Could the government have stopped the massive crypto fraud?

[ad_1]

Prosecutors have indicted Sam Bankman-Fried for allegedly embezzling billions of dollars in client funds placed on his crypto-trading platform, FTX. Bankman-Fried, the alleged mastermind of this massive fraud, was arrested in the Bahamas.

The Securities and Exchange Commission (SEC), the federal agency charged with protecting investors, has also charged him with violations of securities laws. This agency alleges that Bankman-Fried lied to those who sent billions of dollars to FTX by telling them their assets were safe when in fact he was engaged in a massive embezzlement scheme.

Bankman-Fried allegedly sent his clients’ money surreptitiously to a hedge fund he controlled and used it to make all sorts of undisclosed investments, lavish purchases and large political donations.

The SEC’s action seeks to bar him from any further violations of federal securities laws and to obtain restitution for his ill-gotten gains. But unfortunately, the government seems unable to put an end to this gigantic fraud. If the history of such twisted trades is any guide, investors and trading clients of FTX will find that their money has been wasted and will get almost nothing back.

Among the most prominent crypto assets are digital currencies that claim to be an alternative to traditional government-backed money. Using elaborate protocols and blockchain technology as ledgers, they function as mediums of exchange and stores of wealth.

Several years ago, the SEC issued an opinion that when they functioned only in this way, they were not securities because their buyers were buying a commodity that they could use or consume. But these would be securities under the well-established theory of investment contracts, where their buyers expect benefits such as appreciation of these digital assets through the management efforts of others.

In these cases, all the reasons of securities laws that protect investors would come into play. The sale and trading of digital assets would therefore fall fully within this regulatory framework. The SEC certainly knew that cryptocurrencies and their trading platforms, including FTX, could fall under their jurisdiction.

Should these federal officials have more carefully monitored operations such as FTX and taken legal action to stop any violations of the registration and anti-fraud provisions of the laws they are responsible for enforcing?

When I worked at the SEC as a young lawyer, I saw that it lacked resources from the wealthy Wall Street community, that it has to watch over and has the ability to sue at plus only 2% of securities law violations. Despite this, the agency, since its inception in New Deal legislation, has generally received high marks for its effectiveness. Also, to its credit, the SEC is making admirable efforts to get those who would commit their savings to companies like FTX to first investigate their representations by promising them sure profits.

Yet this agency has stumbled badly at times, most infamously in the Bernie Madoff scandal in which the SEC failed to catch a decades-old Ponzi scheme that defrauded investors tens of billions of dollars. It looks like we have yet another unfortunate example where the government is one day behind and one dollar short to protect investors.

Disney and Twitter have had a rough year: Renewed customer focus can help DeSantis on the verge of leveraging COVID vaccines against Trump and Democrats?

Lawsuits by private attorneys may be able to find relief for investors by prosecuting well-resourced participants in this fraud, such as famous promoters of FTX. And the actions of the Justice Department and the SEC against Bankman-Fried could have a deterrent effect on future scammers.

Still, I fear the FTX debacle will join the ranks of other massive frauds such as Madoff, Enron, and WorldCom, where investors lost their life savings to unscrupulous fraudsters.

Daniel J. Morrissey is a professor and former dean of the Gonzaga University School of Law.

[ad_2]