ftx justice

By Rosario (Roy) Girasa and Emilio Collar, Jr.

This is the second part of the article on the fall of the digital Robin Hood, Sam Bankman-Fried. Included in this part are the defense arguments, sentencing, and the civil litigation fallouts that emerged from the trial, including the liability of celebrities and advertisers in endorsing products and services.

Access Part 1 of the article here: https://www.europeanbusinessreview.com/poster-child-of-securities-fraud/

Federal indictment

Defense Arguments

The defense arguments were typical of those raised by senior executives when charged with violations of law, namely, “I didn’t know because I left it to my underlings to manage the company” (notwithstanding they received many millions in salary and benefits); “I acted in good faith to benefit the company and shareholders”; and other related arguments. Their successful use at trials led to provisions in both the Sarbanes-Oxley Act (Congress, 2002) and the Dodd-Frank Act (United States Congress, 2010 Jul 21) which imposed mandatory personal knowledge requirements upon CEOs, CFOs, and other comparable persons holding major positions in public companies. The Acts mandated that the said senior corporate officials to both sign sworn statements that they have personally assured the accuracy of audit numbers and that they have instituted financial programs to accurately divulge the monetary figures stated in filed 10Q and annual reports filed.1

SBF, who decided to testify, contrary to usual legal advice for comparable defendants to remain silent, when questioned by his attorney on October 27, 2023, claimed that the FTX money deposits to Alameda were an interim measure; that Alameda had special privileges as a customer of FTX, and, thus, were not subject to the auto-liquidation feature to prevent the value of accounts falling below zero; and that the $65 billion line of credit was given to Alameda to improve its ability to provide services on the exchange to enable Alameda to borrow money from FTX, although there were limitations on the amount that could be borrowed at one time. In essence, he alleged that he acted in good faith, was well-intentioned, and lacked the criminal intent to defraud (Khalili, 2023 Oct 27). SBF’s defense was not aided by his alleged text remarks to a reporter from Vox wherein he said “F… regulators” (Sigalos, 2023 Oct 31).

ftx broadcast

Exhibits that helped sway decision

Annexed are several of the prosecutor’s main exhibits that jurors were shown. Appendix B is the Forbes magazine cover page with SBF on the cover of the issue listing the Forbes 400 richest persons. Appendix C illustrates the use of customer funds to four designated recipients, namely investments in businesses, political contributions to mainly liberal causes, charitable foundations including those to which his parents were participants, and purchases of properties. Appendix D concerns the use of customer funds to buy FTX stock from Binance and Appendix E illustrates the repayment of Alameda’s loans to crypto lenders. Appendix F is a listing of the extensive real estate purchases in the Bahamas. The jurors may have been less sympathetic to SBF when shown the lifestyle of SBF from the use of customer funds (see Appendix G). According to the Wall Street Journal, as of Sept. 11, 2023, the approximate sums allocated for the various purchases using FTX customer assets that FTX’s new management located totaled $7.3 billion plus some $929 million unaccounted for, whereas customers allege that the total sums were about $16 billion with more than half the sum not accounted for, consisting of liquid assets of $3.4 billion; cash of $1.5 billion; $1.1 billion in FTX bank accounts, seized assets of $800 million, brokerage assets of $500 million, and $8.7 billion not found (Saeedy & Dougherty, 2023 Oct 7).

Binance and its Role in the FTX Collapse

As shown in Appendix E, approximately $2.2 billion of mainly customer funds from FTX Exchange was used to purchase Binance. Binance (Binance Holding Ltd.) is a cryptocurrency exchange fund founded in July 2017, based in London, with almost 180 million users worldwide (as of late February 2024). It was commenced by Changpeng Zhao who, according to its website, had previously engaged in high-frequency trading software. Binance US is the subsidiary branch of Binance and advertises itself as a no-fee transaction service for certain Bitcoin trades and low fees for other cryptocurrencies’ trades (Binance US, 2024). According to testimony furnished by Ellison, there was intense rivalry between Binance and FTX which, when combined, were responsible for almost half of all cryptocurrencies’ trading activities. The testimony revealed that SBF and Zhao engaged in acts or proposed acts to harm the other’s firms. Among proposed actions were SBF’s complaint to have regulators examine and prosecute Binance; Zhao’s threat to unload millions of FTX’s FTT tokens that it possessed as payment for an equity stake in FTX which it allegedly purchased to fund the new exchange; and other actions consisting of tweets and other actions intended to harm the competing firm. It was the announcement of the proposed sale of FTT tokens by Zhao that caused a run of the tokens which SBF’s FTX could not sustain. Bankruptcy of FTX then ensued which resulted in the uncovering of the illegal transfer of customer funds to support Alameda (Chipolina & Oliver, 2023 Oct 18).

ftx bankruptcy

Binance has not been an innocent party to the diverse transactions with investors and users of its services. While remaining the largest global cryptocurrency exchange, it was accused by the US Justice Department of money laundering, acting as an unlicensed money transmitter, and violation of US sanctions. As a result, the parent company Binance Holdings Ltd. pled guilty and agreed to pay a fine of over $4 billion ($2,510,650,588 and a criminal fine of $1,805,475,575 for a total financial penalty of $4,316,126,163) (US Department of Justice, 2023 Nov 21). In a simultaneous civil case against Binance’s founder Changpeng Zhao commenced by the Commodity Futures Trading Commission (CFTC), the defendant agreed to pay a fine of $50 million to the US CFTC and other requirements (United States District Court for Western District of Washington at Seattle, 2023 Nov 21).

Second Trial Avoided

Prosecutors apparently had sufficient evidence to charge SBF with additional charges consisting of bank fraud, unlawful operation of an unlicensed money transfer business, bribery of public officials in violation of the Foreign Corrupt Practices Act (United States Congress, 1977), and other possible charges. Given the seriousness of the charges for which SBF was found “Guilty”, the prosecutors made the determination not to further pursue the added criminal allegations. The prosecutor’s decision was stated in a letter to the presiding judge, Lewis A. Kaplan, who, nevertheless, considered the additional allegations in his sentencing that took place on March 28, 2024. Prosecutors added that a second trial would needlessly delay forfeiture or restitution orders. In addition, a second conviction would likely result in concurrent sentences rather than consecutive sentences that would have added time of confinement (Neumeister, 2023 Dec 29).

SBF Sentence

Judge Kaplan imposed a sentence of 25 years, 3 years of supervised release, and forfeiture of assets totaling approximately $11 billion.

Sentencing of SBF took place on March 28, 2024. The prosecution, on behalf of the DOJ, in a 113-page Sentencing Memorandum, asked the presiding judge, Lewis Kaplan, for the incarceration of SBF of 40-50 years, a fine of $11 billion, and forfeiture. It asserted that the defendant willfully defrauded investors of at least $10 billion; engaged in a scheme to make unlawful political contributions; plotted to bribe Chinese government officials; engaged in banking misconduct; sought to blame others for his misconduct; and obstructed justice (Department of Justice, 2024 Mar 15), (De & Hamilton, 2024 Mar 15). SBF’s attorney, Marc Mukasey, argued for a sentence of 5-6½ years. Judge Kaplan imposed a sentence of 25 years, 3 years of supervised release, and forfeiture of assets totaling approximately $11 billion. SBF, however, may serve as little as half of the imposed sentence due to the 2018 passage of the First Step Act, originally enacted in part to lessen the sentence for non-violent convicted defendants (mainly for drug offenses). Eligible inmates can earn 10-15 days monthly credit for successful completion of Evidence-Based Recidivism Reduction Programs and Productive Activities2  (First Step Act, P..L.) (Office of Public Affairs, 2013 Jan 13). Even without the Act, prisoners can earn up to 54 days of credit annually for good behavior. SBF’s attorney filed an appeal seeking a new trial, alleging the presiding judge’s unfairness, biased comments to the jury during the trial, and other alleged judicial misconduct. It is unlikely that given Judge Kaplan’s reputation and scholarliness, SBF will be successful in his efforts to overturn the conviction (Ligon, 2024 Sep 13).

Civil litigation

SEC v. Samuel Bankman-Fried

Both the US Securities and Exchange Commission (SEC) and the CFTC instituted civil litigation against SBF. The SEC charged SBF with commencing and carrying out a scheme to defraud equity investors in FTX Trading Ltd. According to the civil complaint, beginning on or about May 2019 in which SBF was the CEO and co-founder of the crypto trading platform, the company, based in The Bahamas, raised over $1.8 billion from investors ($1.1 billion from some 90 US investors) that allegedly was virtually risk-free but which funds were fraudulently diverted to SBF’s private-held crypto hedge fund, Alameda Research LLC. The complaint3 further alleged that Alameda had an unlimited line of credit funded by the FTX monetary investments that were not subject to risk-avoidance measures instituted to protect the said FTX investments (United States District Court Southern District of New York, 2022 Dec 13). As a result, FTX was exposed to Alameda’s holdings of overvalued, illiquid assets, coupled with SBF’s commingling of the said funds for undisclosed venture investments, extensive real estate purchases, and sizeable political donations.

The SEC and, particularly, its chairman, Gary Gensler, are not without criticism concerning SBF. It appears that there was a 45-minute phone call between Gensler and SBF in March 2022 allegedly concerning SBF’s lobbying for a bill before Congress to create an alternate crypto trading system at a time when SBF was negotiating to purchase crypto lender, BlockFi, that already had SEC approvals and presumably would extend to FTX. The criticism in part was that SBF and his parents had significant Democrat political influence due to major contributions given to the Party (Vold, 2023 Oct 23), (Roberts, 2022 Nov 11).

ftx

The CFTC commenced civil litigation against SBF, Almeda and FTX seeking an injunction preventing defendants from engaging in violation of the Commodity Exchange Act (Commodity Futures Trading Commission, 2022 Dec 21); disgorgement of monies received from such trades, fines, and restitution. It noted that Alameda Research had launched FTX Trading Ltd. which, at its height, had a daily trading volume of over $20 billion, and possessed a $32 billion valuation. It further recited the events stated previously that led to the collapse of Alameda, FTX, and subsidiary companies. In an amended complaint, the CFTC charged Caroline Ellison and Zixiao Wang with fraud and misrepresentations with respect to the sale of digital assets commodities. The said complaint was not contested by the said defendants and consented to orders of judgment concerning violation of CEA §6(c)(1) and CFTC Regulation 180.1 (CFTC v. Samuel Bankman-Fried, 1:22-cv-10503-PKC).

Celebrity endorsements and ftx

Liability of Celebrity Endorsers

SBF was sued civilly in a class action lawsuit by investors who alleged that his fraud and other crimes and negligence caused the losses sustained with the bankruptcy of FTX. After the conclusion of the criminal action and entry of judgement, SBF agreed to cooperate with the attorneys for the investors to reveal confidential documents and other efforts made with major celebrities who endorsed investments in the companies emanating from FTX. Celebrities included famed former New England Patriots quarterback, Tom Brady, his former wife, Giselle Bundchen, who was a celebrity in her own expertise, comedian Larry David of Seinfeld fame, basketball star Shaquille O’Neal, and eight other celebrities (Garrison v. Samuel Bankman-Fried, No. 1:22 -cv-23753 2022 Nov 15). The bases for the $5 billion lawsuit, injunctive relief and other claims, were the failure to register securities under Florida state law; aggressive marketing that included a $20 million ad campaign featuring Brandy and Bundchen whereby they asked: “FTX – You In” and stated their telling acquaintances to join in; defendant, Kevin O’Leary’s statement of total confidence in full legal compliance; Miami Heat basketball star, Udonis Haslem who promoted FTX with “You in – Miami” ad campaign; Boston baseball star, David Ortiz, with similar ad comment; Larry David in Super Bowl campaign ad “Don’t Miss Out on Crypto;” and other comparable ads.

The specific allegations were a violation of the Florida Securities and Investor Protection Act (Fl. Stat. §517.07) in that unregistered securities were offered and sold to plaintiffs with defendants rendering material assistance; violations of the Florida Deceptive and Unfair Trade Practices Act (Fl. Stat. §501.201 et. seq.); numerous misrepresentations and omissions by causing confidence and driving consumers to invest in FTX and other related securities; and demand for injunctive relief under the Declaratory Judgment Act (Fl. Stat. §86.011 et. seq.) (Garrison v. Samuel Bankman-Fried, No. 1:22 -cv-23753 2022 Nov 15). In addition, a 218-page class action complaint was filed against Mercedes-Benz Grand Prix Ltd. with similar allegations as well as added counts for civil conspiracy, and aiding and abetting conversion (Garrison v. Samuel Bankman-Fried, No. 1:22 -cv-23753 2022 Nov 15).

SBF was sued civilly in a class action lawsuit by investors who alleged that his fraud and other crimes and negligence caused the losses sustained with the bankruptcy of FTX.

The Federal Trade Commission (FTC) issued “Guides Concerning the Use of Endorsements and Testimonials in Advertising” (Federal Trade Commission) that require the endorsements to reflect “honest opinions, findings, beliefs, or experience of the endorser and not be deceptive”. Advertisers are made subject to liability for false or unsubstantiated statements made or failure to disclose material connections between the parties attendant thereto. Consumer endorsements must be made by the said consumers, with comparable requirements of substantiation as if made by the advertisers. Other provisions reflect possible liability regarding expert endorsements and endorsements by organizations.

Possible fallout of parental involvement

As stated previously, Joseph Bankman and Barbara Fried have extraordinary backgrounds occupying endowed chairs at the Stanford Law School. Fried’s expertise consisted of her attempt to combine philosophy with economics and law with a focus on distributive justice (fairness in how goods and societal resources are allocated) and, previously, was both an associate with a famed New York law firm and law clerk to a federal appeals judge. Bankman is famed for writing two well-known law texts on tax law whose focus was promotion of fairness in tax policy.4  Their involvement is unclear. Joseph Bankman allegedly rendered legal advice and counsel to FTX especially at the outset of FTX’s operations, assisted in making hiring decisions, interviewed the company’s possible outside counsel, and assisted in decisions regarding investment and charitable donation decisions including that of the Stanford Law School. Barbara Fried allegedly was the chief advisor regarding money to political candidates, committees and causes including some $40 million given to such causes in 2022. They allegedly received some $10 million from Alameda Research in the form of a loan with no obligations for repayment. There were other monies expended for private jet flights and other disbursements (Gura, 2023 Oct 2).

Aftermath of ftx

The bankruptcy and subsequent prosecutions of the main players of FTX and Alameda led to their initial collapse and a Chapter 11 bankruptcy filing. Trades continue to be ongoing but mainly away from the firms. Digital Assets AG, a Swiss startup, was acquired by SBF in 2021 for $323 million and thereafter renamed, “FTX Europe gross”, and was resold to its founders for $32.7 million after an earlier failed attempt to sue it for substantial overpayment (Periera, 2024 Feb 24). FTX still retains $6.4B in cash assets and received permission in February 2024 to sell its 8% stake in a hot startup, Anthroptic, for $1B, thus adding to the fund lessening the losses suffered by investors in FTX and Alameda (Church, 2024 Feb 22). SEC Chairman, Gary Gensler, appears to have indicated that he and the SEC would not oppose a revival of FTX under proper leadership when asked about a proposed purchase of FTX by the former president of the New York Stock Exchange and others, provided, of course, that appropriate rules and regulations are followed. Among the interested purchasers are Tom Farley, the CEO of the cryptocurrency exchange Bullish, Fintech startup Figure Technologies, and cryptocurrency venture capital firm Proof Group (Lindrea, 2023 Nov 9). It now appears that investors will be made whole with respect to their original investments mainly due to the significant rise in value of bitcoin albeit only about 105 bitcoin remains, the foregoing by the federal government of $43.5 billion in fines and taxes, and the 11-fold increase of Solana tokens  (Adams, 2024 Feb 29) which was FTX’s largest holding. Instead of satisfaction with reimbursement, some investors grumble about loss of interest, losses due to panic trades of holdings, and other criticisms (“The $10.6bn question,” 2024 Apr 6).

Conclusion

The FTX and Alameda debacles are tragedies that differ from typical fraudulent behaviors that are based almost entirely on greed. The founders of the respective firms were idealists who sought to combine their financial and technological talents not only to enrich themselves but also to contribute to the betterment of less fortunate persons. Almost inevitably, the initial vast accumulation of wealth led to actions to protect the bases for their rise. FTX and Alameda were looked upon as one firm so that when one required additional funds to continue, assets were taken from the other firm to shore up its burdened financial obligations. Taking assets from investors to pay the debts of another firm without consent is simply theft irrespective of the motivation that caused the occurrence. Unfortunately, the individual persons, who had extraordinary capabilities to assist the human endeavor, will be compelled to live in cages as a reminder to others that such behavior cannot be tolerated.

Access Part 1 of the article here: https://www.europeanbusinessreview.com/poster-child-of-securities-fraud/

Go to top

About the Authors

Rosario (Roy) GirasaRosario (Roy) Girasa is a Distinguished Professor at Pace University and has been a professor of law at the Lubin School of Business on the Pleasantville, NY campus since 1980. He holds four degrees: a BS and PhD from Fordham University, an MLA from Johns Hopkins University, and a JD from New York University School of Law.

Girasa is the author of six published texts and more than 130 articles. His books include the textbook and manual Cyberlaw: National and International Perspectives; Corporate Governance and the Law of Finance; Laws and Regulations in Global Financial Markets; Shadow Banking: Rise, Risks, and Rewards of Non-Banking Financial Services; and Regulation of Cryptocurrencies and Blockchain Technologies (published July 2018). His latest book Artificial Intelligence (AI) as a Disruptive Technology: Economic Transformation and Government Regulation was published in February 2020.

He has delivered lectures globally, including as president of four annual conferences in Tunisia, several colleges in India, and at the Supreme Court of India. You may reach him at rgirasa@pace.edu.

Emilio CollarEmilio Collar is a Professor of Management Information Systems in the Ancell School of Business at Western CT State University in Danbury, CT. He holds a BBA and MS in Information systems from Pace University (NY) and a PhD from the University of Colorado at Boulder. He is a KPMG Doctor Scholar and a member of Beta Gamma Sigma.
     Prior to his Ph.D., Emilio has had various jobs and consulting engagements in large Corporations including General Reinsurance Corp. and IBM. As an independent consultant, Emilio has provided consulting services on software implementation of Oracle databases, Internet website development, e-commerce applications, and Internet security and planning.
     Emilio co-founded an organization called The International Group of E-business Research and Applications (TIGERA).
     Emilio has served as editing manager for the Journal of Computing and e-Systems, track chair for multiple topics at TIGERA, and either as a guest or invited reviewer for various academic journals. He has published papers in academic journals including Cybernetics and Informatics, International Journal of Computer Science and Information Security, International Journal of Management Science and Business Administration, Journal of Management and Business Research, Journal of Systemics, and Review of Contemporary Business Research. You may reach him at collare@wcsu.edu.

References

Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.

RELATED ARTICLESMORE FROM AUTHOR

LEAVE A REPLY

Please enter your comment!
Please enter your name here