Ignore the shiny crypto object when fraud is still fraud, Bankman-Fried case shows

When the government delivered its closing argument in the fraud trial of FTX co-founder Samuel Bankman-Fried, it told the jury to ignore fancy terms like blockchain, margin trading and automated liquidation engine. Focus on the real issue here, prosecutors said: This was a case about theft. The jury agreed. In the immediate wake of the conviction, US officials echoed the point delivered in the courtroom, which is that fraud is still fraud, regardless of the instrument used to carry it out.

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3 November 2023
By Samuel Rubenfeld

When the government delivered its closing argument in the fraud trial of FTX co-founder Samuel Bankman-Fried, it told the jury to ignore fancy terms like blockchain, margin trading and automated liquidation engine. Focus on the real issue here, prosecutors said: This was a case about theft.

The jury agreed, finding Bankman-Fried guilty on all seven counts after about four hours of deliberation. In the immediate wake of the conviction, US officials echoed the point delivered in the courtroom, which is that fraud is still fraud, regardless of the instrument used to carry it out.

“This case should send a clear message to anyone who tries to hide their crimes behind a shiny new thing they claim no one else is smart enough to understand: the Justice Department will hold you accountable,” US Attorney General Merrick Garland said in a statement.

Bankman-Fried stole billions of dollars from customers who deposited funds on the FTX exchange, using the money to fulfill the lending obligations of his cryptocurrency hedge fund, Alameda Research, as well as for real estate, venture investments, political donations and other expenses, according to prosecutors.

Bankman-Fried had long tried to portray FTX as operating on the cutting edge of digital asset exchanges while zealously safeguarding customer deposits, enshrining the concept in its terms of service. But theft from the company, and the spending of customer funds, didn’t require sophisticated financial engineering, as a financial tracing expert testified during the trial. This was a point hammered home after the verdict by Damian Williams, the US Attorney for the Southern District of New York, who said that though the industry and its players may be new, “the corruption is as old as time.”

During FTX’s period of success and growth, Bankman-Fried had also tried to shape potential regulation of cryptocurrency markets, testifying before Congress several times about the importance of good rules to cover what many saw as a Wild West of digital financial speculation. However, as his companies collapsed around him, Bankman-Fried took a dimmer view, using a profanity to refer to regulators when speaking with a reporter and saying his efforts to shape potential market rules were mere public relations.

Regulators, like Securities and Exchange Commission Chair Gary Gensler, have had tough things to say about the sector. Last month at an enforcement forum, Gensler said the cryptocurrency industry is reminiscent of what things were like in the 1920s, before federal securities laws were enacted in the US.

“This is a field rife with fraud, scams, bankruptcies and money laundering,” Gensler said. 

Lawmakers are also pushing for tougher enforcement over the cryptocurrency industry due to alleged sanctions evasion and terrorism financing.

The US Treasury Department has deemed mixing services, a tool that anonymizes crypto transactions, as a primary money laundering concern. There have also been multiple sanctions designations of key actors in the crypto ecosystem, including mixers such as the Tornado Cash service and its co-founder.

Ekaterina Zhdanova, a Russian national, was sanctioned today after the US said she helped Russian elites and members of a ransomware group move their funds via virtual currencies.

It's unclear whether the Bankman-Fried trial and his conviction will ultimately lead to targeted regulation of the overall crypto industry, but there are multiple ongoing criminal cases alleging fraud and deceit by other former high-flyers.

Roman Storm, another Tornado Cash co-founder, pleaded not guilty in September to charges of money laundering and sanctions violations, and was released on a $2 million recognizance bond. The mixing service was used to launder more than $1 billion in proceeds, including hundreds of millions of dollars for a North Korean hacking group, according to US authorities.

Do Kwon, a cryptocurrency entrepreneur whose currencies, TerraUSD and Luna, collapsed last year and caused a crash estimated at $40 billion, was charged in March with eight counts of fraud and market manipulation. Kwon was arrested in Montenegro after allegedly trying to leave the country on a fake passport, and he remains in custody there, according to media reports. The US and South Korea, which has also filed charges against Kwon, are battling for his extradition.

And Alexander Mashinsky, founder and former chief executive of the bankrupt cryptocurrency lender Celsius Network, is scheduled to go on trial in September 2024 on fraud charges for allegedly making false and misleading statements about core aspects of the business since its inception. His co-defendant, the firm’s former chief revenue officer, pleaded guilty this fall.     

“This case, like the others my office has recently announced alleging fraud in the crypto economy, may appear complicated,” Williams, the US Attorney in New York, said in July, when the Celsius Network case was announced. “But the message we send today is quite simple: If you rip off ordinary investors to line your own pockets, we will hold you accountable. Whether it’s old-school fraud or some new-school crypto scheme, it doesn’t matter one bit.”

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