U.S. prosecutors usually grind away in obscurity for months or years before unveiling a criminal indictment. Their case against FTX founder Sam Bankman-Fried came together in a matter of weeks.
Speed was of the essence for Manhattan U.S. Attorney Damian Williams, who unveiled criminal charges against the disgraced entrepreneur just over a month after FTX filed for bankruptcy. Bankman-Fried is now in jail in the Bahamas, where a judge denied him bail because of concerns that he is a flight risk.
By comparison, Enron Corp. Chief Executive Officer Jeffrey Skilling, who was ultimately convicted of fraud and other counts, wasn’t charged until more than two years after that company’s 2001 collapse.
Bankman-Fried’s swift arrest shows the urgency of a high-profile case involving a founder who has courted the news media and flouted the conventional wisdom for handling a corporate unraveling. Prosecutors were likely spurred into action by several factors, including public and political pressure for an indictment, as well as concerns that Bankman-Fried might flee to a jurisdiction from which it would be more difficult to extradite him to the US.
“They grabbed him as quickly as they could before he went to some other place,” said Edward M. Robbins Jr., a former federal prosecutor who isn’t involved in the case. “That’s just common sense.”
FTX and scores of related companies declared bankruptcy last month after three years of frenetic growth. At its peak, the exchange was worth US$32 billion. Bankman-Fried, its former chief executive, was celebrated as the crypto savant who would lead the industry to untold riches. His arrest appeared to be a surprise to many — he had been expected to testify before the House Financial Services Committee on Tuesday in hearings on FTX’s downfall.
In a news conference Tuesday, Williams claimed that Bankman-Fried scammed FTX customers and venture-capital backers out of billions of dollars in “one of the biggest financial frauds in American history.” The prosecutor has brought other large crypto cases, overseeing the seizure in November 2021 of stolen Bitcoin valued at US$3.36 billion. A Georgia man, James Zhong, pleaded guilty last month to wire fraud charges related to the theft.
“You’re right, this is very, very fast,” Williams said of the Bankman-Fried probe. “Whether we are going to bring charges against anyone else, I can only say this clearly — we are not done.”
Regulators at the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission have sued Bankman-Fried as well.
His lawyer said he would fight plans to send him to the U.S. to face charges. The judge at his arraignment Tuesday set a Feb. 8 extradition hearing.
Dressed in a blue suit and white shirt for the proceedings, Bankman-Fried at times appeared shaky and fidgety. His parents were present in the courtroom as their son was frequently referred to as a “fugitive.” He was allowed 15 minutes with his parents before he was to be taken away by authorities.
Bankman-Fried’s recent words and actions may have given prosecutors enough ammunition to move so quickly. The 30-year-old publicly tried to explain away his culpability and apologize for losing US$8 billion in customer funds.
He acknowledged he’d commingled funds between FTX customers and Alameda Research, a trading operation he controlled. Those transactions were central to wire fraud charges against him in the eight-count indictment.
“SBF making admissions on TV his lawyers did not want him to talk about is like happy hour for federal prosecutors,” said Michael Weinstein of Cole Schotz P.C.
Complex fraud cases usually take far longer to investigate as prosecutors and federal agents sift through documents, interview witnesses and present evidence to grand juries. But FTX’s bankruptcy-appointed Chief Executive Officer John J. Ray III, who also oversaw Enron’s liquidation, testified before Congress on Tuesday that he believed the fraud at the cryptocurrency exchange wasn’t particularly complex.
“The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals,” Ray testified. He called the alleged misuse of FTX customer funds by Bankman-Fried’s inner circle straightforward embezzlement.
Ray has spent the past month poring over the company’s financial records, saying poor controls and malfeasance are to blame for the collapse. He is working with a wide cast of investigators and ex-prosecutors to unravel the FTX fraud. That spadework also helped the government move fast.
The judge at Tuesday’s arraignment said Bankman-Fried would be taken to the Bahamas Department of Correctional Services facility, which is commonly known as Fox Hill and is the government’s only prison.
Although it’s unclear whether he will be held among the general population, a 2020 report from the U.S. State Department painted a grim picture of the place. The facility’s conditions were harsh due to overcrowding and poor ventilation, among other issues.
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