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The criminal case against Sam Bankman-Fried and Caroline Ellison could put jilted FTX customers in the backseat

Sam Bankman-FriedFTX and its creditors’ committee said they’re facing a roadblock into their bankruptcy inquiries into where customer funds went.

David Dee Delgado/Getty Images

  • Creditors in FTX’s bankruptcy say Sam Bankman-Fried and his top deputies aren’t playing ball.
  • The parallel criminal case against SBF, Caroline Ellison, and Gary Wang may be to blame.
  • Usually, cooperating witnesses share everything — but prosecutors may be holding back, experts say.

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

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

In a January filing, they alleged that the former FTX CEO, his parents, and his deputies including Caroline Ellison and Gary Wang, didn’t answer questions in the bankruptcy inquiry into what happened at the crypto exchange.

FTX, which is being shepherded through the Chapter 11 process by its current CEO John Ray, has said it’s looking for information from them, including about any money transfers out of the bankrupt entities and on “anything of value they received from the debtors.”

A group of debtors asked the judge overseeing the bankruptcy case to allow them to file subpoenas against Ellison, Wang, Bankman-Fried, his family members, and several other “insiders” who they said weren’t providing the documents and information the debtors needed.

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

The criminal case takes priority

Ellison and Wang separately reached plea deals with federal prosecutors in Manhattan, copping to charges including wire fraud and conspiracy. Damian Williams, the US Attorney for the Southern District in New York, which is bringing the criminal case, trumpeted their cooperation in a splashy announcement just as Bankman-Fried, under indictment for a spate of fraud and conspiracy charges, was extradited to the US from the Bahamas.

Cooperation agreements with federal prosecutors in the Southern District of New York are famously ironclad, leaving them facing hefty potential prison sentences and requiring full cooperation. But, experts told Insider, the deals require them to focus on working with prosecutors in the criminal case — even if it could be at the expense of other parties.

“As long as there’s a pending criminal investigation, 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 discussions about FTX’s inquiries, their representative Gwen Rocco told Insider in a statement. 

“Barbara and Joe, through counsel, have been in communication with Sullivan & Cromwell and will respond to the document requests in the normal course,” Rocco said, referring to the law firm representing FTX in its bankruptcy.

damian williams ftx sam bankman friedUS attorney Damian Williams speaks to the media regarding the indictment of Samuel Bankman-Fried the founder of failed crypto exchange FTX in New York City, U.S., December 13, 2022.

REUTERS/David ‘Dee’ Delgado

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

While that doesn’t mean they can’t speak to FTX investigators in the bankruptcy, it shows how the multiple parallel investigations in a sprawling case can run up against one another.

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

The US Attorney’s office will usually work in tandem with the civil proceedings and share information with the bankruptcy court, according to Eric J. Snyder, the chairman of the bankruptcy practice at Wilk Auslander LLP. But when both criminal and civil proceedings are ongoing, it’s the criminal case that goes first in line, Snyder said.

If the debtors are asking for subpoenas, it’s an indication that there may be a breakdown in coordination between them and the prosecutors, Snyder told Insider.

“If they’re subpoenaing documents from him and everybody else, I assume what’s going to happen is they’re going to be told to pound sand,” Snyder said. “And that they’re not going to get any of the documents.”

Prosecutors prioritize winning

In a bankruptcy proceeding, the company and the committee representing its creditors are focused on recouping value, said Robert Miller, a professor at the University of South Dakota School of Law, who used to represent companies and other parties in bankruptcies. 

“Your goal is to get the maximum distribution to creditors, not to get people behind bars,” Miller said. “There can be a tension between maximizing returns for creditors and the goals of the government’s criminal investigation, which is to have justice served.”

The alleged lack of cooperation from Ellison and Wang in the bankruptcy, according to FTX’s filing, could get awkward. Cooperators generally want to show the public they aren’t the villains in the saga, and demonstrate their helpfulness to a court in hopes of a lighter sentence.

Sam Bankman-FriedSam Bankman-Fried outside Manhattan federal court.

Photo by Michael M. Santiago/Getty Images)

One possibility, according to a former federal prosecutor who spoke on the condition of anonymity, may be that the US Attorney’s office is still examining the information provided by Ellison and Wang. The prosecutors may want to keep that information close to their chests until their investigation has moved farther along.

“It could impede the criminal investigation because information would get out that’s not ready to come out,” the source said.

Ellison and Wang haven’t responded to FTX’s allegations in court yet. It’s not clear from court filings if they’d offer more cooperation or even welcome a subpoena. If prosecutors want to keep them away from the bankruptcy process as they continue to cooperate, however, it’s possible they could instruct Ellison and Wang to fight the subpoenas in the bankruptcy case, or intervene themselves to demonstrate that they’re the ones running the show.

“Everything they’ve had, I’m sure it’s turned over to the feds because they don’t want to go to jail,” Snyder said. “So the fact that they’re being subpoenaed — I don’t think anyone will let them testify.”

It’s not yet clear what sort of arguments Bankman-Fried will muster 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 the creditors get their money back.

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

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

Read the original article on Business Insider