FTX Crypto Fraud: One Year Later

Zachary Pyers is joined by Zachary Durant, a professional liability attorney at Reminger Co., LPA, for an update on the fall of one of the world’s largest cryptocurrency exchanges - FTX. 

FTX collapsed in early November 2022 and shook the crypto market, which lost billions and fell below a $1 trillion valuation. In December 2022, the U.S. government brought civil and criminal charges against Sam Bankman-Fried and top executives for misappropriating over $8 billion in customer deposits. Bankman-Fried was convicted in November 2023 on criminal charges for which he was extradited from The Bahamas to the U.S., except for one charge dropped in July 2023. A second trial is scheduled for March 2024, covering charges filed post-extradition.

Be sure to check out the video version of this interview on our YouTube page.

Visit our website for information about our legal services related to emerging technologies.

Transcript

Pyers   

Thank you for joining us for this most recent episode of the Reminger Report Podcast on emerging technologies.  I am happy to have one of my newly minted partners with me today who is joining us.  You may recall Zach Durant joined us back, I want to say it was in the beginning part of 2023 to discuss what, at the time, was the initial collapse of the cryptocurrency exchange FTX, and Zach is here to give us an update on everything and kind of fill in the gaps with what has transpired over the last nine, ten, eleven months as well as kind of some updates as it relates to the trial against Sam Bankman-Fried who was one of the founders of FTX.  Zach, welcome back.

Durant

Thank you.  Thank you, Zach for having me again.  I’m happy to dig back into this topic so I appreciate it.

Pyers

Yeah.  If you could, just as a kind of a general matter, could you just kind of let us know and for those of the listeners who may not have seen the first episode, just kind of refresh us, tell us what your practice areas are?

Durant

Yeah, so, I work out of the Cleveland office from just Cleveland office.  My practice is primarily securities litigation of professional liability, banking litigation, broker dealer and investment advisor, regulatory compliance and enforcement, and commercial litigation.

Pyers

That is a mouthful to say the least.

Durant

Yeah.  I had to really study in my own practice areas to make sure that I could regurgitate them.

Pyers

Yeah.  Well tell us, give us a quick update or refresher if you would on the FTX situation.

Durant

Yeah, so, FDX was founded by Sam Bankman-Fried, some call him SBF, in May 2019 and had quite a meteoric rise to where he became one of the world's top cryptocurrency exchanges where investors can buy and sell crypto coins like bitcoin and deutsche coin.  And then, so, at the beginning of last November, a little over a year ago, news broke that Sam Bankman-Fried and FTX had allegedly stolen billions of dollars of investor funds and diverted them to FTX’s sister company Alameda Research and then used them for things like political contributions and venture capital investments and extravagant personal expenditures.  And as we discussed when we got together last time on the podcast, this led to both criminal and civil SEC charges being brought against Sam Bankman-Fried.

Pyers

You mentioned some criminal charges.  I know I’ve seen some stuff in the news.  Can you give us an update on the criminal proceeding?

Durant

Yeah, so after being indicted in December 22, on fraud and conspiracy charges based on diverting investor funds, the criminal case proceeded to trial in October of this year in the U.S. District Court for the Southern District of New York and it was quite a lengthy trial.  It took about a month to complete and from the get go, Bankman-Fried was facing an uphill battle because after the implosion of FTX, three of his top deputies pleaded guilty to fraud charges and agreed to cooperate with the prosecutors in return for leniency at sentencing.  So, during the trial, these folks testified that Bankman-Fried had directed them to lie to the public and to divert the funds and spend them on various things so, including transferring them to Alameda Research.  So, Bankman-Fried also testified in his own defense but, you know, it was a lot of he didn’t recall certain things and that type of thing and it just wasn’t enough apparently for the jurors to overcome the previous testimony they had already heard.  So, at the end of the day, the 12-member jury convicted him on all counts and that was on November 2 – so convicted him on 7 charges of fraud and conspiracy.

Pyers

Has Sam Bankman-Fried been sentenced yet?

Durant

Not yet.  Sentencing has been scheduled for March and it will be interesting because the guilty verdicts, if you add up the maximum sentences, carries a maximum sentence of 110 years so it will be interesting to see how the judge handles sentencing at that time.

Pyers

Now, you also discussed earlier that there was a civil matter against Sam Bankman-Fried filed by the SEC or the Securities and Exchange Commission.  Is there any update on that matter?

Durant

Yeah, so, the SEC brought civil claims against Bankman-Fried which they are able to do under the Securities Exchange Act where they can, if they feel someone’s violated securities laws, they can file a civil action – sort of an enforcement action.  Similarly to the indictment criminally, they allege that he defrauded investors and they sought civil fines and disgorgement of all of the – any and all legally obtained funds and they sought a bar from him serving as an officer or director of any public company.  So, the only update on the civil case is that it was stayed back in February per the consent both of the U.S. Government and Bankman-Fried while the criminal case pended – pending the completion of the criminal case.  So, we really might not see the stay removed until after he is sentenced in March.  So, that’s another legal battle that he’ll have to fight.

Pyers

Now, that’s a lot of obviously drama surrounding FTX.  If you could, kind of as we look at this, what impact does the FTX drama have as it relates to the rest of the cryptocurrency world, if any.

Durant

Yeah, so there’s not doubt that the FTX Sam Bankman-Fried saga has had a very negative affect on the cryptocurrency market.  Even before the news of FTX and Sam Bankman-Fried came out, there was some decline in the market but this certainly contributed and deepened a significant market downturn that people refer to as the crypto winter and we’re starting to see some of that bounce back a little bit and I’m sure that cryptocurrency companies hope that they can shed the stigma of FTX and Bankman-Fried but, and you know, try to convince investors that it’s a safe product that, you know, someone told the media that they’re glad that this happened so that the bad actors are out of the industry but regulators don’t seem as convinced and they still seem deeply concerned about how the cryptocurrency is regulated or not at all.  They’ve referred to the previous period as the wild west and the SEC in particular has indicated that they are going to get more involved.  Some of the things that we’ve seen are continued enforcement actions being brought up by the SEC against crypto exchanges.  There’s been a lot of discussion including by the SEC about whether or not they have jurisdiction over these cryptocurrencies.  The chairman of the SEC has said that these companies and their products fall under the, their, should be considered securities under the law so they need to be registered as securities and failure to do so is a violation of securities laws.  So, we may continue to see more and more enforcement actions.  We may see additional regulation from the SEC, FINRA, other regulators and we will also keep an eye out to see if any federal or state legislation is passed related to these issues.  But it certainly seems like the public at large is still fairly concerned about the industry after all that’s gone down with FTX.

Pyers

You know, one of the things that I saw just before we even started this podcast and I probably should have warned you I was going to mention this, but that I just saw that the finance founder who was another cryptocurrency, which is another cryptocurrency exchange, the founder has agreed to step down from controlling finance and has agreed to plead guilty as it relates to certain charges for money laundering.  So, while the news is just breaking literally as we’re recording this, I’m sure that it will give us information to discuss in another podcast simply because it sounds like, at least from reading the headlines from the Wall Street Journal and Fox Business and CNN and The New York Times, that we’re going to have some additional sagas as you would say in the cryptocurrency exchange world moving forward.

Durant

Yeah, absolutely and we’ll see, I mean, there’s been, there’s been a long period where these companies haven’t had a whole lot of regulation or people looking in to what they’re up to so.  I think we’ll see more and more of that.

Pyers

Yeah.  Absolutely.  Zach, I appreciate you having taken the time out of your day to speak with us and we look forward to having you back as a guest again soon.

Durant

Absolutely.  Thank you, Zach.