to a non-prosecution agreement; is that correct?
MR. COHEN: And this is the agreement?
MR. COHEN: If we could call your attention to the second full paragraph.
MR. COHEN: And call that out.
MR. COHEN: And look at the first sentence. It says, "On the understandings specified below, the Office of the United States Attorney for the Southern District of New York will not criminally prosecute Mr. Sun for any crimes (except for criminal tax violations, if any, as to which this Office cannot and does not make any agreement) related to the schemes by [Mr.] Bankman-Fried" and others, and so on.
So what is your understanding, Mr. Sun, of how this provision works, or this agreement works?
CAN SUN: My understanding of the agreement is I am to testify truthfully on the stand. If I do so, I will not be prosecuted by the government.
MR. COHEN: And who makes the determination of whether you've been truthful on the stand?
MR. COHEN: Isn't it fair to say that's the government who makes the determination?
MR. COHEN: If the government determines that you haven't been truthful or you've provided incomplete or misleading testimony, this agreement doesn't apply, correct?
MS. SASSOON: Objection, form.
JUDGE KAPLAN: Sustained.
MR. COHEN: Let's go down to the next paragraph.
Call it out.
If we can go to the first sentence, Brian, and highlight it in yellow.
BY MR. COHEN:
MR. COHEN: "It is understood that, should Mr. Sun commit any crimes subsequent to the date of signing of this agreement, or should the government determine that he has knowingly given false, incomplete, or misleading testimony or information, or should he otherwise violate any provision of this agreement, Mr. Sun shall thereafter be subject to prosecution for any federal criminal violation of which this Office has knowledge, including perjury and obstruction of justice." Do you see that, sir?
MR. COHEN: Is it fair to say that if the government determines that you've knowingly given false, incomplete, or misleading testimony or information, you could be subject to prosecution?
MS. SASSOON: Objection, form. The question is his understanding.
MR. COHEN: Can we have a nonspeaking objection.
JUDGE KAPLAN: Sustained, form.
MR. COHEN: Mr. Sun, what is your understanding of whether you can be prosecuted?
MR. COHEN: Okay. And what is your understanding of who makes that determination?
MR. COHEN: You signed this——
MR. COHEN: Drop down. Drop the paragraph down.
Go back to the first page, Brian. I'm sorry.
Okay. Go to the top of the page. And the date. Just up at the top, Brian.
MR. COHEN: So you signed this agreement on October 17th; is that correct?
MR. COHEN: That was earlier this week?
MR. COHEN: And then did you meet with the government after you signed it?
MR. COHEN: That was yesterday?
MR. COHEN: Okay. No further questions.
JUDGE KAPLAN: Thank you.
Any redirect?
MS. SASSOON: Just briefly.
Just keep that exhibit up, if you don't mind.
REDIRECT EXAMINATION BY MS. SASSOON:
MS. SASSOON: Mr. Sun, can you please read the second sentence of the first paragraph of this agreement.
CAN SUN: "This agreement is in furtherance of the request for Mr. Sun to testify, and should not be construed as a legal or factual determination that Mr. Sun has violated any federal law."
MS. SASSOON: Thank you for zooming in on that. We can take this down.
MS. SASSOON: You were asked about signing this on October 17, 2023. Prior to that had you met with the government?
MS. SASSOON: Sorry. I couldn't hear you.
MS. SASSOON: And did you meet with the government voluntarily?
MS. SASSOON: And where did you come from to testify in court today?
MS. SASSOON: And why did you come from Japan to testify?
MS. SASSOON: No further questions.
JUDGE KAPLAN: Thank you.
Anything else, Mr. Cohen?
MR. COHEN: No, your Honor.
JUDGE KAPLAN: All right. You're excused, Mr. Sun. Thank you.
(Witness excused)
JUDGE KAPLAN: Do we have another witness today?
MR. REHN: We do, your Honor. It's a witness who I think can probably be done by lunch if we extend a little bit later, to 1:00 or so.
JUDGE KAPLAN: Can everybody hold their appetites?
Okay. Let's do it.
COURT CLERK: If you'd please step around and remain standing and raise your right hand for a moment.
(Witness sworn)
COURT CLERK: Thank you. Please be seated.
Sir, if you could please state your name and spell your last name for the record.
JUDGE KAPLAN: You may proceed, Mr. Rehn. ROBERT BOROUJERDI, called as a witness by the Government, having been duly sworn, testified as follows: