It looked like a set piece straight out of Law and Order: Just a few weeks after he made his surreal star turn before a New York Times DealBook crowd, disgraced crypto mogul Sam Bankman-Fried was under arrest in the Bahamas, awaiting extradition to the United States on eight charges alleging rampant fraud at his now-shuttered currency exchange FTX. And only a month after a damning expose from the crypto site CoinDesk triggered a massive selloff at FTX, the newly anointed dark lord of crypto was behind bars. And as a pointed legal addendum, the financial industry’s lead regulatory agencies, the Securities and Exchange Commission and the Commodity Futures Trading Commission, have each launched separate complaints against SBF, as the 30-year-old former billionaire was familiarly known.
But as the legal phase of the SBF saga unspools in the months ahead, it may more closely resemble the convoluted heist depicted in American Hustle—a burgeoning array of charges and counter-charges pitting a host of self-interested players against one another in a procedural Grand Guignol with an uncertain outcome. And the hastily convened set of legal actions that followed are a conspicuous exercise in public relations on the part of a legal and regulatory establishment that permitted the flagrant pattern of fraud and misrepresentation nested in the very business model of the crypto industry to fester unattended as the FTX scam grew into one of the largest cases of investor fraud in recent history.
Given the complexion of recent financial history in these United States, that’s saying quite a lot. It’s hard for anyone who witnessed the epic collapse of the financial system in 2008—and the distinctly anemic legal and regulatory response to that crisis—to see the indictment of SBF as any sort of dramatic course correction. “The coverage of these things tends to be celebratory,” says Ankush Khardori, a former Justice Department prosecutor who specialized in white-collar crime. “But this is the start of it—not anything approaching the end.”
For starters, he says, demonstrating fraud in a criminal trial involves a high standard of proof. “In terms of the strength of the government case, the fundamentals are shaky here. Unless there was a concerted investigation—if this investigation was underway in early November right when the CoinDesk story broke—there’s no way they have strong cooperating witnesses, or communications proving criminal intent…. We do not see any disclosure that the representations cited in the complaint were intentionally made to mislead. The prosecutors may have all that, and we have public indications of some of the crucial elements, but we still need to determine the degree to which they were false. For a criminal case, there has to be contemporaneous intent, not just a misrepresentation by your own inadvertence, hypothetically, if you forgot to disclose something crucial. That doesn’t meet criminal standards.”
To try to reach those standards, prosecutors have cited language in FTX’s terms of service, but such language is littered with ambiguous wording, expressly to shield financial operators from potential criminal liability. “The representations in these complaints are kind of a hodgepodge, but the rubber is really going to start to hit the road quickly,” Khardori says. “Prosecutors are going to start asking for more detail about representations SBF has made. The government’s indictment contains none, which is par for the course in a quick indictment.”
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The regulatory complaints largely piggyback on the government’s criminal indictment, but there’s plenty of room for mogul-friendly interpretation there as well. “Both the SEC and CFTC complaints contain SBF’s representations of himself as this visionary leader of crypto,” Khardori says. “Those claims were not necessarily false. There’s a whole body of law involving these sort of hand-waving claims. So when SBF ends up in the US court system, litigating this case, those questions become very important–whether you can attach liability for fraud for saying very commonplace things. There’s a case from 2008 involving claims by Goldman Sachs—it’s batting around, going back between the district court in Manhattan and appeals courts; it’s largely about whether Goldman can be sued because they said they’re a well-run company.”
The 2008 crisis is more than just a legal touchstone; in the Bankman-Fried case, we’re already witnessing the regulatory and political forces that largely stood to the side as asset bubble after asset bubble was set aloft now doing a rushed impersonation of serious enforcers of market strictures. “We are in fact watching the same movie over and over again,” says financial journalist Christopher Leonard, author of the recent critical assessment of the Federal Reserve’s quantitative easing regime, The Lords of Easy Money “For the lobbying element, complexity is the special interests’ best friend, and crypto is the pinnacle of using complexity to evade financial regulation. If you look underneath the smoke and mirrors and confront the bare reality, it’s exactly what was happening around the subprime industry: well-funded lobbyists coming into Capitol Hill, using an argument that you can’t understand on its face, and at the same time, insisting that this is a horizon-changing model demanding that regulators give them maximum free rein.”
To be sure, the regulatory landscape confronting crypto was variegated. That’s why Bankman-Fried has thrown around cash on such a lavish scale to persuade lawmakers to shift chief regulatory authority over the speculative currency from the Securities and Exchange Commission—where Biden appointee Gary Gensler was taking aggressive measures to separate crypto investing from mainstream banking—to the Commodity Futures Trading Commission. The CFTC—which, unlike the SEC, relies wholly on congressional appropriations for its budget—is so far along the road to crypto-industry capture that one of its board members, Caroline Pham, took a series of exuberant selfies with SBF as he was making the rounds on Capitol Hill. She has since tried, without success, to scrub these damning images from the Internet. In a sense, the CFTC’s complaint against SBF is the legal equivalent of that effort to purge the historical record online.
And it’s far from the only one. Even as Bankman-Fried prepares for his court date, Congress is continuing to do his bidding—while selectively editing out its own conspicuous role in crypto-touting. Henry Burke of the Revolving Door Project reports that New York Democratic Representative Ritchie Torres sent a letter to the comptroller general demanding an investigation of the SEC for its allegedly lax handling of the abuses at FTX. “Coming from Torres, one of Congress’s most outspoken opponents of the SEC enforcing existing limits on crypto, the letter was almost comic in its shamelessness,” Burke writes. “In March, Torres was one of eight Members of Congress to send a letter to SEC Chair Gary Gensler alleging that the SEC was overstepping authority by requesting documentation and conducting investigations into crypto companies, including FTX.”
Meanwhile, lower-grade exercises in reputation-burnishing proliferate in both the legal world and the crypto-friendly press.”Everything about this case is old stuff, on hyperspeed,” Khadori says. “It’s the old strategy of ‘let’s hobnob with intellectual elites’—idiots like Matt Yglesias. And it all seems to be unraveling at hyper speed. The broad contours here are familiar—I mean, did you really get suckered in the year of the Elizabeth Holmes trial? Did you really get suckered like this? If I were Matt Yglesias, I’d just quit my job.” (For the record, Yglesias is still working, but also furiously backpedaling on all things SBF.)
There’s a kindred charm offensive on the legal front. “We’re getting these reports where [US Attorney for the Southern District of New York] Damian Wiliams is presented as someone with a deep track record in financial fraud cases,” Khadori says. “What happens is in the last couple of years in a prosecutor’s career, they’ll take on some cases like this to position themselves for private-sector jobs. That’s why financial fraud cases are called the airport lounge for departing prosecutors in Manhattan—they don’t even really like doing them; they do them for their resumes. And so far as I can tell, Damian Williams has done zero of these cases; the big cases cited in the press are public corruption. And even there, he just lost a big action against the former lieutenant governor of New York. So the same office is now the hero—we’re seeing that unfold, even though the fundamentals are shaky. I would say that even if this began in earnest at the time of the CoinDesk article, they’re going to be inhibited in the investigative steps they can take. I’d say there’s a one-in-three chance that this doesn’t work for the government.”
Those odds might well appeal to SBF’s legal team; in his pre-arrest tour through the press, Bankman-Fried seemingly played down the advice of counsel, but, as Khadori notes, “arrest concentrates the mind.” When Bankman-Fried does confront the case against him in court, Khadori adds, “he has some readily available themes—that there’s been an irresponsible rush to judgment here to placate the public. And the resulting charges in the case are insufficient, shot through with holes. You can even blow up the political themes, saying, ‘You guys weren’t doing anything, and now you’re trying to make me the scapegoat for your own failures.’ The case just sort of writes itself.”
