Nov 16, 2022 - Economy

For FTX's Sam Bankman-Fried, incompetence could be a legal strategy

Photo: Jeenah Moon/Bloomberg via Getty Images

Incompetence — or the perception of it — has its benefits as a legal defense, especially if you might face charges of fraud, experts tell Axios.

Why it matters: The notion casts an interesting light on Sam Bankman-Fried's recent chat with the New York Times, in which he repeatedly describes FTX's sudden collapse into bankruptcy as an outgrowth of his own distraction, over-extension and performance as a CEO.

  • ''Had I been a bit more concentrated on what I was doing, I would have been able to be more thorough,'' he told the NYT. ''That would have allowed me to catch what was going on on the risk side.''

The big picture: Bankman-Fried, who hasn't been charged with a crime, faces the prospect of serious criminal legal exposure, as a result of the sudden implosion of FTX, the crypto exchange he founded, and his trading shop Alameda Research, as many news outlets have reported.

  • The big question surrounding the collapse is whether the firms misused perhaps billions of dollars of customer money from FTX trading accounts, according to reporting from Reuters and the Wall Street Journal.
  • The Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission are all investigating the collapse, according to multiple reports.

What they're saying: "Bankman-Fried looks like he is at very serious risk of ending up in prison," says Renato Mariotti, a former prosecutor in the DOJ's securities and commodities fraud section, and now a defense attorney at Bryan Cave Leighton Paisner.

How it works: Lawyers tell Axios the main criminal risk Bankman-Fried faces is an indictment on charges of fraud — one of the more common charges in white-collar prosecutions. But to convict, prosecutors must prove beyond a reasonable doubt that someone had knowledge or intent to commit fraud, which can be tricky, they say.

  • That’s why the defense against such charges typically centers on something like, "It wasn't fraud, I was just really bad at my job."
  • "Typically, in a fraud case, the person at the top argues that he was inattentive, delegated to others, and wasn’t focused on the details," Mariotti tells Axios. "The point is to argue that he was sloppy or inattentive, not a fraudster."

Yes, but: There can be other defenses. Mariotti says it's possible that buried in some bit of fine print somewhere on FTX's site is something that gives the company and Bankman-Fried some legal coverage — though Axios reporters couldn't find it in the crypto exchange's terms of service.

For the record: Axios reached out to Bankman-Fried and his law firm, Paul Weiss. Neither responded.

The bottom line: Prosecutors and regulators are going to be combing through email traffic, text messages and other written communication as well as compiling testimony from former colleagues about conversations with Bankman-Fried, all of which could be used to try to establish intent in a potential criminal case.

  • Meanwhile, Bankman-Fried continues to talk to reporters and post cryptically on Twitter, amid the investigations — potentially creating legal headaches, says Philip Moustakis, a former SEC attorney and counsel at law firm Seward & Kissel.
  • "The public statements we're seeing are going to limit the available defenses and create risks for the defense," he says.
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