Two FTX associates have pleaded guilty to charges including wire fraud, commodities fraud, and securities fraud amid the crypto collapse that temporarily destabilized the U.S. economy. Amid the allegations leveled at the company are accusations that they kept no discernable ledger for transactions, did most of their bookkeeping with QuickBooks, and cut themselves loans with their own names as both borrower and recipient.
The largest player, Sam Bankman-Fried, was still in the Bahamas as he was supposed to be testifying before Congress. He was flown back to the U.S. and is currently in FBI custody. A deal was reached with the two associates in exchange for testimony against Bankman-Fried. Bankman-Fried appears poised to be the fall guy for whom the FBI has been waiting. Collectively, the two associates faced 110 years in federal prison. However, their cooperation with law enforcement could help them secure much better deals moving forward.
Ultimately, the federal prosecutors want Sam Bankman-Fried. Bankman-Fried recently disbursed $100 million in FTX assets to Bahamian investors even as the crypto-exchange assets were frozen per the bankruptcy court. This amounts to bankruptcy fraud and is yet another charge that will be added to Bankman-Fried’s growing list of charges.
The Final Outcome
At this point, this situation could be remedied by making the investors whole. Bankman-Fried remains convinced this is possible, and his attorney will claim that was his intention all along. However, discrepancies in the financials, a lack of a paper trail, and obviously unethical mismanagement of funds ultimately only partially rests on the amount of money stolen.
In a fraud prosecution, there are two elements that will rapidly cause your sentence to skyrocket. Those are the amount of money stolen and the number of victims. If both of those are large, then you have a serious problem. Other elements, such as the sophistication of the scheme, can also play a role. However, this scheme was not so much sophisticated as it was intentionally chaotic.
Many of the allegedly unlawful transactions will be scrutinized by prosecutors. It remains unclear if the defendant will be able to provide an explanation that derails the prosecution’s fraud case. It seems unlikely.
If a company declares bankruptcy, its assets are frozen. But also, the claims against the company are frozen. However, Bankman-Fried repaid some investors $100 million even while the majority of investors had their accounts frozen. This is illegal. It remains unclear if the transaction can be reversed, but it is tantamount to defrauding the bankruptcy process.
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