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Criminal case against Sam Bankman-Fried and Caroline Ellison could put abandoned FTX clients in the backseat

FTX and its creditors’ committee said they faced a hurdle in their bankruptcy investigations into where client funds went.David Dee Delgado/Getty Images

  • Creditors in FTX’s bankruptcy say Sam Bankman-Fried and his senior deputies are not playing along.

  • The parallel criminal case against SBF, Caroline Ellison and Gary Wang could be to blame.

  • Usually, cooperating witnesses share everything — but prosecutors may hold back, experts say.

In the months since FTX filed for Chapter 11 bankruptcy, the company and its creditors have said they are leaving no stone unturned in their search for the fallen crypto exchange’s missing funds.

But they recently told a Delaware bankruptcy court they’d hit a roadblock, accusing Sam Bankman-Fried and those close to him of not playing with them.

In a January filing, they claimed that the former FTX CEO, his parents, and his deputies, including Caroline Ellison and Gary Wang, did not answer questions about what was happening on the crypto exchange in the bankruptcy investigation.

FTX, which is being led through the Chapter 11 process by its current CEO, John Ray, has said it is seeking information from them, including transfers of funds from the bankrupt companies and “anything of value they received from the debtors “.

A group of debtors asked the bankruptcy judge to allow them to file subpoenas against Ellison, Wang, Bankman-Fried, his family members and several other “insiders” who they said did not provide the debtors with the necessary documents and provided information.

“Certain insiders are currently cooperating with the debtors to provide important information,” the debtors’ lawyers write in the filing. “But others are not.”

The criminal process takes precedence

Ellison and Wang separately agreed to plea deals with federal prosecutors in Manhattan and pursued charges including wire fraud and conspiracy. Damian Williams, the US Attorney for the Southern District in New York who is handling the criminal case, trumpeted their cooperation in a splashy announcement just as Bankman-Fried, who has been indicted on a spate of fraud and conspiracy allegations, headed to the US was extradited from the Bahamas.

Cooperation agreements with federal prosecutors in the Southern District of New York are notoriously ironclad, meaning they face hefty potential prison sentences and require full cooperation. But experts told Insiders that deals require them to focus on working with prosecutors in criminal cases — though that might come at the expense of other parties.

“As long as a criminal investigation is pending, that can put a damper on everything,” said Kevin O’Brien, a partner at Ford O’Brien Landy LLP and a former federal prosecutor in Brooklyn.

Bankman-Fried’s parents, Barbara Fried and Joseph Bankman, are in talks about FTX’s investigation, their rep, Gwen Rocco, told Insider in a statement.

“Barbara and Joe have been in contact with Sullivan & Cromwell through an attorney and will respond to document requests in the normal course of events,” Rocco said, referring to the law firm that represented FTX in its bankruptcy.

damian williams ftx sam bankman fried

US Attorney Damian Williams speaks to the media about the indictment against Samuel Bankman-Fried, founder of the failed crypto exchange FTX, in New York City, the United States, December 13, 2022.REUTERS/David ‘Dee’ Delgado

Ellison and Wang’s cooperation agreements include standard language in such deals, which limits their discussions of the FTX case to others without the prosecutor’s permission.

While that doesn’t mean they can’t speak to FTX investigators on bankruptcy, it does show how the multiple parallel investigations in a sprawling case can run counter to each other.

Parties to a Chapter 11, including the company going through it, often conduct their own investigations with the assistance of a bankruptcy court to figure out how to get the most funds back to repay creditors. In the case of FTX’s ongoing Delaware bankruptcy, the company has coordinated its investigations with the creditors’ committee in the case, which represents a large category of unsecured creditors, including FTX customers.

According to Eric J. Snyder, chairman of the bankruptcy practice at Wilk Auslander LLP, the US Attorney’s office typically cooperates with the civil litigation and exchanges information with the bankruptcy court. But when both a criminal and a civil case are pending, it’s the criminal case that comes first, Snyder said.

When debtors seek subpoenas, it’s an indication that coordination between them and prosecutors could be breaking down, Snyder told Insider.

“If they subpoena documents from him and everyone else, I assume they’re going to be asked to pound sand,” Snyder said. “And that you will not get any of the documents.”

Prosecutors prioritize victory

In a bankruptcy proceeding, the focus of the company and the committee that represents its creditors is on recovering value, said Robert Miller, a professor at the University of South Dakota School of Law who previously represented companies and other parties in bankruptcies.

“Their goal is to get the maximum payout to creditors, not put people behind bars,” Miller said. “There may be a tension between maximizing returns for creditors and the goals of the government’s criminal investigation, which is to serve justice.”

Ellison and Wang’s alleged lack of cooperation on the bankruptcy could get uncomfortable, according to the FTX filing. Associates generally want to show the public that they are not the villains in the saga and demonstrate their willingness to help a court in hopes of a lighter sentence.

Sam Bankman Fried

Sam Bankman-Fried in Manhattan Federal Court.Photo by Michael M. Santiago/Getty Images)

One possibility, according to a former federal prosecutor, who spoke on condition of anonymity, is that US Attorneys are still reviewing Ellison and Wang’s statements. Prosecutors may wish to keep this information private until their investigations progress further.

“It could hamper the criminal investigation because information would come out that isn’t ready to come out yet,” the source said.

Ellison and Wang have yet to respond to FTX’s allegations in court. Court filings do not indicate whether they would offer more cooperation or even welcome a subpoena. However, if prosecutors want to keep them out of the bankruptcy proceedings while they continue to cooperate, they may direct Ellison and Wang to fight the bankruptcy subpoenas or step in themselves to demonstrate that they are the ones running the show .

“I’m sure whatever they had was turned over to the federal authorities because they don’t want to go to jail,” Snyder said. “The fact that they’re going to be subpoenaed — I don’t think anybody’s going to let them testify.”

It is not yet clear what arguments Bankman-Fried will use in his defense in court. But in public statements, as well as text messages and emails described in court filings, the FTX founder says he wants to help all creditors get their money back.

In a Jan. 2 email to Ray, FTX’s current CEO, Bankman-Fried said he wanted to be “helpful” and asked him to meet in New York City the next day.

On January 3, Bankman-Fried stood in federal court in Manhattan to plead not guilty to the charges against him.

Read the original article on Business Insider

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