Julia Nikhinson/AP Photo
Gurbir Grewal, director of enforcement for the Securities and Exchange Commission, speaks during a press conference about the criminal charges filed against FTX founder Sam Bankman-Fried, December 13, 2022, in New York.
White-collar criminal investigations that don’t involve a confession usually take years to bear fruit. They require the review of massive amounts of documents, witness interviews, and other source material. They require finding lower-level staffers and flipping them to reach the top of the organization. They require legal strategizing and anticipation of the suspect’s defenses. They take years of work.
But embarrassingly bad criminals can help speed things along. As current FTX CEO John Ray, a restructuring specialist installed to manage the crypto exchange’s bankruptcy, told a House committee on Tuesday, crimes at Enron, another famously bankrupt company he stepped in to manage, “were highly orchestrated financial machinations by highly sophisticated people to keep transactions off balance sheets.” Enron declared bankruptcy in December 2001, but its former CEO Jeff Skilling wasn’t convicted of conspiracy, securities fraud, and other charges until May 2006. The group home in the Bahamas housing FTX executives, by contrast, “isn’t sophisticated whatsoever, this is just plain old embezzlement,” Ray said.
Perhaps that’s why, within a month, federal prosecutors in the Southern District of New York announced a grand jury indictment of Sam Bankman-Fried, the billionaire boy “genius” who … let’s not say masterminded, maybe stumbled through? ... the FTX scam. Bankman-Fried was detained by Bahamian authorities on Monday, after saying on a Twitter Spaces interview hours earlier, “I don’t think I will be arrested.”
The Securities and Exchange Commission also issued a civil complaint Tuesday, claiming that FTX defrauded equity investors along with their own customers. And the Commodity Futures Trading Commission filed suit as well over fraud and misrepresentation of digital commodities. If the U.S. Forest Service could have come up with a case, I’m sure they would have.
We’re not used to seeing regulators and law enforcement move with this level of determination. For decades in America, over multiple presidents of both parties, we have witnessed a two-tiered justice system, where kids caught with dime bags of marijuana receive harsher punishment than those whose actions wipe out people’s life savings and nearly crash the economy. The rapid SBF arrest at least begins to reverse this lack of accountability for corporate crime, although the crimes in question were so comically obvious that it may be a one-time deal.
THE RATHER BARE-BONES INDICTMENT, as well as the SEC and CFTC complaints, will be mostly familiar to observers of the saga, though amusing nonetheless. The first four counts of the indictment involve wire fraud, and that makes sense, since the Australian Financial Review reported that FTX leadership had a group chat on Signal labeled “Wirefraud.”
As we’ve learned, FTX misappropriated customer deposits by commingling them with its associated hedge fund Alameda Research, which engaged in risky trading that exposed those customer funds to massive losses. As Ray testified Tuesday, Alameda and FTX “really operated as one company,” with “no internal controls and no separateness whatsoever.”
No new crypto regulatory regime was needed to make those actions illegal. Similarly, Bankman-Fried and FTX lying to Alameda’s lenders about the financial state of the company already violates the law, as does concealing the flow of money from FTX to Alameda through illicit transfers.
Graeme Sloan/Sipa USA via AP Images
FTX Group CEO John J. Ray III testifies during a House Financial Services Committee hearing on the collapse of FTX, December 13, 2022.
There were no financial statements at FTX; invoicing was done through QuickBooks and Slack messages, a shockingly crude process for a multibillion-dollar company. Executives had access to customer assets through special “back doors” and private keys, which they used to acquire funds and separately make hundreds of millions of dollars in real estate and other purchases. “Insiders,” per Ray’s testimony, were able to receive loans and payments of over $1 billion. In the hearing, Ray said that on one loan, Bankman-Fried signed as the issuer and the recipient. All of this is right out of what I imagine would be a Fisher-Price “My First Fraud” manual.
The final count of the indictment is interesting, as it involves campaign finance violations. As we know, Bankman-Fried and his colleagues delivered large donations to both sides of the aisle, and tried to get Congress to institute crypto-friendly regulation through the same lawmakers it showered with money. We have previously seen chats between FTX officials and associated super PACs about how to label certain donations and where they came from; sure enough, the indictment alleges Bankman-Fried arranged illegal “straw donations” in other people’s names in an attempt to breach contribution limits for individuals or corporations.
The indictment could have layered on countless other charges. There are allegations that Bankman-Fried manipulated the market for linked stablecoins Terra and Luna, which crashed earlier this year, among other coins and tokens. The private keys and back doors for personal loans could constitute theft. Even Bankman-Fried’s parents are under investigation for their ties to FTX. As we learn more, I imagine more charges will be added.
CRYPTO’S LEGION OF DEFENDERS on Capitol Hill, many of whom sit on the House Financial Services Committee, are attempting a sly shift, from blaming regulators for investigating crypto to blaming them for failing to uncover crypto fraud. They’re also trying to segregate Bankman-Fried (unlike his disinterest in segregating customer funds), calling him a unique, ordinary fraudster, unconnected to the rich vein of uniquely American innovation in the digital asset market.
Members of the Blockchain Eight, like Reps. Josh Gottheimer (D-NJ), Tom Emmer (R-MN), and Ted Budd (R-NC), took that tactic on Tuesday. Budd’s questioning was particularly humorous, as he asked Ray whether FTX would have been safer if domiciled in the U.S. Ray said no, but Budd nevertheless went on to slam the SEC for pushing crypto innovation out of the country.
Rep. Brad Sherman (D-CA), crypto’s biggest critic in Washington, was virtually alone in rebutting this line of argument. While others characterized Bankman-Fried as “one big snake in a crypto Garden of Eden,” Sherman said, “crypto is a garden of snakes.” And he savaged crypto boosters for attempting to “trash Sam Bankman-Fried and then pass his bill,” namely the legislation that would move a good bit of crypto oversight to the light-touch CFTC.
An industry with fraud at its core does not need to be preserved.
Hypocrisy aside, crypto defenders are mistaken about what we’re seeing from the government, which compared to the events of the past couple of decades is actually quite a success. Regulators kept crypto out of the broader financial system, and the related prospect of contagion and bailouts. The SEC and its chair Gary Gensler, reviled by the crypto industry, were particularly adept in this area, as the American Economic Liberties Project explained in a recent brief. Gensler initiated guidance that kept crypto off of bank balance sheets, barred Bitcoin-based exchange-traded funds, blocked crypto lending products by threatening litigation and engaging in enforcement, proposed rules to put crypto exchanges like FTX under SEC scrutiny, prevented crypto firms from entering public markets, and generally did what he could to protect the financial system.
Furthermore, law enforcement managed to identify and begin to prosecute fraud in a matter of weeks. Granted, this was a remedial fraud case that a kindergartener could have spotted. But as I covered in my first book, in the recent past, big banks mass-produced millions of obviously fake and fraudulent documents and used them in courts to kick people out of their homes, and no major prosecutions ensued. Extremely obvious dumping of crappy securities on unsuspecting investors was allowed to happen before the housing bubble collapse, also without real accountability. A quick mop-up of the dumbest criminals in the world is definitely progress.
THERE’S MORE TO DO, of course. There will be a temptation to use the FTX collapse as a rationale for building a crypto regulatory framework, with of course oversight from the congressional committees that can rake in campaign donations from those crypto companies, which want that regulation to be mild. But as Sherman pointed out, an unproductive instrument doesn’t need the sanction of the U.S. government so it can thrive.
Law enforcement has proven with the quick Bankman-Fried arrest that it can police fraud in the crypto space. More can be done here. The Justice Department is apparently torn over criminally charging Binance, the largest crypto exchange, and its top executives, for facilitating money laundering. Prosecutors are hesitating because Binance is claiming that “a criminal prosecution would wreak havoc on a crypto market already in a prolonged downturn.”
This is the “too big to fail” argument applied to crypto. But we already know that crypto damage has not leaked out into the wider economy. That should make it much easier to charge companies and executives for breaking the law.
An industry with fraud at its core does not need to be preserved; that just marches customers into an array of FTX-type wipeouts. A combination of fencing off crypto from the economy, warning customers of the risks, and prosecuting wrongdoing is more than sufficient.
Bankman-Fried spent a month chattering with everyone with a media credential rather than going into hiding. He seemed unconcerned with any personal legal risk. He had every right to expect that the rich and powerful simply don’t face accountability for their crimes. He was wrong, and unlike Elizabeth Holmes, he wasn’t just faulted for ripping off other rich and powerful people.
This is an opportunity to reset the assumption that your bank account determines your criminal liability. But it’ll take going beyond the easiest criminal case in history to complete the job.
