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the law 8:00 A.M.

Why Hasn't Sam Bankman-Fried Been Arrested Yet?

By Ankush Khardori
[df9d6f4d776951050b0543117beff78d96-sbf-bernie-madoff]
Sam Bankman-Fried rejects comparisons to Bernie Madoff.
Photo-Illustration: Intelligencer. Photos: Getty Images

On December 11, 2008, Bernie Madoff was arrested and criminally
charged with one of the biggest financial frauds in history -- an
audacious, long-running Ponzi scheme that resulted in tens of
billions of dollars in lost investor funds. At the time, the scandal
sparked a national conversation about the gross deficiencies of our
country's white-collar enforcement regime, but ever since the initial
revelations about the problems at FTX and about Sam Bankman-Fried's
criminal exposure, the Madoff case has resurfaced as a point of
comparison for Bankman-Fried's alleged misdeeds -- and as a rallying
cry for people who believe he should already have been locked up by
U.S. prosecutors.

Bankman-Fried was asked about the comparison by Good Morning America
anchor George Stephanopoulos and (of course) rejected it, arguing
that FTX was a "real business" in contrast to Madoff's outright Ponzi
scheme.

But how much weight does the comparison deserve -- particularly as a
guide to how prosecutors ought to be handling the case? Unfortunately
for those seeking immediate action by the Department of Justice,
while the juxtaposition -- between the swiftness of Madoff's arrest
and the fact that SBF is apparently enjoying life in the Bahamas -- is
superficially compelling, it does not withstand more than a few
minutes' worth of scrutiny. In fact, these claims run the serious
risk of misleading the many people, including victims, who are
understandably angry about what may have been a gigantic fraud. Those
who are eager to see Bankman-Fried charged with serious financial
crimes will just have to be patient.

Let's start with the actual circumstances of Madoff's arrest. The
scheme was not detected by the government or the media -- infamously --
but was in fact revealed by Madoff himself, who confessed the whole
thing to his sons once he realized that he could not keep up the
fraud. According to the criminal complaint filed on the day of his
arrest, Madoff told his sons "that he was 'finished,' that he had
'absolutely nothing,' that 'it's all just one big lie,' and that it
was 'basically a giant Ponzi scheme.'" His sons called the FBI, and
two days later, two agents showed up at his home and asked whether
"there's an innocent explanation" for what Madoff had told his sons.
Madoff literally replied, "There is no innocent explanation."

At the risk of stating the obvious, the reason Madoff was arrested so
quickly is because he confessed to every element of criminal fraud --
including both the underlying scheme and his criminal intent. This
meant that the FBI had both that confession and highly potent,
admissible evidence of guilt in the form of testimony from his adult
children (who had no apparent axe to grind).

If that is all the government ever had, they would have been able to
convict Madoff easily at trial. (He eventually pled guilty.) They
also needed to make sure that Madoff did not have second thoughts --
he told his sons that he planned to turn himself in to authorities in
about a week -- and that he would not attempt to flee the country
instead.

We have not seen anything like a real admission of criminal conduct
from SBF yet and, of course, he is not in the country at the moment,
so there is no imperative (no ability, really) to keep him in the
United States. As important, SBF has been rather talkative in
interviews -- including in an interview with New York's Jen Wieczner
that was published yesterday -- but he has been careful as well. So
far as I can tell, he has held firm on a central point for his
defense -- that the epic, still-unspooling fiasco at FTX was the
result of sloppiness and inadvertent missteps by the company's
leadership rather than an intentional effort to mislead FTX customers
or investors.

This means that the Justice Department will need to try to get to the
bottom of it by conducting an investigation that could take a long
time, which is not to say that it will take SBF's claims at face
value. In fact, I am sure it will not, since his comments on the most
prominent issue at the moment -- FTX's transfer of customer funds to
SBF's hedge fund, Alameda Research, and the subsequent loss of more
than $1 billion -- have been transparently evasive and substantively
meaningless. (We have seen this before, down to eerily familiar media
minutiae: In 2016, just days after The Wall Street Journal published
its first expose about Theranos, Elizabeth Holmes took the stage for
an interview at a conference organized by the paper in which she
insisted that the whole thing was a huge misunderstanding.)

What does an investigation of an international financial fraud like
this look like? To simplify matters greatly, the government is going
to be looking for three things -- documents, witnesses, and data -- to
determine whether SBF or those around him committed fraud. Let's take
these in turn.

It is not yet clear how easy it will be for the government to obtain
internal emails from FTX and personal communications among SBF and
his lieutenants. It will depend in significant part on whether and to
what extent FTX, SBF, et al. were using U.S.-based technology
providers like Google or Microsoft who (a) still have this material
and (b) can and will comply with U.S. legal process. (Anything that
has been permanently deleted or that was communicated over an
encrypted messaging app like Signal will be difficult if not
impossible to recover as a practical matter.) Even in the relatively
straightforward situation in which the government can obtain emails
from a third party like Microsoft, this still requires the government
to undertake a potentially lengthy process -- to prepare an
application for a search warrant that establishes probable cause as
to each of the email accounts whose contents investigators are
seeking; to wait for the company to comply, which can take months
under ordinary circumstances; and to actually review the material
itself.

There are some ways around this, though whether and to what extent
the Justice Department will be able to avail itself of them is
unclear at the moment. The government could try to subpoena one of
FTX's U.S.-based entities for the documents, or FTX's new lawyers
could voluntarily produce material to prosecutors, but neither of
these paths is as straightforward as they sound if the documents
actually reside on a server outside the U.S., and both rely on FTX
(or its service providers) having retained the underlying material in
the first place. It is also possible that the Bahamian authorities
might have their own legal tools to obtain documents and that they
would be willing to share them with U.S. prosecutors, but that is
also far from clear at the moment.

Of course, documents are a foundational part of any financial-fraud
case, but at the end of the day, if criminal charges are actually
brought, witnesses have to take the stand to explain to a jury what
happened. That means that prosecutors have to identify knowledgeable
people who can and will cooperate, but so far, I have yet to see
anyone who worked at FTX provide a compelling firsthand account of
criminal conduct perpetrated by SBF or anyone else. That does not
mean nothing nefarious happened -- just that the government may need
to piece things together using accounts from different people who
themselves may not have had full visibility into FTX and Alameda's
operations.

The Justice Department will have to try to interview people who
worked at FTX and Alameda, which is par for the course in a
financial-fraud case, but that is much harder when witnesses are
overseas. For one thing, the government cannot simply subpoena
witnesses the way it can with people who are in the country, and
witnesses in foreign countries can easily decline voluntary
interviews. The government also has much less leverage over witnesses
abroad who have criminal exposure, since the risk of an indictment is
not as potent when you might plausibly never see the inside of a U.S.
courtroom even assuming that you are charged at some point.

As for "data," that is a very large bucket that could include both
customer-level account and transaction data as well as the company's
enterprise-level books and records, assuming that these things even
exist and are reliable -- two very big unknowns. When I prosecuted
international financial fraud at the Justice Department, I placed a
significant premium on the swiftness of criminal accountability even
if the underlying flow of funds could not be forensically retraced,
but this was not a universally held view among my colleagues.

Some prosecutors believe that juries expect a comprehensive
accounting of what actually happened to all of the money in a complex
fraud scheme, but in this day and age, that is getting harder for
prosecutors to provide, particularly when foreign bank accounts are
involved. The Justice Department can request foreign banking data
from other countries, but depending on the jurisdiction, it can take
literal years to get a response, and even then, the information may
be incomplete or simply lead the government to more foreign bank
accounts, which, in turn, require further requests and investigation.

The FTX bankruptcy proceeding is going to complicate matters further.
As is sadly common for these situations, the company is now spending
what little money it still has on expensive lawyers and bankruptcy
professionals, including a team from Sullivan & Cromwell who will do
what I gather is an internal investigation on behalf of the company's
new leadership. The government is going to need to figure out its
posture toward that investigation, which is not going to be easy.

I certainly understand why people would bristle at all of these
sources of potential delay, but this sort of investigative slog is
much more common in a white-collar case than a quick arrest. For
instance, it took almost a year for the U.S. Attorney's office in
Manhattan (which is reportedly handling the FTX investigation) to
charge the founder of the electric-truck start-up Nikola with fraud
even though the short-selling firm Hindenburg Research seemingly did
all of the work when it published a lengthy report that precipitated
the investigation in the first place. And it took nearly two years
for the department to charge Holmes even after the Journal's John
Carreyrou publicly exposed the central problems at Theranos.

Prosecutors at the Justice Department cannot -- and do not -- simply
indict people based on what they read in the press, no matter how
damning it may seem. Even if they desperately want to charge someone,
prosecutors have to conduct their own investigation to develop
robust, admissible evidence of criminal misconduct, which requires
gathering and reviewing documents and data, speaking with witnesses,
and -- perhaps above all -- time.

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What Does Sam Bankman-Fried Have to Say for Himself?
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What Happened to FTX?

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* the law
* sam bankman-fried
* ftx
* bernie madoff

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Why Hasn't Sam Bankman-Fried Been Arrested Yet?

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