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 white collar defense attorneys and former prosecutors offer their reactions to the superseding indictment of Sam Bankman-Fried (SBF) obtained on March 27, 2023 by the U.S. Attorney’s Office for the Southern District of New York (SDNY).
Top row from left to right: Rebecca Mermelstein, Mark Racanelli, and Elizabeth Roper
Bottom row from left to right: William Komaroff, Seetha Ramachandran, and Joseph Facciponti (photos courtesy of authors)
FCPA Charge Gives Prosecutors a Potential Alternate Path to Conviction
by Rebecca Mermelstein and Mark Racanelli
Among the many questions raised by the new superseding indictment against Sam Bankman-Fried – adding allegations that he paid a $40 million bribe to Chinese officials to unfreeze certain crypto-currency accounts in China in violation of the Foreign Corrupt Practices Act (“FCPA”) – is why bother? Bankman-Fried is already alleged to have orchestrated a massive fraud, one which led to the collapse of FTX and to billions of dollars in losses. Relative to the severity of that loss, a “mere” $40 million fraud is relatively insignificant. And should Bankman-Fried be convicted, the additional charges would have no effect whatsoever on his Guidelines calculation or sentencing exposure. So what were prosecutors thinking? It’s possible that they were effectuating SDNY’s recent announcement that they would bring more cases under the FCPA. But it’s more likely that the additional charges are a strategic move. One challenge in proving the core FTX charges to a jury is that the facts are complicated. A jury will have to learn how crypto-currency works; how FTX’s algorithms were structured; and how financial arrangements between FTX and Alameda were structured. And Bankman-Fried’s lawyers may well argue that just as the jury may have trouble following the complex financial transactions, so too was Bankman-Fried confused or unaware of the fraud, and therefore lacked the requisite intent. The new charges offer an appealing simplicity: Bankman-Fried allegedly paid a bribe. That offers prosecutors at least one count where they may feel more certain of conviction, because the underlying facts and the issues the jury will need to grapple with are likely more straightforward. And by charging the FCPA fraud, rather than trying to introduce that conduct at trial as “other acts” evidence under Federal Rule of Evidence 404(b), prosecutors also guarantee that a jury struggling to understand the core-FTX fraud will hear about this alleged separate incident of criminal conduct. That may allow prosecutors to offer a narrative of a defendant who was willing to engage in a range of misbehavior in the pursuit of financial profit. And it could undercut a potential defense argument that the FTX collapse was the result of a single instance of poor oversight or misunderstanding.
Rebecca Mermelstein and Mark Racanelli are Partners at O’Melveny & Myers LLP and are both former federal prosecutors at the SDNY.
SBJ’s Use of Ephemeral Messaging May Have Provided a False Sense of Security
The use of applications that offer users the ability to “auto delete” messages, and sometimes do so by default, has become increasingly commonplace. Individuals and businesses may opt to use these platforms for a number of reasons: they tend to offer default encryption, promoting security from potential intruders; they minimize the amount of data that an organization retains, which can lower exposure if there is a data breach; and they provide a free and seamless way to communicate across borders (which is one reason they are the primary method of communication in some parts of the world). But in the context of a government investigation, the use of these tools can prove to be an incredible risk, both because of increased government scrutiny of so-called ephemeral messaging, and because users often have a false sense of security that these messages won’t ever see the light of day.
In the superseding indictment against Samuel Bankman-Fried (“SBF”) that was unsealed on February 23, 2023 (and superseded again on March 28, 2023), the Department of Justice (“DOJ”) makes several references to SBF’s use of ephemeral messaging applications; the indictment alleges that SBF “required [his employees] to communicate using encrypted and ephemeral messaging platforms that self-deleted, thereby preventing regulators and law enforcement from later obtaining a record of his misdeeds.” In particular, SBF is alleged to have “instructed employees to communicate over Signal,” “to prevent the preservation of evidence that could be used against him.” And the judge presiding over SBF’s case has explicitly barred him from using these applications as part of his bail conditions. The inference that SBF’s use of Signal was motivated by the desire to destroy incriminating evidence is supported the allegations here: for example, after FTX’s General Counsel instructed employees to preserve communications as a result of regulatory inquiries, SBF continued using Signal, and deleted some of his own relevant communications on other platforms. But even the benign use of these platforms can create a risk: in a recent antitrust trial in the District of Maine, defendants had to argue (largely successfully) that the government should not be able to introduce evidence that their WhatsApp messages were encrypted, based on the negative inference that could be drawn as a result. And, on March 3, Assistant Attorney General Kenneth Polite announced changes to the DOJ Evaluations of Corporate Compliance Programs specifically aimed at the use of ephemeral messaging within corporations, noting that if a company claims it cannot produce communications from these platforms, the DOJ “will not accept that at face value.”
Companies and individuals weighing whether the potentially negative inference drawn from the use of these platforms outweighs the possibility of their communications being used as evidence should also consider that, despite the promise of auto-delete, these messages have a way of surfacing in the government’s case. The SBF indictment directly quotes a number of communications that took place over Signal, including the General Counsel’s admonition that “I need to know the fucking truth about FTX US right now.” He does now, and so do we, self-deleting protocols notwithstanding.
Elizabeth Roper is a Partner at Baker McKenzie and a former Assistant District Attorney at the Manhattan District Attorney’s Office, where she was Chief of the Cybercrime and Identity Theft Bureau.
The SBF Superseder: A Second Bite at the Scienter Apple
by William Komaroff and Seetha Ramachandran
The crux of the case against Samuel Bankman-Fried is that he stole FTX customer deposits and used those funds to benefit himself. At trial, the proof of scienter on these charges will likely overlap from count to count and will likely depend on cooperator testimony that Bankman-Fried knew of and directed the various means of misappropriation.
But the newly added FCPA count gives the government a second bite at the “scienter apple.” The FCPA count alleges that Bankman-Fried directed payment of a $40 million bribe to one or more Chinese government officials, and it presents a free-standing offense with unique scienter evidence. As charged, the Chinese government froze cryptocurrency trading accounts belonging to Alameda Research (and controlled by Bankman-Fried) on two Chinese cryptocurrency exchanges in connection with the investigation of an Alameda trading counterparty. According to the indictment, Bankman-Fried and others sought to unfreeze the accounts through apparently legal means, including retaining attorneys to lobby or otherwise advocate in China to get the funds unfrozen. Bankman-Fried is alleged to have later authorized and directed the bribe payment after these legal efforts failed.
Unlike the other charges, the FCPA count does not require the government to prove that Bankman-Fried stole from customers. These allegations are therefore a good example of how the government can develop new avenues to build elusive state of mind evidence in a fraud case after a defendant has been charged. The government will likely offer evidence that Bankman-Fried knew of and was advised of legal pathways for relief, but when unsuccessful, knowingly chose to pursue illegal means. This count would relieve the government from having to prove that the bribe was sourced with funds misappropriated from FTX customers, since the FCPA only requires proof that the defendant intended to make a corrupt payment. Thus, the FCPA count provides an independent and easier path to conviction than the core fraud counts in the indictment.
William Komaroff and Seetha Ramachandran are Partners at Proskauer Rose LLP. Both are former federal prosecutors at the SDNY and Ramachandran is also 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 SDNY Adds Complexity to an Already Complicated Case
As other authors in this post have noted, the SDNY’s addition of foreign bribery charges under the FCPA provides prosecutors with an alternative route to conviction should the trial jury find the government’s proof on SBF’s alleged fraud to fall short. I would note that the government has also given itself another, relatively easier path to conviction by charging SBF with one count of conspiring to operate an unlicensed money transmitting business. This charge would also not require any proof that SBF has committed fraud but simply that he failed to comply with certain regulatory registration requirements.
However, the prosecutors have also added other charges that carry the risk of making an already complex case more complicated, to wit, securities and commodities fraud charges. This substantially adds to the government’s burden of proof, which, for those charges, includes not only having to prove that SBF was engaged in fraud but also that the crypto assets at issue were securities or commodities. And while the theory that crypto assets are securities has thus far found a receptive audience among judges, in 2021 a federal jury in a civil case returned a verdict that certain crypto assets were not securities. It is unclear why the SDNY chose a path that would place in front of the jury very technical and obscure questions that, ultimately, do not get to the heart of the alleged fraud in the case.
Joseph Facciponti is the Executive Director of PCCE and a former prosecutor at the SDNY.
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