Sam Bankman-Fried is not in jail. In fact, the disgraced founder and CEO of the cryptocurrency exchange FTX is in what sounds like a lovely penthouse in the Bahamas. Bankman-Fried presided over FTX’s collapse from a $32 billion company to a bankrupt pile of rubble in the span of a few days in November, at which point he lost his job as the leader of whatever remained of the company. His tenure saw who knows how many billions of dollars in customer and investor losses, a literal uncertainty given recordkeeping and corporate controls that the company’s bankruptcy CEO says bordered on nonexistent. Billions of dollars are simply missing, and Bankman-Fried has offered precious little clarity on where they might be or how they could be recovered.
It all smells very criminal, although Bankman-Fried, in his many, many recent media appearances, has seemed to try to frame the mess as the result of sloppiness and naiveté. Still, “How is this dude not in jail?” is a reasonable question. But there are many more uncertainties around Bankman-Fried’s fate, including who might put him in jail, under what charges, for how long, and after how much diplomatic squabbling over who gets to (or needs to) hold FTX’s senior leadership to account for the company’s destruction.
Yesha Yadav is an associate dean at Vanderbilt University’s law school. Yadav’s research focuses include international bank and financial regulation, securities regulation, bankruptcy, and the law of money. I interviewed her this week about the potential criminal and regulatory trouble on the horizon for Bankman-Fried.
Alex Kirshner: If you were Sam Bankman-Fried’s criminal defense attorney, how worried would you be for him right now?
Yesha Yadav: I’m really glad that I’m not. I would be pretty worried about him. I think there are a couple of things to be mindful of. One, this is not just a U.S. proceeding. There are proceedings potentially around the world, and certainly the Bahamians are extremely invested in making sure that Sam Bankman-Fried and FTX are suitably punished, or that it looks like they are, to reflect the fact that the Bahamians have set up this crypto regime that promises to provide a cryptocurrency framework for regulation, which we don’t have. So there certainly can be different kinds of punishment there. We don’t have a comprehensive system for regulating crypto, but they do. The Bahamians have been trying to look like they’re very serious regulators in crypto. This is a huge dent on that image. It’s extremely tarnishing on the regulators. So obviously I think they’re very keen to push back.
But coming to the U.S. proceedings, the big thing here is that there’s just a lot going on and there’s a lot of loss in customer deposits and investor wealth. We’ve seen a $32 billion valuation go to basically zero in a week. That means that U.S. authorities are going to take enormous amounts of interest in getting to the bottom of what’s going on.
At the same time, criminal cases are very hard to make. Certainly in the case of fraud, mail fraud and wire fraud, they require showings of intent. That means being able to prove that someone intentionally wanted to do this bad conduct or that they were so reckless, that they were so careless, that it was basically intent. That’s going to be quite hard in this case, because there is just such an enormous, horrendous case of internal mismanagement, difficulties in establishing this paper trail. It is just the most insane corporate governance environment ever.
So, certainly, I’m super worried for him because there are going to be regulators around the world with very pissed off people at home who are going to be concerned.
SBF disputes that it was this bad, but our understanding from FTX’s bankruptcy CEO is that the company has shockingly few records of its transactions. Is there a path where SBF could get away with whatever he might have done on the grounds of bad recordkeeping, because nobody can prove anything without records? Or could a lack of recordkeeping in and of itself become a problem for SBF?
Bad recordkeeping makes a case harder to make. It means that the regulators have to do more work, which means that they have to go abroad to find the books and records, because so much of FTX’s activities were offshore. They have to use their subpoena power. They have to use their diplomatic power in order to get regulators and witnesses and financial institutions around the world to hand over documents. At the same time, it’s not impossible. They have to establish the paper trail in order to figure out where the assets are and what the asset trails have been.
All of this work is happening in the background from many different standpoints. So it’s the bankruptcy lawyers, as well as obviously potentially the Justice Department. So there are going to be a lot of eyeballs on this to get the paper trail sorted. The Justice Department and other regulators are getting a helping hand in that context. Certainly, it’s not impossible to piece these records together. Customers in this case are going to be very motivated to hand information over. People who have been screwed over are going to be extremely interested in handing information over. So by no means is bad recordkeeping going to provide the excuse to get off this process. Regulators are very talented at being able to piece together these cases.
You mentioned the Bahamian motivation to hold SBF to some kind of account. The Caribbean is known as a region where rich Westerners go to get less scrutiny of their financial dealings. It sounds like SBF should not expect that kind of hands-off treatment as he deals with authorities in the Bahamas.
That seems to be correct. I think the Bahamians were extraordinarily excited about having a crypto-favorable jurisdiction that’s near to the U.S., has fabulous weather, great lifestyle, and obviously tax laws that are favorable. So in that context, the Bahamians were set up as being a regulated crypto jurisdiction of the future. They had a white paper that basically set themselves up as a digital haven for entrepreneurs and venture capitalists. That was on the basis that they provided a regulated ecosystem. Now, one part of being a regulator is actually regulating. So in this case, the scale of the blowback is so enormous, the reputational fallout is just so catastrophic and horrendous that they’re facing political pressures back home.
That comes from two sources. One, the fact of losing all of this business and just seeing it vaporize in the space of a week and all the fallout being revealed as one part a function of extremely bad mismanagement internally. So what were the regulators doing in that case? Number two, FTX had become quite deeply connected with the local economy. So it employed lots of people, it had a ton of real estate that it bought. So I think that also creates pressure on the Bahamians to act, to be aggressive, and we can see that also play out in real life. So for example, in the case of the bankruptcy proceedings, the Bahamians have pushed back against the U.S.’ Chapter 11 filing to try and push their own filing for FTX digital assets as being the primary filing. So we’re seeing the Bahamians assert themselves as hefty regulators in this case. I think that has to be a function of not just the fallout reputationally, but also the political and economic fallout that they’re facing from the collapse of FTX.
Could there be a domestic turf war over who gets control of this case, in addition to the international one? Particularly between the Justice Department prosecuting SBF criminally and the Securities and Exchange Commission going after him civilly?
They do two different things. So when you have securities fraud that rises to the level of criminal liability, in that case, the Justice Department will obviously get involved.
One of the challenges that we are facing, exactly as you say, is regulators figuring out what exactly their role is in this process and the civil agencies. The SEC and the Commodity Features Trading Commission, which regulates derivatives and commodities in the U.S., have been duking it out for a while about which of them has authority over the cryptocurrency market. That debate, that conversation, that jostling is coming out publicly now because it’s becoming clear that one of the reasons we have lacked a comprehensive regime for crypto is because regulators have not been able to figure out, “Are these things securities or commodities? What’s their legal status?”
So one of the first-order issues that we’re going to have to get to before the SEC and CFTC can have any jurisdiction is what they’re doing under their respective regimes. We’re not there yet. So the Justice Department has a big job to do from the criminal side, and interestingly, now the bankruptcy court obviously has a huge job to do from the bankruptcy side. So in terms of where you’re going to see some real regulatory work being done, ironically, it’s probably going to come from the bankruptcy court as well as from the Justice Department, who have very obvious jurisdiction here.
I’m sure you’ve seen people, including the CEO of Coinbase, wondering how this guy is not in jail right now. It sounds like this is how he’s not in jail yet. This red tape.
Well, exactly. So the tape to cut through here is: How does the DOJ make this case? Where do they get the evidence from? Is the evidence going to be strong enough to make this case airtight? I think it’s worth noting that there’s a further difficulty, which is that S.B.F. is in the Bahamas. It’s a jurisdictional issue as well. So there are a couple of different hurdles to jump through in order to get him in custody or having him charged criminally, which means that because it’s so high-profile, the Justice Department has to make sure the case is airtight. That is going to take time given the evidentiary and jurisdictional issues involved. So it’s not surprising to me that it’s taking a little bit of time, because the Justice Department needs to get this right in order to make sure that something of this magnitude and of the scale and public importance is treated with absolute confidence in the evidence that they collect.
Now in the case of Bernie Madoff, for example, we saw that he was arrested very soon after he made a confession to his kids about the fraud he was involved in. So that arrest happened very quickly. But contrast that with the LIBOR scandal, for example, where the interest rates were alleged as being rigged. Those convictions for criminal liability in that case, many of them have been overturned because the case was not tight enough, and the judges never believed that there was fraud. So financial fraud cases take time to build when there’s no confession or smoking gun or whatever. Here we know there’s evidentiary issues. We also know it’s going to be really important to get this right. So it’s not surprising to me that it’s taking time for the Justice Department to build a case before any kind of custodial issues arise.
Say that all of this missing money boils down to the scummiest thing imaginable, and SBF really has the money in shell companies and is buying himself lots of yachts. Of course that would be scummy, and it sounds like it must be fraud. But fraud is also a legal term. How would prosecutors consider charging SBF, specifically?
Most likely, the two charges are going to be the charges that tend to be the workhorse of the entire system, which are mail and wire fraud charges. They do a lot of work.
In order to establish mail and wire fraud, you also need to show fraud. So that’s a condition before we get to mail and wire fraud, which tend to be not just things that have very expansive reach, in other words, you’ve used the postal service in the case of mail fraud, or emails and things in the case of wire fraud. Wire fraud can include international elements as well.
So they are not only very expansive, but they also carry extremely large penalties—potentially 10, 20 years’ worth of prison terms for single instances of wire or mail fraud. In the case of financial institutions and wire fraud, it can be even longer. So these are very powerful heads of liability that can be wielded against potential defendants. You might be able to negotiate with defendants in order to get pleas, in order to potentially have other offenses that may be levied against them. Aspects that may be looked at here in this case, as you were describing various uses of funds could be money laundering. There are different heads of liability that could attach in this context.
But my thinking here is just like with Bernie Madoff and others, most of the work here is going to be done, at least initially, by mail and wire fraud and conspiracy for mail and wire fraud statutes. That’s likely to be the first port of call because it tends to be so effective in financial fraud cases.
Madoff got a lot of years. I forget how many.
150, I think.
A lot of years. That was a high-profile case. SBF is a symbol for the entire crypto industry right now. Would various authorities want to make an example of him as a warning to other leaders in his industry, as happened with Madoff?
There’s definitely a strong reason to think that that’s certainly possible. The Bernie Madoff sentence was designed to set an example. Investors in that case lost billions of dollars. There was a lot of pain felt in that context.
Now, arguably in the case of crypto, the pain is felt very broadly, which is to encompass everyday retail investors as well as those that are suffering now because of the knock-on effect. So as you know, a number of companies are either teetering on the verge of bankruptcy or have in fact entered bankruptcy like BlockFi has. Their customers are now seeing their money trapped in these situations. So this has been such a seismic systemic event for crypto that to the extent that one can have an example of bad behavior—and the potential of a bad behavior here looks pretty egregious given the scale of the losses and the depth of the fallout—that if there’s any example to be made, arguably it’s going to be in this case.
There’s going to be a strong likelihood that to the extent the regulators do want to showcase this as an example, that Sam Bankman-Fried is likely to see some extremely aggressive prosecution—to the extent that regulators are willing to create a really strong case against him. If there’s anyone here, it’s going to be him. So certainly as you say, there is a very strong likelihood to the extent that regulators want to show they’re serious in the case of prosecuting bad behavior in crypto, as well as in the financial markets, that this could certainly be one way forward here: to be extremely aggressive in their prosecution of Sam Bankman-Fried.
SBF has been on a media tour for several weeks, giving lots and lots of interviews. What are the chances that any of the things he’s said on this press junket show up in a criminal filing against him in the next two years?
It’s all evidence. All of these things that he’s doing on this media tour, it’s all potentially evidence and provides a benchmark to measure, “Is what he’s saying actually borne out by the facts?”
As regulators gather evidence, they piece the case together, and they examine what they’re learning against what he’s actually saying. That could also potentially contribute to any finding or thinking around the question of, “Is he being deceptive and misleading?”
All of this in some sense very calculated to create a public image, to provide certain justification to what he was doing. But equally, it’s all potentially going to be evidence.