SBF says US is criminalizing acts of dishonesty
One of the memos supporting Bankman-Fried’s motion to dismiss repeatedly paints the FTX founder as being perhaps guilty of lying, but not guilty of violating US laws cited in his indictment.
That memo, for example, concedes that Bankman-Fried and co-conspirators lied on a US bank application to open an account to receive FTX customer deposits after the bank had previously rejected an honest application. But just because the bank “was deprived of the opportunity to conduct ‘enhanced due diligence’ and executive committee review before opening the account,” that doesn’t mean that Bankman-Fried committed bank fraud, his lawyers argued. To find him guilty of bank fraud, the US would have to prove that Bankman-Fried either deprived the bank of “moneys, funds, credits, assets, securities” or caused banks to risk suffering “economic harm” from losing the “right to control” access to its bank accounts, lawyers argued.
The same argument, lawyers wrote, applies to allegations that “Bankman-Fried engaged in a scheme to defraud Alameda’s lenders by providing them false and misleading information regarding Alameda’s financial condition” or wire fraud allegations that he “misused FTX customer funds by providing improper loans to Alameda.”
“Simply making a false statement, by itself, does not constitute wire fraud unless it is made for the purpose of obtaining money or property from the victim of the fraud,” Bankman-Fried’s lawyers wrote.
Essentially, lawyers argued that, so far, there’s no evidence of harm caused because fraud requires a “scheme to cause economic loss to the victim,” which prosecutors allegedly haven’t proved. In place of such evidence, Bankman-Fried alleges that federal prosecutors have concocted “a hodgepodge of different intangible losses” suffered by banks and lenders—including “the right to honest services,” “the loss of control of assets,” and “the deprivation of valuable information.” His lawyers argued that this conflicts with prior court rulings limiting the scope of federal fraud statutes to a narrower definition of property rights so that they do “not criminaliz[e] all acts of dishonesty.”
“In the end, the Government is trying to transform allegations of dishonesty and unfair dealing into violations of the federal fraud statutes,” Bankman-Fried’s lawyers wrote. “While such conduct may well be improper, it is not wire fraud.”
Fast indictment followed slow regulatory response
Bankman-Fried’s lawyers seem to suggest that the US government—after struggling to keep up with a cryptocurrency boom—overreacted to news that FTX and Alameda Research were commingling funds. Between 2019 and 2021, the cryptocurrency industry jumped from a total of $64 billion in daily crypto transactions to nearly $3 trillion in 2021. During this time, lawyers wrote, “applicable legal framework for the cryptocurrency industry developed much more slowly” while lawmakers debated whether existing regulations applied or new regulations were needed. One of the biggest questions was how US laws applied to foreign cryptocurrency exchanges like FTX, and indicting Bankman-Fried could seemingly help to answer that question.
Bankman-Fried has admitted that FTX suffered from a flawed risk management strategy, Reuters reported. However, while FTX associates like former Alameda co-chief executive Caroline Ellison, former FTX technology chief Gary Wang, and former FTX engineering chief Nishad Singh have pled guilty and begun cooperating with US federal prosecutors, Bankman-Fried continues to plead not guilty.
In yesterday’s court filings, he even seeks to contradict some of his alleged co-conspirators’ testimony seeming to verify alleged illegal campaign contributions. Bankman-Fried contends that nothing that has been described by co-conspirators violated US election laws.
“The campaign finance allegations reveal, yet again, the consequences of the Government’s rush to indict,” Bankman-Fried’s lawyers wrote.
Whether the court will find Bankman-Fried’s defense persuasive amid the ongoing regulatory confusion over the crypto industry remains unclear. Bankman-Fried’s lawyers have said that they could be prepared to go to trial by October, according to The New York Times.
Meanwhile, the US government still doesn’t have a full grasp on how to regulate cryptocurrencies. Yesterday, a Wall Street Journal analysis of Securities and Exchange Commission (SEC) actions showed that the SEC has only now “labeled almost 80 crypto tokens as securities.” This represents a “small percentage” of total crypto tokens traded in the US and shows “how little of the industry has been addressed in six years of enforcement.”