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Sam Bankman-Fried’s arrest in the Bahamas on Monday marks the beginning of a new chapter in the FTX story, one that will pit the former crypto billionaire against the Southern District of New York.
The indictment is expected to remain sealed until Tuesday morning. US prosecutors have not yet commented, and neither the Attorney General of the Bahamas nor the Royal Bahamas Police Force have confirmed the nature of the charges against Bankman-Fried.
The New York Times reported that the charges against Bankman-Fried include conspiracy to commit wire fraud and securities fraud, as well as independent charges of securities fraud, wire fraud and money laundering. money.
The SEC has initiated a separate series of charges against Bankman-Fried, related to “our violation of securities laws, which will be filed publicly tomorrow in the Southern District of New York,” the director of enforcement said. Gurbir Grewal said in a statement on Monday.
An SEC spokesperson declined to comment further.
The charges could land Bankman-Fried in jail for decades, legal experts told CNBC. But before he serves his sentence, US prosecutors must secure extradition from the Bahamas back to New York.
“I can’t imagine that the Department of Justice will charge this case unless they are confident they can extradite him,” he said. Renato Mariottia former federal prosecutor, told CNBC.
Mariotti predicts the extradition will take several weeks to complete.
Mariotti said: “The Bahamian government statement shows that they will cooperate.
The United States and the Bahamas have had an extradition treaty since 1931, with the most recent iteration being codified in 1990. Because Bankman-Fried had not been convicted in the Bahamas, US prosecutors had to apply. arrest warrant and provide sufficient evidence to the Bahamian that he has committed a crime.
Extradition is the first step in a process that can take years to complete. Given the gravity of Bankman-Fried’s alleged crimes, prosecutors and regulators will be pursuing concurrent cases around the world.
“A trial in the US may not take place for many years,” says Mariotti.
“The more they charge, the bigger the case, the longer it takes them to act,” he said. “I’d say the end of 2023 is when the earliest testing will take place.”
Mariotti said prosecutors could argue that FTX violated its fiduciary duty by allegedly using customer funds to stabilize the price of artificially issued self-issued FTT coins.
Intent is also a factor in fraud cases and Bankman-Fried confirm he is unaware of potential fraudulent activity. He told CNBC’s Andrew Ross Sorkin at the New York Times DealBook conference that he was “not intentionally mixing the money.”
“I have never tried to cheat,” Bankman-Fried said.
In prepared testimony to the House Financial Services committee, FTX’s new CEO, John Ray, confirmed that money mixing occurred between FTX and Alameda Research, Bankman’s hedge fund- Fried.
Other legal troubles
In addition to the criminal charges to be announced Tuesday morning, Bankman-Fried is also facing a civil lawsuit, possibly brought by the SEC, Commodity Futures Trading Commission and securities regulators. and state banks launched, said Richard Levin, president of fintech and regulation. Internship at Nelson Mullins Riley & Scarborough.
The CFTC and lawmakers have begun investigating FTX and Bankman-Fried, who told Sorkin he dropped his last $100,000.
Shortly after Bankman-Fried’s arrest, the SEC appeared to confirm that the agency would pursue a separate set of charges from the criminal indictment.
Lawmakers also expressed satisfaction at Bankman-Fried’s arrest. Senator Sherrod Brown (D-Ohio), chair of the Senate Committee on Banking, Housing, and Urban Affairs, applauded both the Justice Department and Bahamian law enforcement “for holding Sam Bankman to blame- Fried.”
Congressman Maxine Waters (D-Calif.), Chairman of the House Financial Services Committee, echoed that view, but expressed disappointment that Bankman-Fried was arrested ahead of a House hearing, scheduled for on Tuesday.
“I was surprised to learn that Sam Bankman-Fried was arrested in the Bahamas at the direction of United States Attorneys,” Waters said in a statement.
“[The] The American public deserves to hear directly from Mr. Bankman-Fried about actions that have harmed more than a million people,” continued Waters.
Bankman-Fried was also invited to appear before the Senate before his arrest. That hearing will take place on Wednesday.
It is not clear whether the SEC or CFTC shall assume the prime responsibility for ensuring compensation for civil damage.
“The question of who takes the lead there, whether it’s the SEC or the CFTC, depends on whether there are securities involved,” Mariotti told CNBC.
SEC Chairman Gary Gensler, who meet with Bankman-Fried and FTX executives earlier this year, has speak public that “many crypto tokens are securities”, which would make his agency the primary regulator.
But many exchanges, including FTX, have crypto derivatives platforms that sell financial products like futures and options, under the jurisdiction of the CFTC.
Levin, who represents clients before both agencies, said: “For the sale of unregistered securities without registration or exemption, you can consider suing the Securities Exchange Commission. on dissolution – monetary penalties”.
Investors who have lost their savings do not wait. Class action lawsuits have been filed against FTX advocates, such as comedian Larry David and soccer superstar Tom Brady. a suit upset celebrities for allegedly not doing “pre-marketing due diligence .” [FTX] to the public.”
FTX’s peers are also filing lawsuits against Bankman-Fried. Failed lender BlockFi sued Bankman-Fried in November, seeking unnamed collateral that the founder of FTX had provided to the crypto lending firm.
FTX and Bankman-Fried had previously rescued BlockFi from insolvency in June, but when FTX failed, BlockFi faced the same liquidity problem and file for bankruptcy protection in New Jersey.
The largest securities class-action lawsuit is $7.2 billion in Enron accounting fraud, according to Stanford research. The potential for billions of dollars in settlements will emerge in addition to the civil and criminal fines Bankman-Fried faces.
A life behind bars
If the DOJ can secure conviction, a judge will consider a number of factors to determine the length of time to sentence him.
Braden Perry, a partner at Kennyhertz Perry who advises clients, said that based on the size of the damage, if Bankman-Fried is convicted of any fraud, he could spend several years in prison. years – potentially a lifetime. anti-money laundering, compliance and enforcement issues.
Perry, who was previously a senior trial attorney for the CFTC, the only official U.S. regulator of the FTX, said the length of any potential sentencing is difficult to predict.
Federal sentencing guidelines follow a numerical system for determining maximum and minimum sentencing sentences, but the system can be esoteric. The scale, or “severity of violation,” starts at one and goes up to 43.
The wire transfer fraud conviction rate is seven on a scale, with a minimum sentence of 0 to 6 months.
Perry told CNBC, but mitigations and improvements could change that rating.
“The dollar value of damages plays an important role,” Perry said. According to the guidelines, any loss above $550 million adds 30 points to the base offense. FTX customers have lost billions of dollars.
“Having 25 or more victims gets 6 points, [and] Using some regulated markets adds four,” Perry said.
That means Bankman-Fried could face life in federal prison, without the possibility of supervised release, if he is convicted of only one of the crimes that prosecutors will pursue.
If convicted, his sentence could be reduced by mitigating factors.
“In practice, many white-collar defendants receive lighter sentences than the guidelines prescribe,” Perry said. Even in major fraud cases, the previously mentioned 30-point raise could be seen as punitive.
By comparison, Stefan Qin, the Australian founder of a $90 million crypto hedge fund, is sentenced to more than seven years in prison after he pleaded guilty to one count of securities fraud.
Roger Nils-Jonas Karlsson, a Swedish citizen charged by the United States scam more than 3,500 victims with more than 16 million dollarsto be sentenced to 15 years jailed for securities fraud, wire fraud and money laundering.