Prosecutors have indicted Sam Bankman-Fried for allegedly diverting billions of {dollars} of buyer funds positioned in his crypto buying and selling platform, FTX. Bankman-Fried, the purported mastermind of that huge fraud, has been arrested within the Bahamas.
The Securities and Change Fee (SEC), the federal company mandated to guard traders, has additionally charged him with violations of securities legal guidelines. That company alleges that Bankman-Fried lied to those that despatched billions of {dollars} to FTX by telling them their belongings had been safe when in truth he was engaged in an unlimited embezzlement scheme.
Bankman-Fried was allegedly surreptitiously sending his prospects’ cash to a hedge fund that he managed and utilizing it to make all types of undisclosed investments, lavish purchases and huge political donations.
The SEC’s motion is in search of to enjoin him from any additional violations of the federal securities legal guidelines and safe disgorgement of his ill-gotten features. However sadly, the federal government seems to be developing brief in ending this gigantic fraud. If the historical past of such crooked dealings is any information, FTX’s traders and buying and selling prospects will discover that their cash has been frittered away and get better virtually none of it.
Among the many most distinguished crypto belongings are digital currencies that purport to be a substitute for conventional government-backed cash. Utilizing elaborate protocols and blockchain expertise as ledgers, they function like mediums of exchanges and shops of wealth.
A number of years in the past, the SEC issued an opinion that when functioning solely in that manner, they weren’t securities as a result of their purchasers had been shopping for a commodity that they might use or devour. However they might be securities underneath the well-established investment contract theory, the place their purchasers anticipated revenue similar to appreciation of these digital belongings from the managerial efforts of others.
In these instances, all the explanations for the securities legal guidelines that defend traders would kick in. The sale and buying and selling of digital belongings would thus come squarely inside that regulatory framework. The SEC definitely knew that crypto currencies and their buying and selling platforms, together with FTX, could possibly be inside their jurisdiction.
Ought to these federal officers have policed operations like FTX extra fastidiously and introduced authorized motion to cease any that violated the registration and anti-fraud provisions of the legal guidelines they’re charged to implement?
Once I labored on the SEC as a younger lawyer, I noticed that it’s vastly out resourced by the rich Wall Avenue group it should police and has the flexibility to prosecute at most solely 2 p.c of securities regulation violations. Regardless of that, the company, since its creation in New Deal laws, has usually acquired excessive marks for its effectiveness. Additionally, to its credit score, the SEC makes admirable efforts to get those that would commit their financial savings to enterprises like FTX to first examine their representations promising them safe earnings.
But that company has stumbled badly at instances, most infamously within the Bernie Madoff scandal by which the SEC didn’t catch a decades-long Ponzi scheme that bilked investors out of tens of billions of {dollars}. It seems we once more have an unlucky instance the place the federal government is a day late and a greenback brief in defending traders.
Fits by personal attorneys could possibly discover some redress for the traders by pursing members on this fraud who’ve ample sources, like FTX’s celeb promoters. And the actions by the Division of Justice and the SEC in opposition to Bankman-Fried could have some deterrent impact on future swindlers.
But I’m afraid the FTX debacle will be a part of the ranks of different huge frauds similar to Madoff, Enron and WorldCom, the place traders have misplaced their financial savings to unscrupulous fraudsters.
Daniel J. Morrissey is a professor and former dean at Gonzaga College Legislation Faculty.
