Feb 2, 2023

Bankman-Fried Wins Texas Ruling as States Go After Lost Funds

Madlin Mekelburg, Bloomberg News

Sam Bankman-Fried leaves court in New York on Jan. 3. , Photographer: Stephanie Keith/Bloomberg

(Bloomberg) -- Embattled FTX founder Sam Bankman-Fried has staved off a case alleging he broke Texas securities laws, after a judge ruled that the state regulator lacks jurisdiction to act against him.

The ruling came in a case brought by the Texas State Securities Board claiming Bankman-Fried offered unregistered securities through FTX’s yield-bearing cryptocurrency accounts and that he now owes refunds to Texas investors.

Administrative Law Judge Sarah Starnes has canceled a Thursday hearing at which Bankman-Fried had been ordered to testify and has given the securities agency until March 1 to file an amended complaint. Joe Rotunda, the agency’s director of enforcement, didn’t return messages seeking comment on the ruling, and it isn’t clear whether he will refile.

Read More: States Lead Crypto Enforcement as Feds Deal With Inchoate Role

But the case reflects the early efforts some states are making to recover money from FTX and Bankman-Fried in the wake of the crypto exchange’s implosion in November. The obstacles: a criminal fraud prosecution of Bankman-Fried and a sprawling FTX bankruptcy case.

“We’re not going to take actions that interfere with the criminal process,” Rotunda said in an interview last month, before the Jan. 19 ruling. “But at the same time, we have a job to do.”

Read More: Bankman-Fried Fooled the Crypto World and Maybe Even Himself

He added that he was “very happy to see the SEC move very, very quickly on FTX,” referring to the US Securities and Exchange Commission. “But not knowing how that was going to play out, and knowing that Sam Bankman-Fried was not himself in bankruptcy, we brought our case.”

Texas Acts

Because of the twin federal cases, state securities regulators have largely delayed their own investigations of FTX, even though some states have taken a leading role in crypto enforcement over federal authorities in recent years. California’s Department of Financial Protection and Innovation, for example, initiated a probe in November but has yet to take any public enforcement actions.

Alabama and New Jersey, two leading state regulators in the crypto space, also haven’t announced public actions against FTX. Alabama Securities Commission Director Joe Borg said that when it comes to state probes, “bankruptcy trumps almost everything.” His department is monitoring the proceedings, aiming to advocate for recoveries for individuals, but is holding off on taking action for now.

Read More: Ex-Celsius CEO Mashinsky Duped Crypto Investors, NY Claims

Texas and Wisconsin are the only states so far to seek to intervene in the federal bankruptcy case. Texas has filed a petition in the case seeking the appointment of a third-party monitor.

State securities regulators often coordinate their efforts in enforcement cases, letting one state or another take the lead, mostly to economize.

The Sting

Lawyers for Bankman-Fried, who has pleaded not guilty in the criminal case, argue that the state board alleges only that he “controlled various FTX entities and that certain FTX principals may not have disclosed material information to FTX customers,” not that he violated any Texas securities regulations himself.

Starnes agreed, writing in an order that the state board had failed to meet the requirements for establishing personal jurisdiction over a non-Texas resident.

Read More: Bankman-Fried Says He ‘Didn’t Stash Billions,’ Denies Theft

Rotunda told the judge Bankman-Fried “subjected himself to the jurisdiction of Texas’ courts when he decided his business enterprise would offer and sell securities to Texas residents.”

He added that he himself was one of those residents — a purchase he made as part of his investigation.

‘Lot of People Hurt’

Rotunda revealed the Texas probe in October court filings in the bankruptcy of Voyager Digital Holdings, in which he objected to FTX’s bid to purchase Voyager. In November, he filed the board’s claims with the Texas State Office of Administrative Hearings, which resolves disputes involving state agencies.

By initiating an administrative hearing, Rotunda said, the board could seek refunds for clients without litigating the issue in a civil courtroom.

In addition to seeking a refund of principal to Texans who invested in the alleged unregistered accounts, his agency asked for administrative fines of as much as $20,000 per violation of state securities laws and as much as $250,000 for each illegal act involving a Texas resident 65 or older, as determined by the judge.

Read More: Fight to Regulate Crypto at Crossroads as Ripple Ruling Looms

“There’s been a lot of people hurt,” Rotunda said. “But the impact on Texas – while significant, and significant in the other 49 states – is going to be far less than what we saw in Voyager, what we saw in Celsius and what this could have been if it percolated for another couple months.”

Bankman-Fried faces a trial in October. Meanwhile he is free on bail, living with his parents in California.

The Texas case is Texas State Securities Board v. Sam Bankman-Fried, 312-23-06226, Texas State Office of Administrative Hearings.