Is Prison Likely for Sam Bankman-Fried?

Who would have thought that of all people, Larry David would be right about the future of FTX? Sure, Larry might have been wrong about doubting the wheel, forks, toilets, coffee, democracy, the lightbulb, dishwashers, and iPods but we all should have been listening to his doubts on FTX. Not only did the cryptocurrency exchange file for bankruptcy but its founder, considered by many a modern-day J.P Morgan some months ago, could now be going to jail.

The Crypto World Weights In On Bankman’s Future

The FTX bankruptcy saga has been widely documented as one of the most infamous stories of the crypto world. With new details emerging every day and Sam Bankman-Fried, fortunately choosing to continue his foolishness of not following legal advice, the legal case against the new crypto villain is mounting. Sure, Bankman might believe “this isn’t the time and place to think about” prison but the world certainly seems to disagree.

Whether Bankman truly “miscalculated” $8 billion as he claims or he was actually aware of the fraud he was committing, the US Justice Department is calling for an independent examination of what is being called the “fastest big corporate failure in American history.” Galaxy Digital CEO Mike Novogratz and American Magnate Mark Cuban are only some of the latest personalities to predict that Sam Bankman-Fried will be spending time in prison. 

“You’re seeing someone who is just spewing more lies. Sam has always been kind to me. He has a kind demeanor. That was part of the shtick. And I’m not saying he even planned this all like a criminal mastermind. What they did was criminal and they need to be prosecuted for it,” Novogratz said in an interview with CNBC. “You’re seeing someone who is just spewing more lies. Sam has always been kind to me. He has a kind demeanor. That was part of the shtick. And I’m not saying he even planned this all like a criminal mastermind. What they did was criminal and they need to be prosecuted for it.”

Lawsuits Are Already Piling Up

While no criminal lawsuits have been filed against Bankman at this time, this is not the case for civil lawsuits. A class-action lawsuit filed in Miami’s federal court back in November not only names Bankman but also celebrities like Tom Brady, Steph Curry, and Kevin O’Leary for their endorsements. The celebrities not only made ambassadors by the cryptocurrency exchange but also received equity in exchange.

The class lawsuit was not only the start of other legal civil actions against Bankman but could also bring to light plenty of evidence that could later be used in criminal investigations. The 41-page lawsuit, which was filed on behalf of an Oklahoma resident and seeks $11 billion in damages, states:

“The Deceptive and failed FTX Platform was based upon false representations and deceptive conduct. Although many incriminating FTX emails and texts have already been destroyed, we located them and they evidence how FTX’s fraudulent scheme was designed to take advantage of unsophisticated investors from across the country, who utilize mobile apps to make their investments.”

US Agencies Are Investigating the Alameda – FTX Link

The investigative arm of the U.S. Department of Homeland Security has already started a “criminal investigation involving the FTX cryptocurrency platform”. Homeland Security Investigations Miami made it public via a tweet that it was looking for information from those who had invested in the platform, setting a tip line for that purpose.

Other government agencies who are allegedly investigating Bankman’s potentially criminal activity include the Securities and Exchange Commission and the Department of Justice. This investigation would seem to be focused on Bankman’s use of FTX’s customer assets to fund Alameda Research. Not only did this action deviate from the way brokers are expected to manage users’ funds but it also went against FTX terms of service:

“None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat Digital Assets in User’s Accounts as belonging to FTX Trading.”

 Jeremy Hogan, who is widely recognized as one of the top crypto legal experts, weighed on what this means for FTX and Bankman by tweeting:

“All digital assets were to be held in users’ accounts and NOT be used by FTX for any purpose (E.g. speculative investments). There’s no wiggle room. It’s what I would call a “gran problema” for them. BlockFi, on the other hand, was very clear in its TOS that it was not custodian or fiduciary of any customer assets. And that, in legal fallout terms, could be the difference between a “money” problem and a “prison” problem.”

By tapping into FTX’s assets to fund Alameda Research, Bankman would have crossed the line into committing fraud. Not only was this decision against the ToS previously quoted but Bankman would also have lied to investors and shareholders in the process.

The Problem With Claiming Jurisdiction

One of the major points of discussion around the prospect of the US prosecuting Bankman has to do with jurisdiction. Not only is FTX an offshore business based in the Bahamas but it also didn’t cater to Americans (at least technically). This last caveat has to do with the fact that users located in the US couldn’t use the platform without bypassing regional restrictions. While there was an FTX platform available to US users (FTXUS), this one operated separately from the main platform, which means that user funds are safe… At least according to Bankman.

However, this doesn’t mean that no American investors were caught in the mess that is FTX’s downfall. While against the Terms of Service, investors in the US could make use of tools like VPN to bypass restrictions and trade in the platform. This was especially likely given that many users expressed dissatisfaction with the experience when using FTX.us, as reflected by its unofficial subreddit.

Now, while Bankman’s (and FTX’s) defense could argue that U.S law enforcement has no jurisdiction, the fact that FTX’s executives and Bankman himself frequented the US to do business with American entities, could be enough argument to gain jurisdiction. In the words of Professor Devin J. Stone, runner of the popular legal YouTube Channel:

“Prosecutors could overcome this defense if they can show that there’s a nexus between FTX and the United States. Prosecutors would say that FTX does lots of business in America. It has customers in the U.S. It uses American banks, its executives frequently travel to the U.S. and further of the crypto business, and it’s safe to assume that the DOJ could probably clear that jurisdictional hurdle.”

Given the Justice Department’s record at linking foreign individuals and businesses with American jurisdictions, Bankman seems to have an uphill battle to successfully use this defense. 

Did Bankman Intend To Commit Fraud?

Another hurdle Bankman is likely to throw at prosecutors is their need to prove there was intent to defraud. While the end result of FTX’s failure doesn’t change whether Bankman “F***d up” or meant to commit fraud, his prospects of going to prison do. As former prosecutor Randall Eliason told Fortune:

“Mismanaging your company and losing a bunch of other people’s money is not criminal. It happens all the time. For a criminal case, there has to be deception.”

While the jury is still out on this one, most experts agree that Bankman has not helped his case so far. Not only is Bankman potentially diminishing the range of his future legal defense but also increases the chances of self-incrimination. Hogan expressed his disbelief regarding Bankman’s decision to continue going public about the whole fallout, asking “why are his lawyers (or parents) letting him do this??”. 

According to Hogan, Bankman made several self-incriminating statements during the “light cross-examination” that he was subjected to during his The New York Times’ DealBook Summit interview. Bankman’s constant tweeting and interviews are especially baffling when considering his parents are both Stanford Law School professors. 

When asked during the DealBook Summit whether his parents were aware of the collapse beforehand, Bankman said:

“I think I called them up and said, ‘Hey guys, I think there might be a problem, like, it looks like Alameda’s position might be imploding here — there might be a liquidity issue.’” 

Given that Alameda’s Research position problems were followed by the diversion of funds from FTX customers, these events might prove the intent behind the move. This is especially possible given the fact that Bankman admitted knowing about the use of FTX deposits to pay off Alameda creditors despite not knowing it was an “improper use of customer funds”.

The Future Seems Grim For Bankman As Pressure Mounts

With the deck seemingly stacked against him, the prospects of Bankman leaving this episode unscathed seem pretty unlikely. Not only does the evidence and Bankman’s own statements indicate he was aware of what was going on but his own public image as a crypto and financial “wunderkind” are likely to play against him. After all, feigning ignorance after solidifying an image as a genius can be quite hard.

While Bankman’s role in the whole ordeal has certainly put the spotlight away from other people involved, attention is quickly turning to the likes of Alameda Research CEO Caroline Ellison, FTX CFO Jen Chan, Alameda Research Co-Founder Gary Wang, and FTX COO Constance Wang. With Ellison having told Alameda staffers that 3 other people were aware of the use of FTX customer deposits to fund Alameda Research’s operations, questions about their identity have been starting to increase.

With more information showing up every day, even Bankman would be likely to bet on having to spend time in prison. As former SEC prosecutor Ron Geffner told “Legal Eagle” when asked about the events:

“With regard to FTX, there appear to be many misrepresentations and acts of fraud based on the facts that are currently available. The conduct that seems to be most egregious are material misrepresentations as to user funds and where the money was being sent into, where it theoretically was being held on behalf of consumers and investors. It would appear that corporate governance at FTX was, at the very least, we can all agree, sloppy. It may have risen to the level where corporate governance was fraudulent, and the fact that there were conflicts of interest, there were misrepresentations made to both the public and to both private investors.”