The cryptocurrency world is still reeling from the collapse of FTX, the crypto exchange that went bankrupt last December. Overnight, it seemed that billions had disappeared, and no one—notably not its CEO, Sam Bankman-Fried—seemed to know where the money had gone. It’s unclear if investors will ever see any money returned to them. And it’s equally unclear if Bankman-Fried will ever see the inside of a prison cell.
What Is Sam Bankman-Fried Accused Of Doing?
Authorities are prosecuting Bankman-Fried to the fullest extent of the law. The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have both accused him of fraud. Meanwhile, federal prosecutors are accusing Bankman-Fried of defrauding his lenders, his customers, and the United States. They have also charged him with conspiracy to commit fraud, conspiracy to commit money laundering, and violations of federal campaign finance laws.
But there are always two elements that must be proven in order to convict someone of a crime: First, there must be an actus reus, meaning they must have acted in furtherance of the crime, and second, there’s a mens rea requirement: i.e., they must have committed crime intentionally.
There’s no shortage of Bankman-Fried’s public statements to investors and lenders about his company, and he took the money. In other words, the prosecutors can probably meet the actus standard. But it’s the mens rea requirement that some industry experts wonder if prosecutors can satisfy.
In the case of FTX, prosecutors must prove that Bankman-Fried knew that what he was doing was illegal, and that he intended to defraud his investors and lenders (and the U.S.). It’s always difficult to prove what’s in someone’s mind.
Proving He Was A Terrible CEO May Be Bankman-Fried’s Best Defense
Even before his arrest, Bankman-Fried was asserting in interviews that he had no idea FTX was in such dire straits.
During one such interview, Bankman-Fried claimed, “I didn’t know what exactly was going on…. It was a pretty big mistake on my part, that I wasn’t more aware.” He admitted he didn’t have anyone in charge of FTX’s relationship with the crypto research firm, Alameda, that had brought about FTX’s downfall. At one point, he maintained he had intentionally distanced himself from Alameda, concerned there may be some sort of conflict of interest if he got too involved.
He admitted that he had a duty to his shareholders and “didn’t do a good job at that,” but he asserted that the company’s downfall was due to his many mistakes.
While that may seem indefensible, it can sometimes be a pretty solid defense in a court of law.
That’s because it isn’t against the law to be a terrible CEO. Nor is it illegal to make mistakes.
Indeed, a defendant can assert a “mistake of fact” as an affirmative defense against a criminal charge. For example, a defendant charged with stealing a car that looked exactly like his own might argue that it was a case of misrecognition. While admitting he did take someone else’s car, he genuinely believed it was his own. Therefore, he shouldn’t be convicted because he had no intent to steal it.
So, while Bankman-Fried may argue that his company’s downfall was due to a series of bad mistakes, investigators will be searching for evidence that he knew he was deceiving his funders and investors, and that he was intentionally acting in ways he knew would harm his investors.
Down the road, the prosecutors may opt for some charges that include a negligence standard. In that case, the prosecutors would have to prove that Bankman-Fried acted with reckless disregard—that is, he just didn’t care what happened. While this is a lower standard of mens rea, given the complexity of the facts and his protestations of ignorance, it may still be a difficult case to prove.
How Crypto Whistleblowers Can Make The Difference
In cases like Bankman-Fried’s, whistleblowers can make all the difference. Evidence relating to actus reus is comparatively easy. (E.g., an investor can show their account documentation). But whistleblowers can also provide the mens rea evidence that is so difficult to obtain but essential to obtaining a conviction.
It’s always possible that a defendant admitted to perpetrating a fraudulent scheme, and a crypto whistleblower has documentary evidence to prove that. But that isn’t the only option that could lead to a conviction. Other incriminating facts could go a long way to proving intent. For example, perhaps someone in the company informed a CEO of impending disaster, and the CEO refused to heed the warning. Or the executive refused to take any standard steps of compliance and instead actively dissuaded people from tracking transactions and maintaining accurate records.
If you’re considering becoming a whistleblower, Silver Law Group and the Law Firm of David Chase have created a strategic alliance to represent SEC whistleblowers like you.
With years of experience representing SEC whistleblowers, and an SEC Enforcement lawyer on our team, we have an in-depth understanding of the SEC Whistleblower Program. We understand what the SEC is looking for. We can help you submit a tip that is more likely to result in a successful covered action. We are here to assist whistleblowers to maximize their opportunity to receive a financial bounty. For a free, confidential consultation, contact us by email or call us today at (800) 975-4345.