As the March 28 sentencing of FTX founder Sam Bankman-Fried draws near, a marked lack of consensus exists as to whether he deserves the lenient 6.5-year prison term his attorneys have asked for, or the much longer sentence, up to or in excess of a hundred years, that prosecutors are seeking.
Thanks partly to his commingling of funds with FTX’s Alameda Research hedge fund affiliate, an estimated $9 billion of deposits are still lost. The cryptocurrency markets reeled for many months after a Nov. 6, 2022, tweet from Binance founder Changpeng Zhao led quickly to the exchange’s implosion.
Yet even in the face of these facts, not everyone grasps the seriousness of the FTX scandal, and some fear that Mr. Bankman-Fried may receive a light sentence for one of the most devastating financial frauds in recent memory.
The back-and-forth about what would be an appropriate penalty for Mr. Bankman-Fried, whose net worth once stood at $15.6 billion, intensified on Wednesday as John Ray III, FTX’s current CEO, sent a letter to Judge Lewis Kaplan blasting the defense’s “categorically, callously, and demonstrably false” claims.
The fervent disagreement about what sentence Mr. Bankman-Fried deserves stems partly from a deeper problem when it comes to understanding sophisticated cyber and financial crime, and how its impact on society can be just as severe or more severe than much of the street crime with which prosecutors and courts are more familiar.
That’s the view of Harvey Kushner, chair of the criminal justice department at Long Island University in Brookville, New York, who teaches courses on white-collar crime and writes frequently about the issue.
“My view is that this is symptomatic of the problem with crime itself, and with how our society deals with blue-collar crime and white-collar crime, or ‘crime of the streets’ and ‘crime of the suites,’” Mr. Kushner told The Epoch Times.
“There’s always been a difference, but how do you deal with it? As a society, we treat these types of crime differently, our criminal justice system is more capable of dealing with the blue-collar types of crime,” he added.
A New Breed of Crook
While Sam Bankman-Fried caused possibly irreparable harm to thousands of customers and destabilized a broad area of the global financial markets through his reckless conduct and mendacity, many people today still lack the conceptual vocabulary and financial sophistication to grasp the extent of the damage he has inflicted.“We have this situation with Sam Bankman-Fried who committed this humungous theft of funds, but in an area which the public doesn’t really know. If someone commits a murder, armed robbery, burglary, or arson, our system is pretty adapted to how long you should serve. But when it comes to white-collar theft, we’re just not always equipped to deal with it,” said Mr. Kushner.
If the public, media, and courts saw FTX in its proper context, they would view the question of sentencing with the understanding that Mr. Bankman-Fried, and other cryptocurrency moguls who have faced legal trouble, did not commit innocent errors, contrary to the claims they make in court.
Those lauded as pioneers, innovators, and entrepreneurs gravitated to a field long characterized by a lack of transparency, and this was not by accident, Mr. Kushner suggested.
“When you think about it, the reason crypto was invented in the first place was to get away from regulations. The whole idea was to get away from a system where there would be records” of the kind that banks are required to maintain, he said.
“Even though we understand this in 2024, our agencies are not equipped to deal with it. If you look at law enforcement, they’re far more capable of dealing with an arson or a burglary,” Mr. Kushner continued.
Cards Up His Sleeve?
FTX owes huge amounts of money not only to individual creditors but also to companies such as BlockFi, which both loaned funds to and received loans from FTX prior to the collapse in November 2022. Earlier this month, the two companies reached a settlement, subject to court approval, under which FTX will compensate BlockFi to the tune of $874 million.“BlockFi is also a victim of Sam’s fraud,” Louis d’Origny, the founder of Miami-based investment firm Arceau Capital and an FTX creditor, told The Epoch Times.
But under the terms of the agreement, payments to BlockFi will happen only after other creditors get at least 66 percent of the recoveries they seek, Mr. d’Origny noted.
In light of the spectacular fall of FTX in November 2022, and the shockwaves it sent through the markets, many have assumed that the exchange is broke, and that customer funds are probably lost forever.
But the reality is a bit more complex. One potential mitigating factor that may influence Judge Kaplan’s sentencing decision is the possibility, even at this stage, of procuring at least some of the cash his creditors are owed.
That’s the view of Denis Rogachev, CEO of Cryptadium, a Vilnius, Lithuania-based cryptocurrency exchange.
“Even in this situation, FTX has the ability to make payments to creditors in a relatively short period of time,” Mr. Rogachev said.
How would it achieve this goal? FTX’s subsidiary, Alameda Research, invested heavily in the Solana blockchain, Mr. Rogachev noted. Though most of Alameda’s tokens are frozen, they will become available for trading or sale in 2027 or 2028, providing liquidity that by some estimates could reach as much as $5 billion.
Mr. Rogachev pointed to an online rumor that FTX has already begun selling the frozen asset at a marked discount.
“This deal could bring $2.5 billion to the exchange’s balance sheet in the near future. This amount should be enough for creditors to receive repayments sooner than they had hoped,” Mr. Rogachev stated.
The existence of these assets does not by itself minimize the scope of the disaster, or constitute grounds for a more lenient sentence, Mr. Rogachev believes.
A Crime Is Still a Crime
Brook Gotberg, a professor of law at Brigham Young University in Provo, Utah, who specializes in insolvencies and debtor-creditor relations, concurs that the lack of consensus about FTX’s restructuring is striking indeed.“Certainly, there are different schools of thought. There’s one argument that many of the depositors will be paid back some portion of what they’re owed,” Ms. Gotberg told The Epoch Times.
Ms. Gotberg said that FTX has benefited significantly from the comeback that cryptocurrency has made since the “crypto winter.” In 2023, Bitcoin increased 154 percent in value and outperformed S&P 500 Index for four consecutive months, according to VanEck figures.
Capitalizing on this strong performance, FTX has asserted its right to set claims based on the value of crypto shares at the time of the exchange’s collapse in November 2022 and to spread the digital funds across many depositors, Ms. Gotberg said.
Like the sale of the frozen assets, the exchange’s ability to reap the benefits of Bitcoin’s current prices may offer some hope for FTX clients and—depending on one’s viewpoint—militate in favor of a more lenient sentence for Mr. Bankman-Fried.
“But if you steal a car and then give it back, that doesn’t reduce the severity of the crime in stealing the car. Many people who have been arguing for a reduced sentence, including his attorneys and others, have made this ‘no harm, no foul’ claim, but on the other hand, there are certainly parallels to the Bernie Madoff situation, and he received a lengthy sentence,” said Ms. Gotberg.
After the unravelling of his $65 billion Ponzi scheme, which some have dubbed the worst financial fraud in history, Mr. Madoff received a 150-year prison sentence, but died in April 2021 before completing much of it.
Spirit of the Law
While the example of Mr. Madoff may offer hope for those who do not want to see Mr. Bankman-Fried get off with a slap on the wrist, other factors peculiar to U.S. bankruptcy law do not bode as well.In bankruptcies, the rights of creditors under state law are generally paramount, Ms. Gotberg acknowledged.
“There is a significant effort made to respect the state law rights of creditors as they come in, and we really only depart from that in situations where there are bankruptcy-specific reasons to depart—for example, if we want to discourage the debtor from making wealth-destroying transfers or other actions that would hinder redemptions,” said Ms. Gotberg.
At the same time, bankruptcy statutes generally favor giving people a second chance, she said.
“Bankruptcy laws in the United States were passed to facilitate entrepreneurship—to bail out even some of our Founding Fathers who engaged in land speculation and other business ventures that went south. Rather than put debtors in prison, these laws were passed to allow them to start over,” Ms. Gotberg stated.
No Physical Harm
For some, another issue likely to influence the sentencing decision is the nonviolent nature of Mr. Bankman-Fried’s crimes and the unlikelihood of recidivism.“I don’t think that anyone should be sentenced for life for nonviolent crimes. In my heart, I know he deserves to spend time in jail. But not forever. He is no threat to society or to anyone, really,” Louis d’Origny of Arceau Capital said.
Regardless of how Judge Kaplan rules next week, Mr. d’Origny advises FTX creditors, especially those based overseas, to do their homework and understand their rights.
“FTX is a complex bankruptcy, and foreign creditors may be at risk of a withholding tax. It is vital that all FTX creditors seek tax and legal advice. If that isn’t possible, they should consider selling their claims,” he said.
With so many moving pieces, some observers have deep concerns about whether Sam Bankman-Fried will receive a sentence at all commensurate with the scale of his crimes.
Mr. Bankman-Fried and his lawyers have been pushing for months on many grounds, ranging from his dietary restrictions, to his attention-deficit/hyperactivity disorder and depression, to his supposed need for home visits, Charles Slamowitz, a New York-based lawyer who advises clients in cryptocurrency cases, told The Epoch Times.
“Both FTX and Bankman-Fried have been testing the courts and are looking to establish a windfall, which just might very well occur, based on our close monitoring of the matter,” Mr. Slamowitz said.
FTX did not respond by press time to a request for comment.
