Sam Bankman-Fried Highly Likely to Escape Conviction on Most Serious Charges, Former Banker Says

Former FTX CEO Sam Bankman-Fried, who faces fraud charges over the collapse of the bankrupt cryptocurrency exchange, leaves following a hearing at Manhattan federal court in New York City on Jan. 3, 2023. (Andrew Kelly/Reuters)

News Analysis

Disgraced FTX founder Sam Bankman-Fried, who recently pled not guilty to a slew of charges related to FTX’s implosion, is unlikely to be convicted of the most serious charges when the case goes to trial in October or to serve a lengthy prison term, a former investment banker has told The Epoch Times.

Despite having cost FTX customers an estimated $8 billion, which they are unlikely ever to get back, Bankman-Fried’s plea of not guilty on Jan. 3 is probably based on a realistic assessment of the current state of regulations regarding crypto exchanges and the difficulty of proving beyond a reasonable doubt that Bankman-Fried made illicit use of customer funds.

That’s the view of Jeffrey Hooke, a former vice president of investment banking at Lehman Brothers who now teaches at the Johns Hopkins Carey School of Business.

Nearly a month before Bankman-Fried returned from the Bahamas and appeared in New York federal court to enter his plea on money laundering, securities fraud, and other charges, Hooke was among those who predicted that the FTX founder and one-time superstar of crypto trading might avoid serious consequences. The plea affirms what Hooke views as the likely stance of Bankman-Fried’s legal team, as well as the difficulties involved in bringing a conviction in an area of the market where rules and standards are even now in nascent form and in need of clarification.

The lack of oversight on the part of the Securities and Exchange Commission (SEC) and other regulators is an issue, Hooke suggested.

“I think he has a chance to beat the rap. FTX was not a retail brokerage firm regulated by the SEC or similar agencies. The laws governing the crypto space are cloudy, at best. I look at the charges, and I’m a little skeptical that you can turn them into big crimes,” Hooke told The Epoch Times.

Part of the problem here, from the prosecutors’ viewpoint, has to do with the fact that FTX, as a crypto trader, was wholly distinct from financial institutions with a codified fiduciary duty to safeguard assets clearly spelled out in their agreements with customers and depositors, he said.

“Probably the most serious charge is that FTX took depositors’ money and used that money for venture capital investments to do their own in-house trading, and to make other investments, but that’s where it’s really murky. Customers were never making deposits as you and I think of deposits,” Hooke said.

A customer placing money in a reputable bank has assurances that the funds are going into a segregated account protected by the federal government. A Merrill Lynch account, for example, is walled off, Hooke said. But crypto exchanges operate free from such protocols.

“When an investor placed money or crypto assets with FTX, they were not assured that their assets were placed into some separate account, as you have at Merrill Lynch. There was no assurance the customer assets were walled off from FTX executives using the money for FTX purposes,” however they chose to define those purposes, Hooke said.

“The FTX terms of service did not specify what the customer money was used for. FTX advertising was a little suspect, but so is the advertising for a used car dealer. So I don’t see how the government can claim that he was using deposits in an illicit way. The law was never designed to cover crypto exchanges, and the SEC never passed laws to that effect. It’s almost like an unsecured loan—put money in there, and you have an unsecured claim, but you don’t have a deposit-type claim,” Hooke added.

In the Dark

Another issue is Bankman-Fried’s ability to argue that he was unaware of the real state of FTX’s finances when the hedge fund connected to FTX, Alameda Research, engaged in risky trading. Hooke drew a parallel between the spotty bookkeeping at FTX during Bankman-Fried’s reign and the campaign finance fraud that is so prevalent in Washington, D.C., and similarly hard to prosecute.

“Look at these kinds of issues with campaign finance contributions, and there being so many dark and murky areas. Whereas with FTX, someone borrows money based on phony financial statements, and therefore the applications to borrow money from banks were fraudulent. One of the accusations here is bank fraud. But [Bankman-Fried] himself claims he didn’t know what was in the books, and they didn’t really keep books. He can feign ignorance on that particular charge,” Hooke said.

Unfortunately for prosecutors, comparisons of the FDX fiasco to the Bernard Madoff scandal do not hold up to scrutiny. Madoff ultimately pled guilty to charges related to his Ponzi scheme, including securities fraud, wire fraud, and money laundering, and was sentenced to 150 years in prison. But in that case, prosecutors could invoke legal requirements to keep accounts separate that do not apply in the current context, Hooke noted.

“Madoff was a different story. That was a money management firm. You put money into the firm and you have a separate account, and there is a fiduciary obligation, the manager is not supposed to take money out of your account and use it for various things like buying yachts and so on. Madoff’s was a classic Ponzi scheme. He promised he was earning money on your investment, but the accounting was phony, the account statements were made up. The sales pitch was illicit, and it was totally different. I’m not sure that the FTX exchange ever promised returns,” Hooke said.

Again, the emerging nature of crypto platforms, and the regulations that apply to them, are an impediment to those who seek redress.

“There’s a laundry list of rules governing money management firms, like Madoff, or Fidelity, or Vanguard, there’s a laundry list of rules—hundreds and hundreds of pages of historical protocol—but FTX was a tech firm, not a money management firm, and never had to file paperwork with the SEC,. FINRA, or the Office of the Comptroller of the Currency,” Hooke observed.

So the prospects for criminal prosecution in October are uncertain at best, and Hooke also discounted the possibility that civil lawsuits will get very far.

“A lot of lawsuits have been filed, but I think the money has disappeared, and I don’t think he has much left in the way of assets,” Hooke said.

The Epoch Times has reached out to FTX for comment.