Former FTX CEO Sam Bankman-Fried was found guilty of all seven counts of fraud and conspiracy to commit fraud in the late hours of November 2. The jury returned its verdict in less than 10 minutes after nearly four hours of deliberation, leaving his parents to remain silent in the packed courtroom of the Southern District Court of New York.
During the course of his long trial, my thoughts returned again and again to: How did you come to be here? Could all this damage have been avoided? What can we do to avoid the next FTX?
Some say existing financial regulations could have prevented FTX’s collapse. By having to comply with regulatory requirements, Bankman-Fried would never have been able to commingle and misappropriate client funds.
FTX used Alameda Research as a “payment processor,” as Bankman-Fried’s defense describes it. One of Alameda’s subsidiaries, Northern Dimension, had received deposits from FTX clients since the exchange was founded. Without any corporate control, the companies commingled funds.
Commingling of funds may not necessarily involve fraudulent intent, but it can still be problematic due to a lack of transparency and accountability. In fact, it is a “dirty word” in securities law, explained a lawyer who observed the Bankman-Fried trial.
Embezzlement, on the other hand, generally involves intentional and fraudulent actions and occurs when someone in control of the funds uses the capital for personal gain or unauthorized purposes. Bankman-Fried, prosecutors say, used billions of dollars in venture capital investments, real estate acquisitions and political donations for personal benefit. None of these funds belonged to him.
Without corporate controls, his defense was unable to prove that the $8 billion missing from clients was the result of the market crisis and not embezzlement.
Bankman-Fried had big ambitions. He dreamed of being president of the United States. He thought growing FTX would be the only way to cover the billion-dollar hole in its balance sheet, but it was too late for FTX. As Warren Buffett wisely said: “You only find out who swims naked when the tide goes out.”
In the end, Bankman-Fried was caught not for crypto fraud but for traditional fraud. In theory, regulatory barriers could have stopped him from commingling and embezzling funds, but the law won’t stop someone who thinks he’s uncatchable from doing something bad.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.