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Ex-FTX Lawyer Testifies Company Falsely Promised Asset Protection

A former FTX lawyer testified that the company had falsely promised institutional customers, including hedge fund Sculptor Capital Management, that their assets would be safe in the event of insolvency.

In the ongoing fraud trial of Sam Bankman-Fried, the founder of FTX, Can Sun testified that the now-collapsed cryptocurrency exchange had emailed customers to assure them that their funds would be ringfenced and protected in the unlikely event of bankruptcy, Bloomberg reported Thursday (Oct. 19)

Sun revealed this information during his testimony in a federal court in New York, where he stated that he had no knowledge of the inappropriate use of customer funds. He said he believed that customer funds would be fully protected, segregated and returned to them, per the report. Sun joined FTX as a general counsel in August 2021.

During the trial, the government presented an email exchange between FTX and Sculptor Capital Management as evidence of these reassurances. However, it now appears that these promises were misleading, as FTX allegedly misused customer funds for various purposes. 

Bankman-Fried is facing serious charges related to the misappropriation of customer funds. The prosecution claims that Bankman-Fried funneled FTX customer funds into an affiliated hedge fund called Alameda Research. These funds were allegedly used for risky trades, political contributions and property investments. If convicted, Bankman-Fried could face decades in prison. 

The trial is on its 12th day. The prosecution witnesses include Co-Founder and former Chief Technology Officer Gary Wang, Alameda Research’s ex-CEO and Bankman-Fried’s former girlfriend Caroline Ellison and former engineering director Nishad Singh. All three have pleaded guilty even as Bankman-Fried maintains his innocence. 

Meanwhile, FTX’s current CEO John J. Ray III, who was brought in to restructure the crypto exchange following its collapse, has proposed a settlement to repay its debtors

If allowed, the settlement would gives creditors more than 90% of their funds, FTX announced in a press release on Monday (Oct. 16). 

“Together, starting in the most challenging financial disaster I have seen, the debtors and their creditors have created enormous value from a situation that easily could have been a near-total loss for customers,” Ray said in a statement.

According to the release, the debtors want to split missing customer assets into three pools: one for FTX.com customers, one for FTX.US customers and a “general pool” of other assets.