Although Sam Bankman-Fried (SBF) has resigned from his CEO position at bankrupt exchange FTX, there is speculation that him facing charges for securities law violation. This comes as the company and SBF himself are under scrutiny following shocking financial revelations.
FTX witnessed massive withdrawals, sending the crypto exchange and its native token FTT on a downward spiral and prompting an announcement on November 11 that FTX was filing for Chapter 11 Bankruptcy and CEO’s resignation.
Accusations Against FTX
According to a report in The Wall Street Journal, FTX had misused billions of dollars worth of customer funds, including financing Alameda Research’s risky bets, eventually leading to FTX’s collapse.
Under its terms of service, FTX exchange explicitly says, “None of the Digital Assets in your Account are 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. On this reference, a Twitter user @wassielawyer noted:
“… FTX’s [terms of service] states that title to assets remains with the customer. This means FTX was stealing customer funds. Clearest criminality so far….”
Authorities in the Bahamas have also frozen FTX’s local trading company and related parties, pending approval of a Supreme Court-appointed liquidator. An SCB statement acknowledges awareness of “public comments suggesting that clients’ assets were mishandled, mismanaged, and transferred to Alameda Research.
FTX Under Investigation
According to a Wall Street Journal report, the U.S. Justice Department, CFTC, and the U.S. Securities and Exchange Commission (SEC) began investigations against FTX long before its recent debacle, focusing on FTX US, where there was a minimal implosion in the aftermath of the current implosion.
FTX’s collapse has also raised concerns in Washington, D.C., where crypto skeptics like Congressman Brad Sherman point fingers at “billionaire crypto bros” for slowing down much-needed cryptocurrency regulation.
The U.S. House of Representatives Financial Services Committee chair, Maxine Waters, has also called for improved customer protection and more federal oversight of cryptocurrency trading platforms.
President Joe Biden is also following the story, according to White House Press Secretary Karine Jean-Pierre, who alluded to FTX’s liquidity crunch during a White House statement. Jean-Pierre also noted that the administration and financial agencies would “closely monitor” developments in the crypto market.
Is SBF Going To Jail?
Despite civil lawsuits as customers and investors look to recover the remainder of FTX’s assets, the Justice Department reports investigations on whether the agency will file criminal charges and the supposed prison sentence if it happens. While the facts appear utterly condemning at face value, legal experts have spotted two potential hurdles to any criminal conviction.
Since FTX is an offshore business headquartered in the Bahamas, jurisdiction is a significant obstacle. Based on defense narratives by lawyers, FTX did not cater to Americans, which means that the actions of the company’s executives are not within U.S. law enforcement’s reach.
Nevertheless, former prosecutor Randal Eliason acknowledges the Justice Department’s expertise in finding a nexus to link overseas defendants to American shores. Other legal personnel underscores Eliason’s point, noting that prosecutors could see a tie between FTX and U.S. banks, emails, stateside meetings, or other interactions.
The intent is the second potential hurdle to a criminal prosecution against SBF. On this note, Eliason says that any conviction will hinge more upon whether SBF deliberately deceived investors than the question of incompetency. In his words:
“Mismanaging your company and losing other people’s money is not criminal. It happens all the time. For a criminal case, there has to be deception.”
SBF’s actions violated the company’s terms of service, which, according to an anonymous crypto lawyer, may prove significant in any legal court. The lawyer also highlighted concerns surrounding FTX’s investor
presentations and public statements by SBF. In his opinion, all the elements are in place for Justice Department prosecutors to bring a case under a federal criminal law called Section 1343; on the premise of wire fraud (committed with the aid of electronic tools) which carries a maximum penalty of 20 years in prison).
Should the Justice Department pursue criminal charges against SBF, any FTX executives believed to be complicit in related wrongdoings will also face charges.
Besides potential charges, SBF is also facing a collapsed net worth in the aftermath of this implosion. On November 8, Bloomberg reported the FTX founder and ex-CEO’s wealth shrunk by almost 94%. This followed a decline from under $16 billion to less than $1 billion.