To say that federal prosecutors moved quickly in filing criminal charges against Sam Bankman-Fried would not begin to capture my surprise upon hearing the news late Monday that he had been arrested in the Bahamas. “This is very, very fast,” Damian Williams, the U.S. Attorney in Manhattan, said at a press conference Tuesday, “but we are not done.”
Even that was an understatement. We are not just talking about a swift arrest. This is more like the prosecutorial equivalent of breaking the sound barrier.
It was barely a month ago that the problems at Bankman-Fried’s crypto exchange FTX started to come into public view, but since then, the developments have been head-spinning. Billions of dollars of customer money appear to have evaporated. A bankruptcy proceeding that is sure to be among the most complex in decades is just starting to take shape. Meanwhile, Bankman-Fried went on an aggressive and deeply unwise media campaign to salvage his reputation that unhelpfully recalled the similar efforts of Elizabeth Holmes.
All the while, there were broad outlines of a potential criminal case against SBF, but given the nature of the case — an alleged international financial fraud perpetrated in a largely unregulated sector with the target overseas — I would not remotely have anticipated an arrest this fast. I try to avoid predictions, but the truth is that if I had been pressed to provide my best guess for a timeline for charges against him, I would have said a year at minimum — maybe six months if the department moved unusually aggressively, if prosecutors dispensed with some of the usual practices associated with building a case like this, and if a whole bunch of things broke their way. Needless to say, that expectation was very wrong, but this is all far from over. Let’s dig in.
The Charges
At the time of this writing, we have both the Justice Department’s indictment and the Securities Exchange Commission’s parallel civil complaint, both filed in federal court in Manhattan. The indictment is bare bones, presumably by design — alleging just enough to withstand a motion to dismiss without locking the government into a series of specific factual allegations that could be muddied as the facts continue to develop. The SEC’s complaint is best read as a supplement to the indictment because it is not yet clear to what extent prosecutors have been coordinating with the SEC’s investigators. (It is not uncommon for a criminal indictment and a parallel regulatory complaint to be simultaneously filed in financial-fraud cases, but coordinating extensively beyond the timing of charges is sometimes legally risky.)
The indictment of Bankman-Fried alleges eight counts against him involving unnamed co-conspirators, but there appear to be two core theories of misconduct — one being a scheme to mislead FTX customers (the people all over the world actually using the platform to invest, trade, and so on), and the other a scheme to mislead investors in Alameda Research (the people and entities that invested in Bankman-Fried’s proprietary crypto hedge fund).
First, prosecutors allege that Bankman-Fried defrauded FTX’s customers from its inception in May 2019 through November 2022 by “misappropriating those customers’ deposits, and using those deposits to pay expenses and debts of Alameda … and to make investments.” The charges associated with this theory are conspiracy to commit wire fraud and wire fraud itself — the latter being a so-called substantive count in addition to the conspiracy charge.
Second, prosecutors allege that Bankman-Fried defrauded lenders to Alameda from “at least in or about June 2022” through November 2022 “by providing false and misleading information to those lenders regarding Alameda Research’s financial condition.” Like the alleged fraud on FTX customers, the indictment charges Bankman-Fried with two wire-fraud counts associated with these allegations — one conspiracy count and one substantive count, which, unlike the accompanying conspiracy count (and thus somewhat curiously), stretches back to 2019.
In addition to those four counts, there are four stand-alone conspiracy charges alleging separate conspiracies to commit commodities fraud, to commit securities fraud, to engage in money laundering, and to violate campaign-finance laws. The commodities-fraud count alleges that Bankman-Fried conspired as far back as 2019 to defraud customers of FTX who traded or intended to trade commodity swaps on the platform “by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research,” while the securities-fraud count charges him with engaging in a scheme to defraud investors in FTX.com by providing false information about the platform’s “financial condition” going back to May of this year, apparently as FTX began to unravel.
The money-laundering count goes back to 2020 and alleges that Bankman-Fried used financial transactions to conceal the fraud on FTX’s customers. Finally, the campaign-finance count charges Bankman-Fried based on alleged contributions in excess of federal limits, including through contributions “in the names of other persons.”
The dates are intriguing — particularly the references to conduct going back to 2019 and 2020 — but the government can get by making these sorts of allegations even if the evidence going back that far is not particularly strong at the moment. In fact, it is generally to their advantage to be as broad as possible in identifying the temporal scope of a scheme like this in an indictment so as not to have evidence excluded down the line (including evidence they may obtain in the future) because it happens to fall outside the relevant time frame specified in the indictment.
The Speed
Like many other lawyers, I will be fascinated to learn how this actually came together so quickly, but there are a few possible explanations that had already emerged in the press over the last week or so.
The first and most obvious is that the Justice Department has secured key cooperating witnesses against Bankman-Fried. Given the massive public target on his back, it is not surprising that people around him would be eager to turn on him to try to save themselves, particularly if they have criminal exposure of their own — up to and including participating in the alleged conspiracies themselves. Presumably we will learn more about this as the case unfolds, but as of now, it is unclear whether and to what extent any formal agreements with cooperators have been papered — whether those are plea agreements under seal or nonprosecution agreements in which the government forgoes criminal charges against a cooperator entirely.
The second is that the department and perhaps the SEC had already been investigating FTX and Bankman-Fried prior to the public revelations. Recent reporting indicated that federal prosecutors had been investigating potential market manipulation by Bankman-Fried, and though the indictment does not charge him based on this theory, it is possible that investigators already had some meaningful insight into FTX’s internal workings as a result of that work.
I say this with some very modestly relevant experience. In 2017, I worked with the FBI to arrange the arrest of a foreign national who was one of the architects of a large financial fraud and who happened to be traveling to the U.S. for what was supposed to be a birthday celebration. The investigation was not public before that happened, and no one had been criminally charged anywhere in the world based on the conduct in question. As a result, the arrest took many people by surprise, but in fact the investigation had been underway — outside of public view — for nearly half a year, and we had already secured swaths of internal communications through search warrants to the company’s email provider. The scheme at issue was large by the usual standards of federal financial-fraud cases (around $150 million in customer losses), but needless to say, that pales in comparison to the losses to date associated with FTX, and given the intense public interest, the risks for the government if the case against Bankman-Fried does not result in a meaningful conviction are exponentially larger.
The third is that FTX’s new management has been aggressively cooperating with the government by, for instance, providing the government with access to FTX’s books and records or perhaps internal communications. According to news reports last week, they were already meeting with prosecutors.
The Fight to Come
At the moment, Bankman-Fried is in the Bahamas, and he will need to undergo extradition proceedings. It is unclear how long that process will take to work its way through the relevant Bahamian legal channels or if Bankman-Fried will contest it.
Assuming that Bankman-Fried winds up in the U.S. to face the charges and maintains his innocence, the case will then be in the standard procedural posture for the start of a criminal prosecution. Generally speaking, the Justice Department prevails in its criminal cases around 90 percent of the time — between both guilty pleas and convictions at trial — and there have been some notable wins this year, including the convictions of Nikola founder Trevor Milton in Manhattan and a former Goldman Sachs banker in Brooklyn.
It is tempting to assume that Bankman-Fried will face the same fate, but some caution is in order, since, at least as an anecdotal matter, prosecutors often fare worse in high-profile cases involving defendants with deep pockets and good lawyers. It was just last week that a federal judge in Manhattan dismissed the main criminal charges against former New York Lieutenant Governor Brian Benjamin — a significant setback for the same office that has now charged Bankman-Fried. As recently as last year, the office was raked over the coals by a judge in the district after a criminal case against an Iranian businessman imploded in spectacular fashion after the guy was convicted at trial. Last month, fellow prosecutors across the East River lost a criminal case against a friend and adviser to Donald Trump. And over the course of the past year or so — across a variety of different high-profile white-collar cases — the Justice Department has seen outright acquittals, mixed verdicts that have involved juries rejecting major aspects of prosecutors’ cases (including in Holmes’s prosecution), and significant losses on appeal based on narrow interpretations of law by the courts.
It is too early to try to predict with great confidence how this will end, particularly given all of the unknowns, but if you are a lawyer trying to construct a defense for Bankman-Fried, there are some standard lines of inquiry and themes that you are likely to try to develop.
To start, they will of course want to try to discredit any cooperators by claiming that they are unreliable, that they are throwing Bankman-Fried under the bus to save themselves, or both. One of the reasons that the department is often seemingly slow to charge financial-fraud cases even when there are cooperators is that ideally prosecutors want to check the cooperators’ claims against other evidence to test their veracity and reliability, including against internal communications. It would be extremely embarrassing to find out that you had charged someone off the back of testimony from a cooperator that turned out to be flawed or intentionally misleading, which could then imperil the whole prosecution.
At the moment, it is not clear how robust the department’s efforts on this front could have been, particularly since we know very little about what sorts of documents they have in their possession and how extensively they could have reviewed them. Both the Justice Department’s indictment and the SEC’s complaint contain conspicuously few references to such internal material.
That challenge could be exacerbated by the fact that prosecutors are not supposed to use grand-jury subpoenas to obtain additional evidence against Bankman-Fried now that the department has obtained an indictment. There is, however, some flexibility in the joints of this process — in particular, if the department is gathering evidence to charge other defendants and just so happens to come across additional evidence incriminating Bankman-Fried.
On the merits, there are the usual defenses to a criminal fraud case based on alleged misrepresentations, which are likely to be in play here for at least the main wire fraud charges. To start, what were the actual, specific misrepresentations at issue? What is the evidence that those claims were false? And what is the evidence that Bankman-Fried knew that they were false at the time?
In a few places, the alleged misrepresentations are stark. The SEC’s civil complaint alleges, for instance, that Bankman-Fried falsely told an investor last year that FTX “did not hold FTT” — the exchange’s in-house cryptocurrency — and that person or entity proceeded to invest $30 million. That alone, if established at trial, would be compelling evidence against Bankman-Fried in the criminal case.
You can, however, see some potential wrinkles early on in the SEC’s complaint. The document alleges, at one point, that “Bankman-Fried held himself out as a visionary leader in the crypto industry, and touted his efforts to create a regulated and thriving crypto asset market” while conducting “an intensive public relations campaign to brand himself and his companies as honest stewards of crypto.” What exactly was false about this — and, more to the point, intentionally false? The complaint argues that the “reality was very different” because Bankman-Fried “continually diverted FTX customer funds to Alameda and then used those funds to continue to grow his empire, using billions of dollars to make undisclosed private venture investments, political contributions, and real estate purchases,” but on their face, those actions do not clearly contradict generalized claims by Bankman-Fried about his supposed vision and business plans or his aspirations for the crypto industry.
Challenges like these are not unusual. Indeed, the question of how specific an alleged misrepresentation about a firm’s business practices needs to be in order to support a fraud claim has been kicking around prominently in recent years in the context of private securities fraud claims. If the Justice Department adopts plans to pursue theories akin to that one, it is not hard to foresee serious litigation on this front similar to what we have recently seen in major criminal fraud cases.
A fair amount of the SEC’s allegations also appear to rely on omissions — like the “failure to disclose to FTX investors the diversion of FTX customer funds to Alameda,” which implicates related legal questions. Generally speaking, a misrepresentation has to be affirmative in nature: a statement that is either explicitly or implicitly misleading. Strictly speaking, the mere failure to disclose some fact — even if it is something everyone else would want to know — is not sufficient to establish liability for fraud unless there was either a specific legal duty to disclose the information at issue or there was an affirmative statement that was rendered misleading as a result of the omission. Sorting through those sorts of disputes can require judges and juries to undertake intense, context-specific examinations of the claims at issue.
In other areas, the SEC’s complaint provides more specific and apparently more potent alleged misrepresentations, including some that were identified early on by industry observers concerning the handling of FTX deposits. The complaint does not itself outline detailed evidence indicating that Bankman-Fried was involved in all of the alleged misrepresentations or that he and others knew that they were false when made. Of course, the SEC has a considerably lower burden of proof than the Justice Department, but it will be interesting to see how extensive the evidence in the criminal case is on these legally critical points.
These sorts of issues, which will undoubtedly draw the attention of Bankman-Fried’s lawyers, will not, however, provide a comprehensive defense. The campaign finance charge appears to stand alone both factually and legally. The commodities-fraud charge will require establishing a nexus to actual commodities under the law, but the relevant law in that particular context tends to be more forgiving on the question of whether prosecutors have to identify specific fraudulent misrepresentations as opposed to a scheme that is more broadly deceptive in nature.
Altogether, you would likely want to explore some sort of defense theme premised on an irresponsible rush to judgment by prosecutors — a theme that you might try to buttress with any investigative missteps or failures that you identify in the course of pretrial discovery and litigation. It would not be the first time that a well-heeled defendant has mounted a defense like that, and it sometimes works, particularly if the defendant takes the unusual track of insisting on a quick trial, which would limit the government’s ability to strengthen its case while preparing.
For now, at least one thing remains clear. Bankman-Fried, the onetime crypto-finance pioneer, continues to break new and exciting ground, though perhaps not in the ways he had intended.
