The ultimate day of Sam Bankman-Fried’s (SBF) trial introduced additional revelations about what transpired behind the scenes on the trade as former FTX lawyer Can Solar took the stand because the day’s first witness.
Solar’s testimony revolved round FTX Digital Markets’ phrases of service and their pivotal function within the ongoing trial. SBF has publicly used the phrases of service to justify a few of the losses at FTX.
Unaware of misuse
Former FTX Normal Counsel Can Solar — who performed a central function in drafting FTX Digital Markets’ up to date phrases of service in Could 2022 — started his testimony with a stunning assertion.
Underneath a non-prosecution settlement to guard himself, Solar mentioned he “didn’t do something mistaken” and had “no thought” that the trade was misusing buyer funds.
Solar testified that when FTX confronted a collapse in early November 2022, he engaged in a name with non-public fairness agency Apollo International. The decision aimed to safe an funding to deal with the huge surge in buyer withdrawals.
Solar informed the jury that he was “shocked” to find that FTX confronted a staggering “$7 billion shortfall” in assembly buyer withdrawal calls for.
“Theoretical justifications”
Solar mentioned that following the decision, Apollo requested a steadiness sheet, which was supplied by both SBF or former FTX head of product Ramnik Arora. The steadiness sheet painted a grim image of FTX’s monetary state of affairs.
Apollo’s response was to say no the funding, however not earlier than looking for explanations for the lacking funds. Solar mentioned that SBF directed him to supply “theoretical justifications” for the disappearance of buyer funds.
Throughout his testimony, Solar emphasised that no “theoretical justifications” had been supported by factual proof. He additional acknowledged that there was no authorized justification for diverting the funds from buyer accounts.
One other important revelation throughout Solar’s testimony was associated to the scrutiny of FTX’s margin buying and selling protection. SBF steadily cited a bit in FTX’s phrases of service, which acknowledged that taking part in margin buying and selling may end in collateral loss if the account is liquidated.
Solar disclosed that he had knowledgeable SBF that this rationalization alone was inadequate to account for the lacking $7 billion in buyer funds and couldn’t be used to clarify the shortfall. He added that SBF acknowledged this on the time however resorted to utilizing it as a justification throughout his interview with George Stephanopolous.
To underscore this level, the prosecution performed a Dec. 1, 2022, interview of SBF with George Stephanopolous. Within the interview, Stephanopolous identified that FTX’s phrases of service explicitly acknowledged that buyer property wouldn’t be loaned out.
Nonetheless, Bankman-Fried deflected this by pointing to a different part of the phrases, the “borrow-lending facility,” also referred to as buying and selling on margin. It was revealed that this facility required clients to choose in; nonetheless, even those that had not signed up for it misplaced cash within the FTX collapse.
Cross-examination
Solar’s cross-examination additional explored the phrases of service of FTX Digital Markets. The protection has beforehand indicated that these phrases may very well be central to their case.
The phrases of service clearly outlined FTX’s dedication to safeguarding buyer property and assuring clients that their deposited property had been completely theirs. This aligned with the federal government’s allegations that Alameda Analysis accessed and spent buyer deposits despatched to FTX.
Throughout cross-examination, lead protection lawyer Mark Cohen delved into the margin buying and selling part of the phrases. Cohen aimed to determine the proportion of customers engaged in riskier buying and selling methods.
This info may make clear what number of clients struggling losses within the FTX collapse had been concerned in such buying and selling. Nonetheless, Solar couldn’t present particular numbers, main Cohen to pivot to different features of the phrases.
Alameda’s exemption
Cohen additionally probed into a bit regarding account liquidation, the place clients had been warned they could lose “all” of their property if backstop liquidity suppliers couldn’t successfully intervene.
Nonetheless, Solar didn’t have responses to queries associated to this part.
Moreover, Cohen inquired about Solar’s data relating to Alameda’s exemption from auto-liquidation. Solar testified that he turned conscious of this exemption in August or September 2022.
He revealed that he had requested its removing, however SBF and FTX co-founder Gary Wang had resisted. Solar additionally famous that this carveout for Alameda had by no means been triggered, as he was knowledgeable throughout the identical interval.
Cohen requested Solar why he didn’t resign at the moment, to which the lawyer defined that he was unaware that the particular privilege exempting Alameda from liquidation additionally allowed it to withdraw buyer funds from FTX.
Solar mentioned he realized concerning the misuse of buyer funds on Nov. 7, 2022, when Nishad Singh disclosed it to him, and he submitted his resignation the next day.
Third Level’s funding
Robert Boroujerdi, a managing director at asset supervisor Third Level, was the subsequent witness to take the stand. His testimony gave the jury priceless insights into the monetary features of FTX and its dealings.
Third Level finally invested $60 million in FTX Worldwide, an funding Boroujerdi now values at “zero.”
Throughout his testimony, prosecutor Thane Rehn delved into Boroujerdi’s conversations with SBF earlier than Third Level’s preliminary $35 million funding in FTX in July 2021.
Boroujerdi revealed that FTX had not knowledgeable him that Alameda was exempt from FTX’s danger engine, that means its buying and selling accounts couldn’t be liquidated and will go unfavorable infinitely. He added that FTX’s so-called “speedy” danger engine made it really feel protected concerning the funding.
When requested how his funding technique would have modified if he had recognized about Alameda’s particular privileges, Boroujerdi acknowledged unequivocally that Third Level wouldn’t have proceeded with the funding.
Moreover, he identified that Third Level wouldn’t have participated had they recognized that the $35 million can be funneled to Alameda or that Alameda may withdraw buyer funds from FTX.
David Lisner performed the cross-examination of Robert Boroujerdi, aiming to discover the due diligence performed by Third Level on FTX. Nonetheless, most of his queries had been met with instant objections, subsequently sustained by Choose Kaplan, resulting in restricted progress in his line of questioning.
Prosecution on monitor
The trial continues to unravel advanced particulars surrounding FTX, with just a few extra witnesses anticipated to take the stand on the subsequent listening to.
The prosecution mentioned it’s on monitor to wrap up its case by the subsequent court docket session on Oct. 26 after presenting the ultimate witnesses from its facet.
The protection mentioned it’s going to current its case as soon as the prosecution rests. Nonetheless, whether or not the protection will current an argument and who they could deliver to the stand as witnesses is unclear.