Understanding the Two-Level Enhancement Dispute in Bankman-Fried's US Trial

E. The Enhancement for Deriving More Than $ Million in Gross Receipts From a Financial Institution Is Applicable

The defendant argues against application of the two-level enhancement for obtaining more than $1 million in gross receipts from a financial institution as a result of the offense. (Def. Mem. at 25). His argument appears to be that Silvergate Bank, which opened accounts for the defendant in the names of Alameda and North Dimension, may have transmitted more than $1 million in gross receipts, but it did not suffer any losses. But that argument lacks merit. First, Silvergate Bank's financial soundness was in fact affected by the defendant’s conduct. Second, the defendant derived more than $1,000,000 from multiple other financial institutions, and his false statements to Silvergate Bank are not the sole basis for this enhancement.

Pursuant to Section 2B1.1(b)(17)(A) of the Guidelines, a two-level enhancement is warranted if “the defendant derived more than $1,000,000 in gross receipts from one or more financial institutions as a result of the offense.” U.S.S.G. § 2B1.1(b)(17)(A). The defendant argues that Silvergate Bank was a mere conduit for his receipt of fraud proceeds, and that this enhancement only applies where the financial institution “is the source of funds involved in the offense and suffers some loss.” (Def. Mem. at 25 (citing United States v. Huggins, 844 F.3d 118, 122-23 (2d Cir. 2016))). But this case is distinguishable from Huggins. First, unlike the bank accounts at issue in Huggins, the Silvergate bank account here was not merely a “conduit” for the fraud. Rather, the defendant here made affirmative misrepresentations to Silvergate Bank to induce it to open a bank account that was an essential component of the fraudulent scheme. That account ultimately processed billions of dollars’ worth of transactions and put the bank’s “financial safety and soundness at risk.” Huggins, 844 F.3d at 123. Indeed, Silvergate Bank declared insolvency in March 2023, just a few months after the collapse of FTX, in significant part because the defendant’s misrepresentations exposed the bank to risks it might not have otherwise taken on. See Recent Bank Failures and the Federal Regulatory Response, Hearing Before the Committee on Banking, Housing, and Urban Affairs, 118th Cong (Mar. 27, 2023) (Statement of FDIC Chairman Martin J. Gruenberg) (FTX’s bankruptcy led to additional “outflows of deposits from digital asset customers” which in turn “caused Silvergate Bank to sell debt securities to cover deposit withdrawals, resulting in a net earnings loss of $1 billion,” and its subsequent bankruptcy).

However, the Court does not need to reach the question of whether the enhancement applies to the conduct directed at Silvergate Bank because there is no real dispute that the defendant defrauded multiple other financial institutions as that term is defined in the Guidelines. The definition of “financial institution” includes any “investment company,” “union or employee pension fund,” and “brokers and dealers registered, or required to be registered, with the Securities and Exchange Commission.” U.S.S.G. § 2B1.1 Application Note 1. The defendant defrauded multiple victims who fit into these categories of more than $1 million. That includes investment companies, such as BlackRock, and an international pension fund, which were equity investors in FTX and were defrauded by the defendant’s securities fraud. See, e.g., BlackRock Private Investment Fund Registration Statement, www.sec.gov/Archives/edgar/data/1816389/00011931 2520184172/d945449dn2.htm (noting the company’s registration under the Investment Company Act of 1940).

This enhancement also applies because BlockFi was an investment company. BlockFi reached a settlement with the SEC in 2022 acknowledging that it was required to be so registered, and agreeing to pursue registration as an investment company. BlockFi was also a victim of the defendant’s fraud as both a lender to Alameda and a customer of FTX, and its CEO testified at trial regarding the fact that BlockFi lost approximately $650 million due to the defendant’s fraud, which is significantly more than what is required for the enhancement. (Tr. 1164-65).

Accordingly, the defendant derived more than $1,000,000 in gross receipts from financial institutions and the enhancement applies.