On May 8, Bankman-Fried asked U.S. District Judge Lewis Kaplan to dismiss most of the charges against him, arguing that some were based on a theory of fraud that centers around depriving a victim of economically-valuable information rather than tangible property.
Days later, the U.S. Supreme Court invalidated that theory known as “right to control” when it overturned the conviction of a Buffalo construction executive accused of bid-rigging. The Court said the theory is “inconsistent with the structure and history of the federal fraud statutes.”
Lawyers for Bankman-Fried, who has pleaded not guilty, said in a May 12 letter to U.S. District Judge Lewis Kaplan, who is overseeing his case, that the Supreme Court’s decision had a “direct bearing” on his case.
But legal experts said that in Bankman-Fried’s case, prosecutors can in fact point to tangible property that victims lost.
“If the customers turned over their money to FTX based on allegedly fraudulent statements that Bankman-Fried made, the government would argue that is a deprivation of property,” said Mark Kasten, counsel at Buchanan Ingersoll & Rooney in Philadelphia.
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Representatives for Bankman-Fried declined to comment. A spokesman for the U.S. Attorney’s office in Manhattan, which has until May 29 to respond to Bankman-Fried’s motion to dismiss, declined to comment. Bankman-Fried’s case is part of an escalating crackdown on alleged abuses at digital asset exchanges by U.S. prosecutors and regulators, following last year’s plunge in the values of Bitcoin and other tokens as central banks raised interest rates. Officials say Bankman-Fried portrayed FTX as a safe, responsible platform in the volatile sector, even as he was diverting customer funds.
BANKMAN-FRIED FACES MULTIPLE CHARGES
Bankman-Fried, 31, rode a boom in bitcoin and other digital assets to accumulate an estimated net worth of $26 billion before FTX declared bankruptcy in November. The exchange imploded after a flurry of customer withdrawals in the wake of reports it had commingled assets with Alameda Research, Bankman-Fried’s crypto-focused hedge fund.
Bankman-Fried may have a better chance of convincing Kaplan that a bank fraud count he faces rests on the right to control theory and should be dismissed, said Paul Tuchmann, a former federal prosecutor and current partner at Wiggin and Dana.
That charge accuses Bankman-Fried of telling an unnamed California bank that he wanted to open an account for a trading company, but intended the account to process deposits and withdrawals for FTX customers. The bank had allegedly previously told him it was unwilling to process such transactions.
“It is to me logical to argue that you are not trying to obtain money or property when you lie … to open up an account,” Tuchmann said.
Even if the bank fraud count is dismissed, Bankman-Fried would still face 12 other counts at his Oct. 2 trial.
“SBF has an uphill battle,” said Tim Howard, a former federal prosecutor in Manhattan and current partner at Freshfields, referring to Bankman-Fried by his initials. “He’s going to have to prove that none of these theories of fraud are applicable to escape liability.”