Sam Bankman-Fried could be fined and put behind bars for FTX's $32 billion debacle

Federal Law Enforcement agencies are currently building a case to level charges of fraud against him.
Christopher McFadden
Sam Bankman-Fried
Sam Bankman-Fried

Alex Wong/Getty Images 

Sam Bankman-Fried, the former CEO of the now defunct FTX crypto exchange, could be in even hotter water if recent news is accurate. According to various sources, including CNBC, Federal Law Enforcement agencies are currently building a case to level charges of fraud against him.

FTX was valued at an eye-watering $32 billion until a few weeks ago. However, what might be the most high-profile downfall of a large company since Enron, FTX, and its associated companies fell like a house of cards as the truth behind how they were run was exposed.

Large investors fled in droves, leaving most smaller investors with useless junk in their portfolios. This has led, understandably, to anger among those who trusted Bankman-Fried. There have even been claims that FTX was, effectively, a high-tech, crypto-based Ponzi scheme on a grand scale.

A Ponzi scheme is a type of deception when the quick profits paid to the initial investors from funds provided by later investors encourage belief in the success of an unrealized business. If this is the case, the federal authorities will be eager to throw the book at Bankman-Fried.

But these are just accusations; there is no concrete evidence yet. At least, as far as we know.

However, running companies poorly is not a crime, as he has admitted repeatedly over the interim weeks. In interviews, including with Andrew Ross Sorkin, he has even seemed to blame Caroline Ellison, his colleague (and ex-girlfriend) at Alameda.

He claims he was unaware of how heavily leveraged Alameda was and that he was unaware of many activities taking place within his enormous empire. But, of course, we only have his word to go on.

But, if fraud were involved, as some have claimed, that would be a very different story; that is indeed illegal.

Did Bankman-Fried commit fraud?

Currently, at least $8 billion of money from former customers that were supposed to be used to cover massive losses at the hedge fund he used to run called Alameda Research is missing. With billions of dollars in debt, both of his businesses are bankrupt.

The chosen replacement CEO, John Ray III, said that in the 40 years he has worked in law and restructuring, he has never seen "such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here."

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He is the same Ray who supervised Enron's bankruptcy in the 2000s, as it happens.

What could happen to Bankman-Fried if convicted of fraud?

So was fraud committed? If so, a fraud conviction could result in a life sentence in prison for Bankman-Fried.

Renato Mariotti, a former federal prosecutor and trial lawyer who has defended clients in derivative-related claims and securities class actions, says the most important question about Bankman-Fried is whether he intentionally misled FTX customers into thinking their money was available and not being used as collateral for loans or other purposes.

Mariotti explained, "it sure looks like there’s a chargeable fraud case here." If I represented Mr. Bankman-Fried, I would tell him he should be very concerned about prison time. That it should be an overriding concern for him," he added.

However, Bankman-Fried doesn't seem too concerned about his potential legal liability if his demeanor in recent interviews is anything to go by. And this also seems to be supported by the lack of action by regulators or authorities, which has inflamed the ire of many in the sector, not just those who lost money. Investors, clients, venture capitalists, and Wall Street were all caught off guard by the stunning collapse of FTX and SBF.

But, the worm may be beginning to turn. According to CNBC, Bankman-Fried could potentially face both criminal and civil prosecution.

According to Richard Levin, a partner at Nelson Mullins Riley & Scarborough, where he chairs the fintech and regulation practice, he could face criminal action by the U.S. Department of Justice for "criminal violations of securities laws, bank fraud laws, and wire fraud laws." Under such a case, prosecutors could go after him for allegedly using customer funds to stabilize the price of FTX's own FTT coin forcibly; the prosecution could claim that FTX violated that fiduciary duty.

Bankman-Fried can also be subject to civil enforcement actions and criminal prosecution. Levin also told CNBC that the Securities Exchange Commission, Commodity Futures Trading Commission, and state banking and securities agencies "could bring that."

“On a third level, there’s also plenty of class actions that can be brought, so there are multiple levels of potential exposure for [...] the executives involved with FTX,” Levin said.

If convicted, subject to cases being pursued in the first place, Bankman-Fried could face heavy fines and, potentially, prison time.

But, for the time being, Bankman-Fried will have to add the potential for such actions to his list of apparently self-inflicted woes.

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