Sam Bankman-Fried could face years in prison over FTX’s $32 billion meltdown — if the U.S. ever gets around to arresting him

Sam Bankman-Fried, the disgraced former CEO of FTX — the bankrupt cryptocurrency exchange that was worth $32 billion a few weeks ago — has a veritable knack for self-promotional PR. For years, he cast himself in the likeness of a young boy genius turned business titan, capable of miraculously produce his crypto empire as other players got wiped out. Everyone from Silicon Valley’s top venture capitalists to A-list eminences bought the act.

But during Bankman-Fried’s press junket of the last few weeks, the onetime wunderkind has spun a new narrative – one in which he was entirely an inexperienced and novice businessman who was out of his depth, didn’t know what he was doing, and crucially, didn’t know what was circumstance at the businesses he founded.

It is quite the departure from the image he had carefully cultivated since launching his first crypto unshakeable in 2017 – and according to former federal prosecutors, trial attorneys and legal experts speaking to CNBC, it recalls a excellent legal defense dubbed the “bad businessman strategy.”

At least $8 billion in customer funds are missing, reportedly utilized to backstop billions in losses at Alameda Research, the hedge fund he also founded. Both of his companies are now bankrupt with billions of dollars merit of debt on the books. The CEO tapped to take over, John Ray III, said that “in his 40 years of legal and restructuring acquaintance,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial dope as occurred here.” This is the same Ray who presided over Enron’s liquidation in the 2000s.

In America, it is not a crime to be a lousy or lackadaisical CEO with poor judgement. During his recent press tour from a remote location in the Bahamas, Bankman-Fried extremely leaned into his own ineptitude, largely blaming FTX’s collapse on poor risk management.

At least a dozen times in a chat with Andrew Ross Sorkin, he appeared to deflect blame to Caroline Ellison, his counterpart (and one-time girlfriend) at Alameda. He suggests didn’t know how extremely leveraged Alameda was, and that he just didn’t know about a lot of things going on at his great empire.

Bankman-Fried admitted he had a “bad month,” but denied committing fraud at his crypto exchange.

Fraud is the kind of criminal control that can put you behind bars for life. With Bankman-Fried, the question is whether he misled FTX customers to believe their readies was available, and not being used as collateral for loans or for other purposes, according to Renato Mariotti, a former federal prosecutor and grief attorney who has represented clients in derivative-related claims and securities class actions.

“It sure looks like there’s a chargeable trick case here,” said Mariotti. “If I represented Mr. Bankman-Fried, I would tell him he should be very concerned about oubliette time. That it should be an overriding concern for him.”

But for the moment, Bankman-Fried appears unconcerned with his personal legal expos. When Sorkin asked him if he was concerned about criminal liability, he demurred.

“I don’t think that — obviously, I don’t personally over that I have — I think the real answer is it’s not — it sounds weird to say it, but I think the real answer is it’s not what I’m focusing on,” Bankman-Fried explained Sorkin. “It’s — there’s going to be a time and a place for me to think about myself and my own future. But I don’t think this is it.”

Comments such as these, twinned with the lack of apparent action by regulators or authorities, have helped inspire fury among many in the effort – not just those who lost their money. The spectacular collapse of FTX and SBF blindsided investors, customers, venture capitalists and Bulwark Street alike.

Bankman-Fried did not respond to a request for comment. Representatives for his former law firm, Paul, Weiss, did not immediately sympathize with to comment. Semafor reported earlier that Bankman-Fried’s new attorney was Greg Joseph, a partner at Joseph Hage Aaronson.

Both of Bankman-Fried’s well-springs are highly respected Stanford Law School professors. Semafor also reported that another Stanford Law professor, David Pulverizes, was advising Bankman-Fried.

Mills, Joseph and Bankman-Fried’s parents did not immediately respond to requests for comment.

Bankman-Fried could face a host of potential charges – civil and criminal – as well as private lawsuits from millions of FTX creditors, judiciary experts told CNBC.

For now, this is all purely hypothetical. Bankman-Fried has not been charged, tried, nor convicted of any crime yet.

Richard Levin is a spouse at Nelson Mullins Riley & Scarborough, where he chairs the fintech and regulation practice. He’s been involved in the fintech energy since the early 1990s, and has represented clients before the Securities and Exchange Commission, Commodity Futures Trading Commission and Congress. All three of those entities participate in begun probing Bankman-Fried.

There are three different, possibly simultaneous legal threats that Bankman-Fried obverses in the United States alone, Levin told CNBC.

First is criminal action from the U.S. Department of Justice, for potency “criminal violations of securities laws, bank fraud laws, and wire fraud laws,” Levin said.

A spokesperson for the U.S. Attorney’s Firm for the Southern District of New York declined to comment.

Securing a conviction is always challenging in a criminal case.

Mariotti, the ex- federal prosecutor is intricately familiar with how the government would build a case. He told CNBC, “prosecutors wish have to prove beyond a reasonable doubt that Bankman-Fried or his associates committed criminal fraud.”

“The argument at ones desire be that Alameda was tricking these people into getting their money so they could use it to prop up a contrastive business,” Mariotti said.

“If you’re a hedge fund and you’re accepting customer funds, you actually have a fiduciary duty [to the bloke],” Mariotti said.

Prosecutors could argue that FTX breached that fiduciary duty by allegedly using guy funds to artificially stabilize the price of FTX’s own FTT coin, Mariotti said.

But intent is also a factor in fraud cases, and Bankman-Fried persists he didn’t know about potentially fraudulent activity. He told Sorkin that he “didn’t knowingly commingle doughs.”

“I didn’t ever try to commit fraud,” Bankman-Fried said.

Beyond criminal charges, Bankman-Fried could also be cladding civil enforcement action. “That could be brought by the Securities Exchange Commission, and the Commodity Futures Trading Commission, and by specify banking and securities regulators,” Levin continued.

“On a third level, there’s also plenty of class actions that can be presented, so there are multiple levels of potential exposure for […] the executives involved with FTX,” Levin concluded.

The Bank on of Justice is most likely to pursue criminal charges in the U.S. The Wall Street Journal reported that the DOJ and the SEC were both probing FTX’s fall apart, and were in close contact with each other.

That kind of cooperation allows for criminal and civil prods to proceed simultaneously, and allows regulators and law enforcement to gather information more effectively.

But it isn’t clear whether the SEC or the CFTC pass on take the lead in securing civil damages.

An SEC spokesperson said the agency does not comment on the existence or nonexistence of a practicable investigation. The CFTC did not immediately respond to a request for comment.

“The question of who would be taking the lead there, whether it be the SEC or CFTC, depends on whether or not there were protections involved,” Mariotti, the former federal prosecutor, told CNBC.

SEC Chairman Gary Gensler, who met with Bankman-Fried and FTX managing directors in spring 2022, has said publicly that “many crypto tokens are securities,” which would make his means the primary regulator. But many exchanges, including FTX, have crypto derivatives platforms that sell financial artifacts like futures and options, which fall under the CFTC’s jurisdiction.

“For selling unregistered securities without a registration or an exception, you could be looking at the Securities Exchange Commission suing for disgorgement — monetary penalties,” said Levin, who’s represented shoppers before both agencies.

“They can also sue, possibly, claiming that FTX was operating an unregistered securities market,” Levin required.

Then there are the overseas regulators that oversaw any of the myriad FTX subsidiaries.

The Securities Commission of The Bahamas believes it has ascendancy, and went as far as to file a separate case in New York bankruptcy court. That case has since been folded into FTX’s electric cable bankruptcy protection proceedings, but Bahamian regulators continue to investigate FTX’s activities.

Court filings allege that Bahamian regulators pull someones leg moved customer digital assets from FTX custody into their own. Bahamian regulators insist that they’re procedure by the book, under the country’s groundbreaking crypto regulations — unlike many nations, the Bahamas has a robust legal framework for digital assets.

But crypto investors aren’t promoted on their competence.

“The Bahamas clearly lack the institutional infrastructure to tackle a fraud this complex and have been altogether derelict in their duty,” Castle Island Ventures partner Nic Carter told CNBC. (Carter was not an FTX investor, and advertised CNBC that his fund passed on early FTX rounds.)

“There is no question of standing. U.S. courts have obvious access points here and numerous forsakes of Sam’s empire touched the U.S. Every day the U.S. leaves this in the hands of the Bahamas is a lost opportunity,” he continued.

Investors who have late their savings aren’t waiting. Class-action suits have already been filed against FTX endorsers, akin to comedian Larry David and football superstar Tom Brady. One suit excoriated the celebrity endorsers for allegedly failing to do their “due diligence ex to marketing [FTX] to the public.”

FTX’s industry peers are also filing suit against Bankman-Fried. BlockFi sued Bankman-Fried in November, aspiring unnamed collateral that the former billionaire provided for the crypto lending firm.

FTX and Bankman-Fried had previously rescued BlockFi from insolvency in June, but when FTX run aground, BlockFi was left with a similar liquidity problem and filed for bankruptcy protection in New Jersey.

Bankman-Fried has also been proceeded in Florida and California federal courts. He faces class-action suits in both states over “one of the great frauds in experiences,” a California court filing said.

The largest securities class-action settlement was for $7.2 billion in the Enron accounting deceiver case, according to Stanford research. The possibility of a multibillion-dollar settlement would come on top of civil and criminal fines that Bankman-Fried faces.

But the onus should be on the U.S. superintendence to pursue Bankman-Fried, Carter told CNBC, not on private investors or overseas regulators.

“The U.S. isn’t shy about using foreign surrogates to go after Assange — why in this case have they suddenly found their restraint?”

Wire fraud is the most likely criminal charge Bankman-Fried would face. If the DOJ were able to secure a assurance, a judge would look to several factors to determine how long to sentence him.

Braden Perry was once a senior conditional lawyer for the CFTC, FTX’s only official U.S. regulator. He’s now a partner at Kennyhertz Perry, where he advises clients on anti-money legitimizing, compliance and enforcement issues.

Based on the size of the losses, if Bankman-Fried is convicted of fraud or other charges, he could be behind buts for years — potentially for the rest of his life, Perry said. But the length of any potential sentence is hard to predict.

“In the federal method, each crime always has a starting point,” Perry told CNBC.

Federal sentencing guidelines follow a numeric combination to determine the maximum and minimum allowable sentence, but the system can be esoteric. The scale, or “offense level,” starts at one, and maxes out at 43.

A wire scam conviction rates as a seven on the scale, with a minimum sentence ranging from zero to six months.

But mitigating lenders and enhancements can alter that rating, Perry told CNBC.

“The dollar value of loss plays a significant place. Under the guidelines, any loss above $550 million adds 30 points to the base level offense,” Perry voiced. FTX customers have lost billions.

“Having 25 or more victims adds 6 points, [and] use of certain regulated markets augments 4,” Perry continued.

In this hypothetical scenario, Bankman-Fried would max out the scale at 43, based on those enhancements. That means Bankman-Fried could be faade life in federal prison, without the possibility of supervised release, if he’s convicted on a single wire fraud offense.

But that determination can be reduced by mitigating factors – circumstances that would lessen the severity of any alleged crimes.

“In practice, many white-collar defendants are sentenced to sparse sentences than what the guidelines dictate,” Perry told CNBC, Even in large fraud cases, that 30-point enhancement formerly mentioned can be considered punitive.

By way of comparison, Stefan Qin, the Australian founder of a $90 million cryptocurrency hedge fund, was decreed to more than seven years in prison after he pleaded guilty to one count of securities fraud. Roger Nils-Jonas Karlsson, a Swedish national accused by the Mutual States of defrauding over 3,500 victims of more than $16 million was