The NYU School of Law Program on Corporate Compliance and Enforcement (PCCE) is following the collapse of FTX and the civil and criminal enforcement actions arising from FTX’s and its founder’s alleged misconduct. In this post, several former federal prosecutors offer their initial reactions to the arrest of Sam Bankman-Fried (SBF) and the criminal case brought by the U.S. Attorney’s Office for the Southern District of New York (SDNY).
From Left to Right: John Savarese, David Anders, Seetha Ramachandran, Jaimie Nawaday, and Eugene Ingoglia
Speed Matters: The Swift Arrest and Prosecution of Sam Bankman-Fried
by John F. Savarese and David B. Anders
Over the past several months, senior DOJ leaders have repeated the message that prosecuting individuals in white-collar cases remains a top Department priority. The recent indictment of Sam Bankman-Fried plainly exemplifies that message but it also demonstrates the importance of a far less-often observed objective: to investigate expeditiously and, when appropriate, to prosecute swiftly. Many commentators, in reacting to the speed with which charges were brought against SBF, have expressed surprise that the U.S. Attorney’s Office and the SEC were able to bring these criminal and civil charges so quickly. For example, the Wall Street Journal commented that the arrest of SBF “roughly a month after the swift collapse of his cryptocurrency exchange is among the fastest recent indictments in a financial blowup and comes as federal prosecutors look to speed white-collar prosecutions.” Similarly, Bloomberg reported that “[s]peed was of the essence for Manhattan US Attorney Damian Williams,” and noted that the case against SBF “came together in a matter of weeks,” which departed from the usual pattern of “US prosecutors usually grind[ing] away in obscurity for months or years before unveiling a criminal indictment.”
In our view, while the fast work in the SBF case was somewhat unusual, there are precedents worth noting and the larger point, which should not be lost, is that the government can be most effective when it moves expeditiously. For example, in 2002, the U.S. Attorney’s Office for the Southern District of New York and the SEC filed charges against Adelphia Communications Corp.—one of the nation’s largest cable companies at the time—and its top executives for securities, bank, and wire fraud less than a month after the company had filed for bankruptcy. In doing so, the SEC described the accounting scandal as “one of the most extensive financial frauds ever to take place at a public company.” Similarly, in 2002, the SDNY criminally charged two former executives of WorldCom less than five weeks after the telecommunication giant announced its discovery of the multi-billion dollar accounting fraud—which the New York Times at the time described as “among the fastest ever in a white-collar case.” And more recently, in 2021, the SDNY and the SEC charged a partner at the McKinsey consulting firm with insider trading less than two months after Goldman Sachs announced an acquisition of Fintech lender GreenSky, Inc.
Both general and individual deterrence are most effectively served when the public sees that misconduct is brought to justice with reasonable dispatch. In making this point, we of course do not mean to suggest that justice should be rushed or that prosecutors should not take the appropriate time to hear from counsel regarding countervailing evidence and considerations. Justice often demands that prosecutors act deliberately and with great care before proceeding ahead with charges. What makes the FTX situation appropriate for swift action, in our view, is the apparent scale of the harm, the extent of the fraud, and the risk of flight. In situations like these, justice demands that prosecutors act quickly to assure a sometimes skeptical public that the system can indeed work effectively and speedily when necessary and appropriate.
John F. Savarese and David B. Anders are Partners at Wachtell, Lipton, Rosen & Katz LLP and are both former federal prosecutors at the SDNY.
SBF Prosecution Raises Novel Issues for Asset Forfeiture and Victim Restitution
The crimes charged against SBF are simple — old-fashioned fraud through a Ponzi scheme. His conviction seems inevitable.
For the government, the challenging part of this case will be the forfeiture proceedings. Under the Mandatory Victim Restitution Act (MVRA), federal prosecutors have an affirmative obligation to use their “best efforts” to see that crime victims are compensated. In an ideal world, forfeiture and restitution should work in tandem. Prosecutors should use the forfeiture laws to identify, seize, and forfeit assets so that they can be preserved and are available to compensate victims through restitution at the conclusion of a criminal case.
Even though the government wields extraordinary power to restrain and forfeit property, FTX presents many challenges. There have been so many conflicting reports about where the assets are being stored, the integrity of the cold storage wallets involved, and who has access to them, that the basic first task – identifying and restraining assets that are the proceeds of crime – is quite difficult. The forfeiture allegation that appears in the indictment against SBF is just a notice provision to the defendant. It doesn’t tell us what, if anything, the Department of Justice has done to identify and seize the proceeds of the crimes charged. Even if DOJ is successful in locating digital assets, it is unclear how the U.S. Marshals Service would store the crypto during the many months or even years it takes to resolve the criminal case, whether assets would be returned to victims as crypto, and how losses in value would impact the restitution that victims are owed.
Another challenge for prosecutors will be navigating the interests of other parties who, unlike ordinary third-party claimants who are barred from intervening in the criminal case, are other government actors who may also be acting to ensure that assets are available for victim compensation. These could include the U.S. Bankruptcy Court, foreign regulators, the SEC, and other agencies who are likely to pursue enforcement cases against SBF and FTX. Prosecutors should think about how best to maximize recovery by working cooperatively with other agencies, and look to precedents in other complex, multi-victim cases.
Seetha Ramachandran is a Partner at Proskauer Rose LLP and is a former federal prosecutor at the SDNY and a former Deputy Chief in the Asset Forfeiture and Money Laundering Section (AFMLS) in the U.S. Department of Justice in Washington, D.C.
The Government Plays it Safe with its Charging Decisions Against SBF
Although this is an extremely high profile case, the SDNY indictment is a no-nonsense, no-frills document. Whereas in the past we would sometimes see “speaking indictments,” in such cases, which include far more facts and details than necessary and provide colorful statements for the press, this indictment is very conservative. The factual statements are short and plain. The theories of fraud are very standard—lying to get money, lying about what you’re doing with the money. There are no novel or creative theories here that could come under attack on an eventual appeal. The government is already facing a course correction on its expansive wire fraud theories based on two of its criminal cases pending before the Supreme Court, so what we see here is a return to classic theories of fraud.
Also, of course, the government faces a potential extradition battle, and typically the more complicated the charges, the lengthier the extradition fight. And although the underlying asset is a complex one, the indictment reads not like a cryptocurrency case but like any other alleged wire fraud case. The government might have decided to move quickly, but also safely, as complexity brings complicated motion practice and delay. This indictment suggests that the government took into account the ways in which this case could run into trouble either in the short term (with extradition) or in the long term (on appeal) and sought to guard against both.
Jaimie L. Nawaday is a Partner and Co-Head of the Government Enforcement and Internal Investigations Practice Group at Seward & Kissel LLP and a former federal prosecutor in the civil and criminal divisions of the SDNY.
Tactical Considerations for Bail and Extradition
Taking a step away from the substance for a minute, I’m intrigued by what might be the tactics around the extradition process, which can take a long time if extradition is contested.
First, there are the short and medium term practicalities. SBF is currently detained in the Bahamas. What are the conditions like in that prison? Does the prospect of having to spend months or years in a Bahamian prison trump all other strategic considerations? And even if extradition was waived and he was brought to the US, what are the chances of securing bail in the US? The government surely will oppose bail. The question likely would turn on how a judge assessed the question of whether he was a risk of flight. No doubt the defense would be prepared to offer consent to robust surveillance and significant limitations on his freedom if that came with home confinement rather than incarceration at the Metropolitan Detention Center, itself a very challenging institution in which to spend time. Will that be enough?
Second, it would not be surprising in cases like these if there was a negotiation between the prosecution and the defense along these lines: the defense says, we are willing to come and face trial, and will agree to some form of waiver of extradition, but only if you agree to provide the same specialty protections that we would get if we were went through the extradition process. The goal from the defense perspective would be (as under the rule of specialty) to limit the prosecution to proceeding on the charges they currently have filed – they couldn’t add new charges later. That might be valuable in a case like this one because, although the current charges are broad and carry very significant potential penalties, the investigation seems relatively young and there could be facts unknown to the prosecutors that might justify other charges down the road. The leverage the defense has in that discussion, to the extent it has any, is time. They can say, if we go through the extradition process, even if we get extradited we will get specialty protections; you might as well agree to that aspect and have me there sooner. Here, with a relatively early-stage investigation, maybe the government is content to wait, notwithstanding the public clamor? We will have to wait and watch.
Eugene Ingoglia is a Partner at Allen & Overy LLP and a former federal prosecutor at the SDNY.
The views, opinions and positions expressed within all posts are those of the author(s) alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of New York University School of Law. PCCE makes no representations as to the accuracy, completeness and validity of any statements made on this site and will not be liable for any errors, omissions or representations. The copyright of this content belongs to the author(s) and any liability with regards to infringement of intellectual property rights remains with the author(s).