In a press conference today, the US Attorney for the Southern District of New York said Bankman-Fried is facing a total of eight criminal charges, including defrauding FTX customers, FTX investors and Alameda subsidiary lenders Research.
The arrest has taken place jubilation in crypto circles, after some biting your nails for its seemingly generous treatment by the “mainstream media” and speculation (from Twitter CEO Elon Musk, no less) that his political donations could earn him a sort of free pass with U.S. law enforcement.
Still, the timing of the arrest — one day before Bankman-Fried was due to testify before Congress on the collapse of FTX — raised eyebrows.
Against the advice of his lawyers, Bankman-Fried gave a series of interviews after the crash, but none were particularly illuminating (with the exception of one Vox report which caught him off guard). He largely avoided simple questions, gave marginal answers and was generally distracted: him played video games during at least one interview.
But as pointed out by U.S. Representative Maxine Waters, chair of the House Financial Services Committee, today’s hearing would have marked the first time Bankman-Fried has spoken under oath about the FTX debacle. In a declarationWaters said she was “surprised” to learn of the arrest. “The public has been eagerly awaiting these answers under oath before Congress,” she wrote, “and the timing of this arrest denies the public that opportunity.”
In addition to providing his own testimony, Bankman-Fried was also expected to respond to testimony from John Ray III, the liquidation savant who stepped into his shoes as CEO of FTX on Nov. 11, who should have spoken before him.
A written preview of Ray’s testimony, released before the hearing, gave the first indication that Bankman-Fried was about to face a rough ride. “Never in my career have I seen such a total failure of corporate controls at all levels of an organization,” wrote Ray, before describing Bankman-Fried and his inner circle as “grossly inexperienced and unsophisticated.”
While the details remain unclear, Ray confirmed that FTX clients’ deposits were mixed with funds held by subsidiary Alameda Research and used to fund risky trading activities, exposing FTX users to “massive losses”. He also explained that, contrary to Bankman-Fried repeated complaints that FTX’s US division has always remained solvent, the offshoot “has not been independently operated by FTX.com,” denting any remaining hopes that US-based clients will recover their funds in full. Bankman-Fried’s attorney did not respond to a request for comment.
A leaked version of Bankman-Fried’s preparationsobtained by Forbes, suggests that even his own testimony would have added a lot to the show. According to the document, Bankman-Fried was preparing to point the finger at least in part at rival exchange Binance, which the document says played a role in triggering the run on the bank that led to the collapse of FTX. Not only has Binance engaged in a sustained smear campaign, the document suggests, but it “never intended” to carry out a rescue package agreed on Nov. 8, which precluded Bankman-Fried from speaking to other potential White Knights.
The paper also retraces the same ground Bankman-Fried walked in her interview parade. His argument has always been that while not enough attention has been paid to risk management, no deliberate fraud has occurred.
Securities attorney Aaron Kaplan says he believes the timing of the arrest in connection with the congressional hearing was “interesting but coincidental,” only a reflection of a desire to prosecute Bankman-Fried as quickly as possible and in the “maximum measure of the law”. “
But it’s at least conceivable, says Richard Schulman, an attorney at the law firm Duval and Stachenfeld, that the US government didn’t want to “take the risk” that Congress might extend some sort of immunity to Bankman-Fried in exchange for her testimony. By arranging for Bankman-Fried to be arrested before his appearance, the Justice Department eliminated that possibility.
Bankman-Fried faces two sets of charges: criminal charges from the United States Department of Justice (DOJ) and civil charges from the United States Securities and Exchange Commission (SEC). Kaplan calls them the “two sides of a full-screen print.”
The SEC has charged Bankman-Fried with “a scheme to defraud equity investors in FTX” and the agency says investigations into other securities law violations are “ongoing.” SEC chairman Garry Gensler accused Bankman-Fried of building a “house of cards on a foundation of deception.”
Max Dilendorf, a lawyer specializing in cryptocurrency cases, describes the criminal charges filed by the Justice Department as “serious” and certain to carry a prison sentence of at least 20 years if proven.
But for the many victims of the FTX crash, Bankman-Fried’s arrest will mean little, Dilendorf says. While people who have lost money may take comfort in the knowledge that charges have now been filed, he says the arrest is just the beginning of what could be a years-long process leading up to trial.
The complexity of the alleged fraud means that the discovery period (in which relevant material is collected and reviewed) and the filing process “could take years,” Dilendorf says, during which hundreds of millions of dollars in client funds will be locked up. . “It will be a very bloody case… very bloody.”
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