SBF says “dishonesty and unfair dealing” aren’t fraud, seeks to dismiss charges

   2023-05-09 19:05

SBF says “dishonesty and unfair dealing” aren’t fraud, seeks to dismiss charges

Late Monday, legally embroiled FTX founder Sam Bankman-Fried moved to dismiss the majority of criminal charges lobbed against him by the United States government after his cryptocurrency exchange went bankrupt in 2022.

In documents filed in a Manhattan federal court, the law firm Sullivan & Cromwell shared Bankman-Fried’s first official legal defense. Lawyers accused the US of a “troubling” and “classic rush to judgment,” claiming that the government didn’t even wait to receive “millions of documents” and “other evidence” against Bankman-Fried before “improperly seeking” to turn “civil and regulatory issues into federal crimes.”

After FTX’s collapse last year, federal prosecutors acted quickly to intervene, within a month alleging that Bankman-Fried was stealing billions in customer funds, defrauding investors, committing bank and wire fraud, providing improper loans, misleading lenders, transmitting money without a license, making illegal campaign contributions, bribing China officials, and other crimes. Through it all, Bankman-Fried has pleaded not guilty. Now, in his motion to dismiss, Bankman-Fried has requested an oral argument to “fight these baseless charges” and “clear his name.” He’s asking the court to dismiss 10 out of 13 charges, arguing that federal prosecutors have failed to substantiate most of their claims.

“The Government’s haste and apparent willingness to proceed without having all the relevant facts and information has produced an indictment that is not only improperly brought but legally flawed and should be dismissed,” Bankman-Fried’s lawyers argued in one of several memos filed yesterday.

Bankman-Fried’s lawyers also allege that—after extraditing Bankman-Fried from his home in the Bahamas—the US has failed to honor terms of an extradition treaty requiring that the Bahamas consent to all charges brought against Bankman-Fried.

“Bankman-Fried now faces charges on four counts that were not encompassed by the counts listed in the Bahamas’s Warrant of Surrender and to which the Bahamas has not consented,” his lawyers alleged in court filings.

Should the court decide not to dismiss the charges, Bankman-Fried has asked the court to try the charges of illegal campaign contributions and foreign bribery separately from the charges of fraud and conspiracy. His lawyers argue this would help “avoid undue prejudice,” because a jury “may use the evidence of one of the crimes charged” to find “his guilt of the other crime or crimes charged.”

In short, combining the charges could “tempt the jury” to “infer a criminal disposition” on “the part of Bankman-Fried,” Bankman-Fried’s lawyers wrote in a memo.

Additionally, Bankman-Fried’s lawyers want a chance to further develop Bankman-Fried’s defense. To that end, they’ve asked the court to compel federal prosecutors to share any withheld “communications or other documents” relating to Bankman-Fried’s extradition from the Bahamas, as well as additional discovery from FTX that goes beyond the incriminating evidence gathered so far by federal prosecutors.

“The Government has failed to provide the required discovery and particulars needed to defend the case,” Bankman-Fried’s lawyers argued in a memo.

Bankman-Fried could not immediately be reached for comment.

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.”

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