Sam Bankman-Fried Denies Fraud Charges

fraud concept - Sam Bankman-Fried

Sam Bankman-Fried, the 30-year-old co-founder of crypto-exchange FTX, was charged in December with multiple counts of securities fraud, wire fraud, conspiracy, money laundering, and violating campaign finance regulations.

Federal prosecutors claim that Bankman-Fried deliberately and knowingly “agreed with others to defraud customers of by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research.”

The indictment also accuses Bankman-Fried of conspiring with others to defraud FTX’s lenders “by providing false and misleading information to those lenders regarding Alameda Research’s financial condition” and that Bankman-Fried conspired with others to make illegal donations to political candidates, using the names of other persons to mask and augment political giving.

Finally, federal prosecutors claim that Bankman-Fried siphoned billions of dollars in customer deposits from FTX and used the funds to purchase luxury real estate, invest in other companies, make political contributions, and fund cryptocurrency trading at Alameda Research, a hedge fund he also owned.

The case against Bankman-Fried was constructed largely with assistance from his longtime executives, Caroline Ellison and Zixiao “Gary” Wang, both of whom pleaded guilty to fraud charges.

Bankman-Fried entered a plea of Not Guilty to the charges and was released on a $250 million recognizance bond. His trial is set to begin in October.

History of the FTX Crypto-Currency Exchange

At its height, FTX was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money. It also used a native cryptocurrency known as FTT.

FTX’s troubles began in November when Changpeng “CZ” Zhao, the CEO of Binance, a competitor of FTX, sold his stake in FTX back to Bankman-Fried in exchange for a number of FTT tokens. CZ later said he would sell the tokens and expressed concern about the financial stability of FTX. The statement spooked investors and drove down the price of FTT, causing investors to withdraw from FTX and resulting in an $8 billion shortfall.

Bankman-Fried claims that the crypto-exchange lost money due to a market crash for which it was unprepared.

FTX filed for bankruptcy in November after a run on customer deposits exposed an $8 billion hole in its accounts. Bankman-Fried was arrested in December at his home in the Bahamas, where FTX was based.

Bankman-Fried Publicly Proclaims His Innocence

Since his arrest, Bankman-Fried has proclaimed his innocence, suggesting that CZ conducted a months-long effort to bring down FTX.

In a January post published on Substack, Bankman-Fried stated that “very substantial recovery remains potentially available” and that “[he] didn’t steal funds, and…certainly didn’t stash billions away.” “Nearly all of my assets were and still are utilizable to backstop FTX customers,” he wrote.

A bankruptcy lawyer for FTX told a federal judge that the exchange had recovered more than $5 billion of cash and crypto assets—considerably more than the company had previously said it had on hand. The announcement raised hopes that FTX might be able to return some money to its millions of creditors and customers around the world.

Bankman-Fried Faces Civil Liability in Cases Filed by the SEC and the CFTC

In addition to criminal charges, Bankman-Fried will face cases filed by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). These agencies have brought lawsuits that present issues almost identical to those present in the criminal case and can result in fines and other penalties as opposed to prison time.

Those proceedings have been stayed until the conclusion of the criminal case, as the outcome will undoubtedly have a significant impact on Bankman-Fried’s potential civil liability.

Analysis: Extraterritoriality, Minimum Contacts, and Lack of Criminal Intent

The US Attorney’s Office for the Southern District of New York moved unusually quickly to indict Bankman-Fried. From a prosecutorial standpoint and armed with testimony from former FTX executives, the case appears to be one of relatively unsophisticated embezzlement.

However, despite his numerous public statements, including interviews and social media posts, some pundits have suggested Bankman-Fried may be able to defend himself on the basis of extraterritoriality, as federal securities laws typically do not apply outside of the United States. Nonetheless, it appears that federal prosecutors will try to apply federal wire fraud statutes and the anti-fraud provisions of the federal securities laws against a defendant who largely acted outside the US. To succeed, they must prove that Bankman-Fried had sufficient contacts with the US to justify prosecution here.

In addition, based on interviews and social media posts, Bankman-Fried appears to claim that he lacked fraudulent intent. He has essentially said that he got in over his head, the company grew too fast, and he was unaware of all that was happening. He could claim that his actions were the result of some combination of inexperience, carelessness, and incompetence and that he never meant to defraud anyone.

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Categories: Fraud