The U.S. Government's Response to FTX's Collapse Was 'Troubling'

PRELIMINARY STATEMENT

I. INTRODUCTION

In 2022 the entire cryptocurrency sector underwent tremendous shocks due to a broad market crash dubbed the “crypto winter.” Every major participant––including exchanges, banks, lenders, and hedge funds––cratered, with many ultimately going out of business by the end of the year. FTX, the non-U.S. exchange founded by Mr. Bankman-Fried and others, lasted far longer (paying back billions to customers and lenders during the course of the year), but ultimately succumbed to the same market forces, filing for bankruptcy on November 11, 2022.

The Government’s response was dramatic––and troubling. Rather than wait for traditional civil and regulatory processes following their ordinary course to address the situation, the Government jumped in with both feet, improperly seeking to turn these civil and regulatory issues into federal crimes. In a classic rush to judgment, the Government brought the original indictment against Mr. Bankman-Fried on December 9, 2022, less than a month after FTX’s bankruptcy. See Sealed Indictment, Dec. 9, 2022, ECF No. 1 (the “Original Indictment”). The Government did this before it had even received, let alone reviewed, millions of documents and other evidence directly relevant to the issues in this case, including detailed financial records of FTX and its counterparties. Not surprisingly, this resulted in an indictment containing eight vague and non-specific charges against Mr. Bankman-Fried. Each of the charges contained boilerplate recitals of statutory language, followed by literally one sentence purportedly describing the basis for the charge––nothing further.

Armed with its vague pleading, the Government sought to extradite Mr. Bankman-Fried from the Bahamas. But Mr. Bankman-Fried had not defrauded anyone, nor intended to defraud anyone. And he had been a lawful permanent resident of the Bahamas for two years. Nevertheless, the Government insisted that he be held in a Bahamian prison during the 2 proceedings and then sought to end-run around the extradition treaty between the United States and the Bahamas (the “Extradition Treaty”). After Mr. Bankman-Fried properly consented to a simplified extradition procedure, the Bahamian government agreed to release him to U.S. authorities and issued a warrant of surrender specifying that he be tried on seven of the eight counts in the Original Indictment––but not the count relating to alleged campaign finance violations. Despite this clear direction from the Bahamian government, the Government now seeks to have Mr. Bankman-Fried tried on that charge as well. And after Mr. Bankman-Fried returned to this country, the Government superseded the Original Indictment, not once but twice, improperly adding several new, unrelated charges without first obtaining the express consent of the Bahamian government. The Court should not permit trial to proceed on the charges brought in violation of the Extradition Treaty and the rule of specialty.

The Government filed the Fifth Superseding Indictment on March 28, 2023. Superseding Indictment, March 28, 2023, ECF No. 115 (the “S5 Indictment”). Even if the Court were to consider all of the charges in the S5 Indictment (notwithstanding the Government’s violation of the Extradition Treaty), those charges suffer from multiple legal flaws.

As noted in Mr. Bankman-Fried’s pretrial motions, several of the fraud charges are improperly premised on a “right to control” theory of property that the Solicitor General recently conceded is invalid in Ciminelli v. United States, No. 21-1170, a case currently pending before the Supreme Court. Further, the wire fraud charges repeatedly assert that Mr. Bankman-Fried made actionable misstatements without identifying either the “property” that Mr. Bankman-Fried was allegedly trying to obtain through the fraud, or any intent to defraud. To the extent the wire fraud charges focus on loans from FTX to Alameda, which the Government views as an improper use of customer assets that constitutes interference with the right of customers to 3 control their assets and have access to information necessary to make discretionary economic decisions, this is not a viable theory of wire fraud. Rather, this is the very theory of property fraud that the Solicitor General expressly abandoned and confessed was error before the Supreme Court in Ciminelli. In the wake of the “crypto winter,” the Government, in hindsight, may dislike or disapprove of business practices of the cryptocurrency industry, FTX, or even Mr. Bankman-Fried––but this does not give it license to turn them into federal crimes. See Kelly v. United States, 140 S. Ct. 1565, 1571 (2020) (the federal fraud statutes are “limited in scope to the protection of property rights” and do not “criminaliz[e] all acts of dishonesty”).

As noted in the motions, the other charges suffer from additional flaws:

• The commodities fraud charges fail to satisfy the “in connection with” statutory requirement and in any event violate the prohibition on extraterritorial application of the statute;

• The unlicensed money transmitter charge is undercut by FinCEN’s own rules;

• The campaign finance charge is not only self-contradictory, but fails to satisfy the relevant statutory requirements; and

• The Foreign Corrupt Practices Act (the “FCPA”) charge is hopelessly vague and improperly pleaded.

In sum, the Government’s haste and apparent willingness to proceed without having all the relevant facts and information has produced an indictment that is not only improperly brought but legally flawed and should be dismissed.

Further, the Government has failed to provide the required discovery and particulars needed to defend the case. As noted in the motions, the FTX Debtors have become so enmeshed in the investigation and prosecution of Mr. Bankman-Fried that they have become part of the “prosecution team.” Accordingly, the defense is entitled to an order requiring a full review of the FTX Debtors’ internal records for all discoverable material, including potentially exculpatory 4 materials under Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194 (1963). Such discovery must be granted should the Court allow any of the charges to go forward.