Sam Bankman-Fried, FTX Promoters May Avoid Serious Consequences for Fraud, Experts Warn

Samuel Bankman-Fried, founder and former CEO of FTX, testifies on Capitol Hill in Washington, on Feb. 9, 2022. Saul Loeb/AFP via Getty Images

News Analysis

The international scandal of the implosion of FTX, whose founder and former CEO, Sam Bankman-Fried, stands accused of all manner of fraudulent and reckless practices, could spur a regulatory overhaul aimed at curbing the excesses of the barely-regulated crypto space and preventing such fiascos in the future, experts on finance and law have told The Epoch Times.

But the opportunity may well be lost if lawmakers treat FTX’s blow-up as the financial shenanigan du jour and let those complicit in the deceptive marketing and trading practices of FTX off the hook, the experts warn.

In the aftermath of the exchange’s insolvency and Chapter 11 filing, parties ranging from the U.S. Justice Department to the government of the Bahamas, where FTX and Bankman-Fried are based, to private former clients of FTX, have launched investigations or filed lawsuits, with many more expected in the weeks and months to come.

In a widely-viewed interview with Andrew Ross Sorkin at the New York Times’s DealBook Summit on Nov. 29, Bankman-Fried admitted “Look, I’ve had a bad month,” but also said, “I didn’t ever try to commit fraud on anyone” and suggested that he is not too concerned about a possible prosecution at this point in time.

“There’s going to be a time and place for me to sort of think about myself and my own future, but I don’t think this is it,” Bankman-Fried said.

It is wise to keep things in perspective and not exaggerate the liability for the malefactors in a financial world where the politically well-connected have many tricks and resources to put to use to escape the consequences of their malfeasance, believes Jeffrey Hooke, a former vice president of investment banking at Lehman Brothers who now teaches at the Johns Hopkins Carey School of Business.

“I don’t see much blowback. This is how things are done in D.C. on this ‘inside baseball’ type of regulatory matter. The rich companies hire a bunch of lobbyists and essentially write their own legislation,” Hooke told The Epoch Times.

In an aerial view, the FTX Arena, which the Miami Heat call home on November 18, 2022 in Miami, Florida. Miami-Dade County and the Miami Heat are ending their arena naming rights deal with the company. Joe Raedle/Getty Images

Republicans may try to use the fiasco to impugn Democrats who received huge donations from Bankman-Fried, but Hooke sees a greater likelihood that lawmakers on both sides of the aisle will pool their political resources to craft rules and regulations aimed at forestalling the next blow-up.

“I think there will be some kind of bipartisan legislation proposed to rein in the crypto companies and exchanges. We may need a few more bankruptcies to move it along. Did you notice how little happened until a big failure occurred?” Hooke said.

Hooke sees the FTX implosion as the latest in a long line of financial scandals and shenanigans that may have triggered short-term outrage without fundamentally altering the way things are done.

“That is the way it is here with regard to financial stuff—the S&L crisis, Enron, the financial crisis [of 2008-2009], Madoff, SPAC IPOs, Puerto Rico’s bankruptcy, and now crypto. It just repeats itself,” he reflected.

Bankman-Fried went on lying and covering up his trading even while giving massive donations to Democrats, but people outraged at his fraud often do not have lobbyists and high-priced lawyers at their service, Hooke continued.

Growing Anger

A source within the legal industry who spoke to The Epoch Times on condition of anonymity suggested that the frustrations of FTX customers are likely to grow more severe as the matter heads for the morass of a painful, drawn-out legal battle in multiple jurisdictions over the recovery of assets.

“No one knows yet, it’s way too early, but by my operational assessment, based on public information, is that it’s headed towards a Madoff-style pursuit of assets, taking place around the world,” the source said.

The situation is particularly unfavorable to unsecured creditors, who will have to undertake recoveries pari passu, or in lockstep with one another, the source predicted. The fact that lenders are spread out around the world poses further complications for those who seek redress under the provisions of the U.S. bankruptcy code, the source added.

“A predatory lender in India, with no ties to the U.S., dealing with a Bahamian entity also with no ties to the U.S., could snub their nose at an American bankruptcy court,” the source said.

“I am not a hundred percent sure Bankman-Fried actually broke any laws, since crypto exchanges are so regulation-free. He has two choices, in my opinion. One, stay abroad, like Marc Rich, and don’t do time or big fines. Two, pay a big fine, like Michael Milken, and serve a year or two in prison, and then be able to live in the U.S.,” Hooke said.

Public Figures on the Hook

The lawsuit filed on Nov. 15 by investor Edwin Garrison in Florida federal court names not only Bankman-Friend as a defendant, but a large number of celebrities whom Garrison accuses of not having been forthcoming about the terms of their aggressive public endorsement of FTX and its services. These include such renowned names as comedian Larry David, model Gisele Bundchen, NFL star Tom Brady, NBA star Stephen Curry, and tennis champion Naomi Osaka, among others.

With more than a million former FTX customers facing the prospect of never recovering investments totaling billions of dollars, and with $3.1 billion owed to the top 50 creditors alone, according to a recent court filing, the close interrelationship of the Democrat Party—a purported populist organization representing the interests of marginalized and disenfranchised members of society—and FTX and its founder are potentially extremely problematic for the party, some observers believe.

The losses suffered by hundreds of thousands of unsophisticated or “Main Street” investors could come back to haunt the Democrats, they say, and the opportunity is the Republicans’ to lose.

“If Republicans handle this right, it could reap big dividends. Even though both parties received campaign donations, the Democrats are far more entangled in FTX,” Keith Naughton, the principal of Silent Majority Strategies, a consultancy based in Germantown, Maryland, told The Epoch Times.

“As a bonus, big parts of the Democrats’ institutional coalition, including media outlets and academia, were praising Bankman-Fried and even trying to excuse his behavior,” Naughton added.

Naughton sees the current situation as particularly advantageous to the GOP given that Republicans have long sought to make inroads among a voting bloc that has tended to favor the other party.

“As a majority of retail crypto investors and traders are millennials, Republicans have a chance to break into this demographic if they make investigating FTX a priority,” Naughton said.

The Epoch Times has reached out to FTX for comment.