This is Bloombird Law with June Brusso from Bloomberg Radio. So hard to compare these things, but I think it's fair to say that by any anyone's license is one of the biggest financial frauds in American history. Federal prosecutors moved at warp speed to charge f t X founder Sam Bankman Freed in a sweeping eight count indictment for allegedly misappropriating billions of dollars in customer funds for his personal use and risky bets by sister trading house Alameda, Manhattan.
US attorney Damien Williams said Bankman Freed scammed ft X customers and venture capital backers out of billions. Even though the cryptome Maven might not fit the typical profile of a fraud ster, Well, you can commit fraud and chorts and t shirts in the sun the best possible to Just a few weeks ago, Bankman Freed was on ABC TV denying any comparison to Bernie made Off. When you look at the classic Bernie made Off story, there is
no real business there. The whole thing, as I understand it, I think was was just one one big Ponzi scheme, right f t X, that was a real business, but prosecutors say f t X was just a scam from day one, or as John ray It's new CEO put it, this is really old fashioned and embezzlement. This is just taking money from customers and using it for your own purpose, not sophisticated at all. My guest is former federal prosecutor
Renato Marianti, a partner at Brian Cave Layton Paisner. With complex financial crimes, it usually takes prosecutors a while to bring charges. It took the Feds more than two years to charge Jeff Skilling after the Enron collapsed. So what do you make of the speed with which these charges were brought. It's remarkable, absolutely remarkable. I have never seen a case of this scope within weeks of the precipitating event before. In other words, I used to investigate when
I was a federal prosecutor complex financial crime. Those investigations would typically take years. A fast investigation would take months, and now we're seeing a case that was brought a little over a month after the collapse of FDx. So that's just absolutely sounding and I think what it speaks to when you look at that end the breath of the charges that are brought against Mr Bankman Free. It really suggested me a confidence that prosecutors have in this
case that's remarkable that I haven't seen before. This is a sweeping indictment charging conspiracy, fraud, money laundering, among other things. What struck you most about it a couple of things to make this stand out. One is the sheer, breath and brazen nature of the alleged fraud. This is not a fraud scheam related to a very particul killer portion of FDx business, not related to a specific deal or
a specific customer. Was the beds of alleged is that effectively all of fd X was a giant fraud on its customers, that all Alameda with the frauding and customers and investors, very widescale frauds, very simple, straightforwards, garden variety frauds. So that I think certainly contributes to the confidence the Feds have. Another thing that's unusual here is that Mr Banker Freed, he took it upon himself to answer everyone's question about this and really locked himself into a story
more than I've ever seen before. We're not talking about one lone interview. Mr bank the greed spokes the many reporters he spoke on Twitter spaces really answered very insight the questions for hours, making it very difficult for defense councils to weave a story that isn't already locked in. So fraud guters not that they can contradict the story that he's already locked himself into. I think that could explain a lot of their compas. Yeah, surprising because I'm
sure his lawyers told him to be quiet. But do you think he was trying to set up a defense basically saying I made mistakes, I may have commingled funds, whatever, but I didn't mean to defraud anyone. I think that's right, to be fair. That is not an uncommon defense in a froud case. In fact, I would say that that is in many ways the typical defense that you would see in a froud case. In other words, I may have been in intentive or enough, or a bad businessman,
but I'm not a fraudster. I wasn't intending to do that. Because the prosecution has to prove beyond a reasonable doubt that the defense it had the intense defraud. But that said, the problem for Mr Banker free is really with how this is going to play out of the trial. This is why he really did himself a disservice by concluding that he didn't need lawyers. You know, he's ad at one point that he understood the law better than lawyers did,
and that sort of thing. And I think he did himself a disservice because under the federal rules of evidence, he cannot introduce his out of court statements in his defense. They are inadmissible here says, but if the government wants to pick and choose and find bits of those interviews that are incriminating, they can introduce those specific pieces of his interviews as admissions by a party opponent. And so he put himself in a situation with a lot of
downside and no upside. He is going to be facing, in a criminal case, a lot of negative statements that the Feds candy playing his way, and he can't play any positive statements. His response has to be to take the stand, and if he does that, he's going to
be facing a barrage of his own prior statements. He's effectively locked himself into regarding his own testimony and put himself in a situation where he's got to remember and beginsistent with all the things he said in the past, even if his lawyers later realized that some of the things he said previously we're not the smart thing for him to say at trial. So what strikes me is that prosecutors have said this was one of the biggest
financial frauds in American history, billions of dollars disappearing. Yet as you said, and as John Ray, who has taken over f t X said, this is just plain old embezzlement. So why did it take so long then for it to be discovered for it to fall apart? That's a great question. I think there's a number of reasons why.
One is that SPS was able to successfully convince not only the customers of FTX and his investors, but also the public at large that he was some sort of visionary, you know, potentially the world's first trillion era because he had this large personality, and I think that that caused many people not to exercise the appropriate judgment and conduct
the appropriate due diligence. I think another factor is that it's fair to say that there has been a lot of excitement about CRIPTO, and enthusiasm that has caused many who are not sophisticated in that space to put money into visional assets without carefully considering that investment. And I think it's also fair to say that he's really good at fooling people and that it's not entirely unusual for fraudsters to get away with their fraudulent activity for years.
I mean, Bernie Madoff got away with it for years and pretty made not had obviously a lot of institutional validation that came from his prior position, but SPP over time was heralded by many people as some sort of visionary. You know, he is photo on covers of Major MAGA. He was seeing as some larger than life entrepreneur, and I think that contributed to the trust that people have for now. As far as the evidence at trial, John Ray said, we're dealing with a literal, paperless bankruptcy. It
makes it difficult to track. They didn't put things in writing, communications that disappeared, etcetera. Will that also make it more difficult to prosecute. When I was a prosecutor, I used to always say that emails are prosecutor's best friends. And it's certainly a white collar prosecuters typically emails, text messages. I am the other types of communications usually are what
you rely on to establish intensive to fraud. In addition, other types of documents, whether they're ledgers or other types of financial records, are really important to provide a snapshot not only of what the company's books look like at a certain time, but also what people like SPF new at particular points time that doesn't exist here. I do think that in a different kind of case it might
matter more. The beauty of the government's case from their perspectives is that they're not really claiming anything that relies too much in the detail. I think at its core the fraud case, the main fraudcasts a number of different frauds that are really set a charge, a number different
schemes that are charged. But I would say the main scheme is that FBX was taking customer money, promised customers that their money would remain at fb ACT it wouldn't be used by FDx for a different purpose that can't
be disputed, and the money went elsewhere. And so given that the government can prove that he signed off on those money transfers, I think between that and his public statements, they appear confident, and so I think that will mitigate the lack of paper and the disappearing chats and all the other things that Mr Ray mentioned which otherwise might
prove fatal to a criminal case. So bank and Freed has said that he had little involvement in the management of Alameda after he passed control of it to Caroline Ellison, and then statements that customer funds were passed to Alamita because of an accounting error that might be part of his defense. Do you think it has any weight? It
certainly maybe part of this defense. What I would say is that it would have been a lot smarter for him to wait for his lawyers to get discovery from the government, determine whether or not the evidence back those claims up, and then have his lawyers asserts those claims rather than him. But now, yes, I do think you've got to hang his hat on those things, and the question is whether or not it ends up being true.
What I will say is, if it turns out that those statements are not accurate, that's a major problem for him because it's going to be impossible for him to successfully pivot away from that at trial given his prior statements. What I do is suspect is that the government, whether or not there's paper or not, to get to the point you're raising earlier, they're going to be able to establish from a variety be of different individuals and different
documents what exactly happened and what SPF do. And it's worth noting that the other individuals involved have different interests than Mr bankmet Freed. They're not his servants, and ultimately they have their own potential liability to consider. And presumably, for example, the people at Alameda are not gonna want to suggest that they were responsible for fd X is
misused to customer funds. Presumably what they're gonna say is that Mr banknet Freed authorizes and told all of them that this was appropriate, and would anticipate that that's their testimony would be something along those lines. What do you think the hardest part of the prosecution's case against him will be? Well, that's a very very good question. I think that one thing that's really surprising about the government's case is the breath of the case that they brought. Now,
part of that is because they're extraditing. In once you extradite someone, you cannot add charges you can always dismis charges you can't add charges um and so I do think they were probably trying to be over inclusive. If I was the supervisor looking at this indictment, that sense to me. For a review, I would really question why we're charging campaign finance case as part of fraud case. In other words, if you're going to prison for fraud, what do we care? I mean, just tell the judge
about the campaign finance stuff. She can consider that a sentence thing. But like, let's just charge our strong counts and let's just argue the rest of us and the judge that sentence. Think, you know, it's not like you need those talents. So I think that similarly with money laundring, that as a complexity and a bunch of elements that you have to prove. That makes your case more complicated.
And I tend to believe that, particularly in a white collar crime case, the simpler story usually with SO I would try to keep my prosecution cases a simple and straightforward to prossible. He said he's going to fight extradition. What grounds can he possibly offer not to be extradited? And I don't know, off the top of my entieres, I'm not an expert on Bahamian law. M or Behavian law.
But I would just say that, generally speaking, because I say this from the perspective someone who used to be on the federal prosecutions, I try and extradite the defendants, that of prosecuting he generally the offense needs to be a crime in both the US jurisdiction and the foreign jurisdiction. So he might try to argue that let's say the campaign finance fraud was conspiracy, was not actually a crime,
and under Beahamian law, that's possible. You know, I don't really view that as um an important part of this defense strategy. In other words, I view that as buying time. You know, he he spoke during the Twitter space that I listened to, how he was completely broke and I was trying to figure out out to pay his lawyers. The unless a hund thousand dollars of his name. He was looking at the directors and officers, insurance and so
forth to find a way to pay lawyers. So, you know, buying a little bit of time makes sense for someone in this position, So that that may be part of it. As Danny and Williams also said, well, this is our first public announcement. It will not be our last. So for a U S attorney to say that with such confidence, and he sort of said it twice, do you think that they've already got more indictments ready to go? Yes.
I was surprised by that because use certain you're supposed to be very careful, and they are generally very careful about their work when they make a announcement in a press release, because what they say can be used by defendants in emotions to try to argue that they have been unfairly prejudiced and so forth, So they're usually very their Their words are very carefully orchestrated and planned out, and I think they're he was trying to imply the
charges against others who were down down the pike. He also appeared to be sending a message that anyone involved in this should cooperate, and so I think that that was definitely part of the point here. I think he was trying to send a message the people like Caroline Allison other associates of SPS that it was time for them to come forward and cooperate with the government and what they do. So finally, you know, you hear ridiculous numbers like a hundred and fifteen years that he's facing.
If these charges are approved, will he get out of prison? I can explain why that's such a silly number. That a hundred something here is that he's looking at. You know, we often hear those depressed reports. I mean someone starts to facing hundred or hundreds of years up to hundreds
of years in prison? Would that number constitute is all of the maximum possible sentences under law for each one of the counts if you stacked those counts one after another, And as a practical matter, that's never going to happen. So what Yes, that's the theoretical cap. But what really matters here are a couple of things. First of all, the judge is required under federal law to look at a variety of factors when fashioning a sentence. Those factors
are very broad. They include things like the history and characteristics defendant, the nature and circumstances of the offense, essentially everything surrounding the defendant. And by the way, that includes thinks he wasn't charged with. That includes things he may have even been acquitted for. If he's acquitted on the campaign finance charge, the judge can notetheless consider that conduct. So you know, all of that will be thrown into the mix and the judge is going to make a judgment.
In addition to that, there is something called the Federal Sentencing guidelines. They are just that, so they are only guidelines. They're not our rules, they're not laws, so it judge could disregards them, but they do have an influence on judges. I think they can anchorage judge's decision. So if I was getting handicap, what a sentence would look like for SBS, I would say at the starting point that it would
probably be something in the range of multiple decades in prison. Uh. You know, we recently saw the founder of the atous sentence to fourteen years in prison, and she was pregnant at the time. Uh. In my experience too, I think that particularly someone who has a young child and a
pregnant woman would get a lower sentence. I would expect Mr bankers Free to get a higher sentence in her And additionally, another factor that not only dramatically increases sentencing guidelines but also is heavily considered by judges one weighing a sentence in a proud game, it's called the loss amount. In others, a total amount of money at issue that was lost by victims. And I think that the loss amount here is likely to be substantially more than it
was in the Farinos case. So I think that Mr Bank, the fred is going to likely receive a sentence so much more than those fourteen years. I think you should prepare himself for multiple decades. Thanks so much. That's we're not on. Marialti A partner Brian cave Layton Paisner coming up. We'll look at the sec complaint. This is Bloomberg questions we have are you know, where where are the assets? How we locate those assets? Uh, it's a mining exercise
at this point. Uh and uh look, you know, at the end of the day, we're not going to be able to recover all the losses here. Money was spent that will never get back. John Ray, who's guided dozens of companies, including and Ron through bank see, called ft x is collapse one of the worst business failures he's ever seen, saying it was run by a small group of grossly inexperienced people, with a complete lack of oversight
and financial controls and an unprecedented lack of documentation. You know, even the most failed companies you have a fair roadmap of what happened. Uh, we're dealing with literally a sort of a a paperless bankruptcy in terms of how they created this company. It makes it very difficult to UH
to trace and track assets. Currently, f t x is founder Sam Bankman Freed is sitting in a Bahamas prison fighting almost certain extradition to the US to face criminal charges and civil lawsuits by the Securities and Exchange Commission and the Commodities Futures Exchange Commission. Joining me as securities law expert, Robert him a partner at Tartar, Krinsky and Drogn.
How would you describe generally the sec is complaint. The SEC's complaint in this matter is very interesting because it really sells out a very basic fraud in a sense of misusing customer deposits at cfc X exchange and using those for personal purposes by banks and Freed and others supposed to you know, what some people thought might be a very complex fraud. It turns out to be very
garden variety, except just on a very massive scale. The SEC's jurisdiction is limited to fraud and security sales, and there's ambiguity about whether crypto is a security so how did the SEC steer clear of that in its complaint?
The SEC has brought securities fraud charges in its complaints, and the way they have done that is that they have alleged that's starting in twenty nineteen, so way back to the very beginning of when ft X was founded, that misrepresentations were made to investors, including US investors, to induce them invest in the equity of ft X. These
are separate in the customers who traded crypto. There were institutional investors who invested billions of dollars into f t X, and the SEC said that that was done through misrepresentations and omissions, and that's how the SEC has crafted its security scrot complaints in this matter. Tell us a little about the SEC's allegations that Bankman Free concealed f t x is relationship with al ame To Research and used
commingled customer funds. One of the key allegations in the SEC complaint has been that there is an affiliated hedge fund called Almita Research, which essentially traded crypto, made markets in crypto, and was supposed to have been a separate company.
But the SEC is alleged there was a significant amount of commingling of asset, specifically customer assets and f t X that was used to fund Almeda's operations, and that was contrary to the representations that f TX was making to customers as well as to its lenders and investors. Let's go through different parts of the complaint explain how the SEC says that bank Man Freed misled investors. The SEC has laid out a number of specific claims with
how bank Man Freed misled investors. They center around representations that Banksman's Freed made that there was risk controls in place at fc X, that investor money was safe, and also that Almeda was not given any sort of special treatment that had been a subject of repeated misrepresentations. According to the SEC, that ALMDA was just like any other customer on the ft X platform, but in fact, according
to the SEC's complaint, it was treated very differently. The SEC is alleged that Almita had a virtually unlimited credit line with f t X, that it was the stempted from many of the margin requirements that typical customers had to comply with, a result that led to massive losses for UM investors and customers of FPS. What about the poor controls fd X had and risk management and those
loans to Sam Bankman, Freed and other staff. Yeah, the loans are particularly incriminating fact that the SEC has alleged because what the complaints says is that customer money from the ft X exchange was transferred over to Almeda, and from there Almita made loans the hundreds of millions of dollars to insiders, including facts Banks and freed Um and also use the money to purchase lavish real estate and
other expenses that were clearly personal in nature. And as a result of this sort of transactions, the SEC said that that was never disclosed to investors and f p X that that was going to happen, and in fact, the SEC alleges investors were told, uh completely the opposite, that fc X was completely fund separately from Almida, But that turns out, according to the SEC, not to have been the case. So the SEC alleges that bank Man
Freed orchestrated this scheme to defraud equity investors. But yet John Ray said that this is really just old fashioned embezzlement, just taking money from customers and using it for your own purposes. So was there really an orchestrated scheme that makes it sound much more sophisticated. Yeah, that's a very
good point. I think that even though the purpose of the scheme in namely using customer funds for personal expenses and embezzlement, is very basic, the way that it was done here shows a high degree of culpability, according to the SEC, because steps were taken by Frank and Freed and other executives to conceal the relationship with Almita and to conceal the amounts of money that was flowing from st X to Almita, And as a result of that, it makes it very hard for the new CEO, John
Ray and regulators to piece together exactly how fun to fload And now that's an ongoing process to to really document how this money was moved and how much was moved and how much um was lost as result of these transactions. What would the SEC have to prove were the basics of what the SEC would have to prove
if this went to trial. In addition to having to prove that the representations to investors were material, the key thing that the SEC has to prove is how it's called to enter, which is either intent or recklessness on the part of Banks and Freed, and in white collar cases like this one of dependants, intent is always a
contested issue. And I think we've seen a preview of Banks and Free defense and prior public statements that he's given where he says that he wasn't aware that f t x IS customer deposits were being used to cover all Meda's debts and a liabilities. So he's trying to set off as a defense that the underlings at the two companies were doing this and he wasn't aware of it, and that's gonna be a tough defense to really be successful. On what kind of things were the SEC point to
to show the ner. In order to show the nswer the SEC, it could prove a few different things. Number one is the personal benefits financially to Banks and Freed as a result of these transactions, and courts has held that when a person is getting personal benefits and money that that can be an indication of motive and an
opportunity to engage in securities fraud. But even beyond that, the SEC is going to have to look and prove the corporate structure and show how banks and Free to prove transactions like money being moved from ft X customer account tal Meta. They're going to look at email correspondence between the other employees at f t X that may
have updated Bank and Freed about what was happening. And I think importantly there's been a lot of speculation and rightfully so, as to whether they'll be cooperators in this case. Other employees like Carolyn Ellison, who was the CEO of Alameda, who may be wanting to cut deals with the SEC and the prosecutors in exchange for their testimony against Bank
and Freed. SEC chair Gary Ginsler said, we alleged that Sam Bankman Freed built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto. Does the SEC have to prove that investors relied on his alleged misrepresentations? The SEC itself does not have to prove reliance as part of its case. To the extent that there's going to be private lawsuits and class actions, those private lawsuits from
the investors will have to prove reliance. So the SEC is set up in a way by statute that they have a lower burden in order to prove their case. The reliance is not part of the SEC's claims here. John Ray spoke about this unprecedented lack of documentation, the paperless bankruptcy. Is that going to make it much harder for the SEC? There's his view of very shocking lack of any sort of paper or documentation to support loans and why and how money was moved from FTX to
Almeda Research and where the money went from there. However, with digital assets and crypto, there is going to be a record on the blockchain of a lot of these transactions. And while it may take more work for the investigators to come through all of those transactions for the last three years, I think ultimately they're going to be able to put together a pretty complete picture of what happened, even though SCXS records themselves don't appear to be very good.
Is prosecuting a case with crypto? Is that a challenge for the SEC at this stage? I don't think that prosecuting a crypto based case like this is going to present any significant challenges. The SEC has been studying the market for years. They have a market abuse team that brought other cases in cryptos so there's a lot of institutional knowledge about the market, and I think one thing that's going to help is the fact that this appears to be more or less garden variety type of fraud
and an embezzlement. Granted it involved billions of dollars of customer assets, but at the same time, I think that with the transactions being publicly availed on the blockchain and even having potential cooperators, is going to make the SEC's
job a lot easier. One nagging question I've had throughout these revelations about what Gainsler called a house of cards is looking at the allegations, especially for example, something like the billion dollar loan to himself by a man who basked in publicity and self from ocean, the Super Bowl ads, the deals with sports teams, the political contributions, on and on. How did bank man Freed ever expect to get away with this? I mean, the house of cards was bound
to collapse at some point. Yeah, absolutely, It's it's really shocking. And the SEC actually also discusses this in their complaints where they say for the past three years, bank man Freed has been now self promoting himself as responsible businessman and wanting to have regulation in the crypto industry and
ethical practices. But you know, meanwhile, he used his reputation as a person who was running legitimate crypto exchange to help convince investors to put more and more money into sc X, and all the while, according to the SEC, Bankman freed knew that it was setting up to be a very risky investment and then also misusing customers deposits. So all his public statements now can potentially be used against him in this SEC case. And what is the
SEC asking for if it wins. The SEC is asking for several different things, um like in all securities fraud cases. They want an injunction against future violations of the securities laws. They're asking thanks Freedman to give back any sort of money that was improperly taken out, and they're asking for civil penalties. The SEC is gonna be working closely with the Department of Justice on the criminal case to help
coordinate that. But the SEC is a civil agency and as a result, it's limited to just monetary and adjunctive release. With the bankruptcy in place, and with all the money that appears to have been taken a year, is it likely that the SEC is going to recover any funds or get me penalties. I do think that there's a
high likelihood that money is going to be recovered. Whether it's by the SEC or the do o J or even the bankruptcy receiver, it's all going to go into the same pot, so to speak, to help make invests and creditors full. But we have seen UM that John Ray, the new CEO, has already taken steps to secure assets, so there are assets left, and I think it's instructive when we look back to the to the main off situation.
UM in the early days, there was huge losses, but over time through enforcement efforts and lawsuits against third parties like UM, auditors, law firms, and people who are supposed to be date keepers, because that that can also be another source of recovery for both customers as well as creditors in the bankruptcy. The Senate Banking Chairman Shared Brown is calling for the SEC to regulate the crypto industry. Do you think that it's about time that they did
or someone else should do it. I think there's no question that this FTX case is a wake up call that's going to spurn significant new efforts and regulating the crypto industry. We've had a situation where billions of dollars of customer assets have been um diverted and misused. And there's a framework that's already in place for exchanges and regulations that I think will be the roadmap for how the regulators will look to regulate crypto industry and exchanges.
The Commodity Futures Trading Commission has also filed a suit against him. Does that work in coordination with the SEC? Yes, the Commodities of Futures Trading Commission. The CFTC has also filed its own enforcement action in the same matter. It's going to be helpful for the SEC because it brings another area of expertise to bear on the facts of
this case. And in general, the regulators are going to cooperate very closely, so they're not stepping on each other's toes, so they're not gonna be fighting over who has jurisdiction over this correct The regulators usually are going to defer to the Department of Justice, and they're going to be the lead agency and the crim case, and typically the SEC and the CFCC bill acting the supporting role for that.
Thanks so much, Bob. That's Robert him a partner a Tartar Krinskin Droken as fd X founder Sam Bankman Freed sits in a Bahamas prison fighting extradition to face fraud charges in the US. John Ray the third has taken over as the CEO of f t X, dealing with one of the biggest corporate collapses since the Great Recession and trying to recover customer funds. Ray handled the in run bankruptcy, but says he's never seen such an utter failure of corporate controls at every level of an organization.
We're dealing with literally a sort of a paperless bankruptcy in terms of how they created this company. It makes it very difficult to h to trace and track assets. Uh, and particularly as I've said, in the crypto world, UH, it's really unprecedented in terms of UH the lack of documentation. Joining me is restructuring expert Jim Bear, president of CMBG Advisors. How difficult is this bankruptcy? Even for someone with the
experience of John Ray. I believe this is going to be qualitatively harder than most bankruptcy followings for a variety
of reasons. You've got a lot of complexity here because there were rumored to be approximately a hundred different entities set up, so trying to break this down in a bankruptcy the most challenging thing is doing an accounting and getting your arms around what went on so that you have an ability to actually go out and in this type of situation recover assets for the million people have been harmed. If you look back to situations like made on in two thousand and eight, we're just now seeing
distributions being made. Because it takes a long time to trace and recover assets. One of the things particularly difficult here is that there was such bad record keeping and there were so much complexity and commingling of asset that to actually determine how much money came in how much
money went out is going to be difficult. And then one way to bring back money is through going to people that received distributions during the last ninety days or eight days or a year, depending on the different law
of and applause, and pulling that asset back. And in some cases those are gonna be innocent people that just got paid before someone else, and so under bankruptcy law it is supposed to be done in a more pro rat of fashion, and so you're gonna have assets pulled back and then allocated to various people, and all of that is complex and takes a lot of time to do. So we've heard a lot about John Ray saying this is a paperless bankruptcy. But are the customer records the
same as customer records elsewhere? So can he see who put in what? So I don't have access to actually the company records at this point, so all I can go on is what as you point out, John has testified, for instance, before Congress or otherwise, it appears as he said that he's never seen a lack of documentation to
this extent. When people put money into the exchange for trading, presumably presumably that money should be accountable, because you would assume customer accounts were kept for the people so that you could in fact return money and or deal with those customers. Now that is an assumption I'm making because I haven't actually seen those customer records, but I'm assuming that that does exist. But from there, where that money when, and what checks and balances existed that I think, from
what we've heard, is pretty much non existed. So he said at this point, it's a mining operation. What did he mean by that? Well, my speculation when he means by that is in a mining operation, you're digging to actually uncover the minerals that you're looking for. In this instance, we're also like archaeologically digging or mining to find out actually where the assets are, and we're looking for those in the various places and trying to uncover those assets.
So he's been able to secure one billion dollars of assets to coal wallets in a secure location. First of all, explain what does he mean by coal wallets. This may be a crypto term. Yeah, So when I think of a wallet in the crypto space, think about it from the perspective of a wallet that is a physical wallet, right, so you have a place where, like a leather pouch where you put your money. When you're dealing with essentially a digital asset, think about a hard drive on a computer,
Think about a thumb drive on a computer. You've got these storage devices which are very different than a typical storage device that's physical, like a wallet, because you don't have physical assets, you have digital assets. And so when we think of terms like wallets or digital wallets, what we're talking about is a storage device for these digital assets. Does the fact that this is cryptocurrency make this harder? I don't think it's just because it's cryptocurrency per se
that makes it harder, Because you can trace cryptocurrency. I mean, in the same way you can trace a wire transfer from one bank to another, or from a bank to a customer. You can trace where these digital assets were transferred. From my understanding, from a technological perspective, you can trace that. So I don't think the fact that it was digital currency per se or digital assets per se that makes
this harder. I think what makes this harder is the fact that it was so unregulated and it was so abused that the normal checks and balances, like an independent board, like audited financials, like SEC regulation, we're not exa instant. So one thing that confused me a little bit. Ray said that the collapse appears to stem from the absolute concentration of control in the hands of a very small
group of grossly inexperienced and unsophisticated individuals. Is it that they were inexperienced and unsophisticated, or is it that they were swindlers who knew what they were doing. I suspect. But remember, we do have a concept of innocent until proven guilty, and so I like to try to be respectful of people and give them the benefit of the doubt.
But here's what we do know. We do know their inexperienced. Meaning, if you've been in the business world for number of years, you understand the needs of checks and balances, you understand chain of control, you understand oversight. When you're youthful, right, and you haven't experienced some of the falls and the experiences of history, I think you're more prone to look for shortcuts, not knowing that shortcuts don't really work. You know,
the tortoise and the hair. The hair is obviously a famous story, but when you're young, you're youthful exuberance can sometimes need you to believe that you know the rules don't necessarily apply to people in the same way. When they're young, there's a certain sense of invincibility. I think the inexperience is part of it. And then the concentration of so much power in so few people without those checks and balance is a huge problem. And again, power corrupts.
Absolute power corrupts absolutely. When you look at the way our country is set up, with the three branches of government. It was specifically designed by the founding fathers so that there would be checks and balances. The corporate world really mirrors a lot of ways our government. There are boards of directors, there are shareholders, and there is a president. So think about that. The shareholders are essentially the voters in a republic. You've got the president of the company,
which is like the chief executive officer. You have the board of directors, which really is kind of the oversight like the legislative body, and that has to approve things. And so there was designed that way to create these checks and balances. Unfortunately, in the crypto space, especially and miss specific situation, those checks and balances did not exist. There's an excess of seven billion dollars in losses. Ray has been able to secure one billion at this point.
Does that sound hopeful to you? So I spent a lot of my time doing what John Ray does, which is restructuring, overseeing bankruptcies, liquidating companies. We do a lot of work in the space called assignments for the benefit of creditors, which is a state alternative to federal bankruptcy. And so in these situations, one of the things you focus on is your job is as a producer is to maximize the value for creditors, and every situation is different.
You have sometimes hard assets to recover. You could be working in a jewelry industry where you have diamonds that you can recover and sell off, or you can be in a situation where the assets disappeared. The challenge in this situation is that we know there was a lot of commingling of money. We know that Alameda was a hedge fund. We know that there were investments being made, loans that were being made, and many of those investments
went bad. If the investments turned out to be profitable, you could actually pull back those investments, or you have those investments and you could share that with the creditors. But when you're dealing with the situation where actually loans were made with no ability to pay them back, investments were made in the worthless companies or the bad investments, that money has gone forever. So then the question is what do you look to for recovery. One is insurance.
My understanding is there's very little insurance here. Another is you look to negligent people where there are people on the board or other deep pockets with insurance that you might go after. My understanding is there's not a lot here in that situation. So one of the ways that you pull back money is you look at the people that did receive distributions and return of money, and you pull that money back and then you share in a more equitable pro rat of fashion with the other creditors.
And we just don't know at this point how much money that's going to be, but realistically, I think we're gonna look at billions of dollars of losses here. The liquidators appointed by a court in the Bahamas are fighting with f t x IS bankruptcy lawyers. Can you tell us a little bit about what's happening there? Sure? So remember we started by talking about the complexity of a
hundred different entities. When you have offshore operations and you have domestic operations, you have different jurisdictional issues, and each jurisdiction has a duty to look after its constituents. So in the US, we're looking at US investors and US citizens in the Bahamas, their regulatory bodies are supposed to
be protecting investors in the constituencies in the Bombas. My understanding is that's one of the hundred companies was a real estate company, and there's real estate that was actually owned and invested in in the Bahamas. From a jurisdictional perspective, the legislatures and the judges and the people passed with protecting the assets in those jurisdictions are fighting for their
jurisdictional rights over those assets. And of course that's being challenged by the US regulators and lawyers and so forth, because we want to get our hands on those assets for the people in the US that have been harmed. So what I see going on here is there are some accusations flying back and forth. But but even putting that aside, they're just legitimate jurisdictional legal challenges that go back and forth when you have different jurisdictions involved in
a dispute like this. The Bahamians want to remove the company that owns the real estate in the Bahamas from the US bankruptcy. Is that an unusual thing to do in bankruptcy to take one piece and say no, this is separate. No, not at all. So again, you got a holding company structure in certain cases, and that's where
there's a company that owns other companies. As I mentioned, allegedly, we're dealing with a hundred entities, right, and so my understanding is that those all run up and are essentially controlled by SAM. But at the end of the day, there are jurisdictional issues and different companies, maybe because they're incorporated admiss all in different jurisdictions, there will be different
rules that apply to those entities. Sometimes you can pull it all back to one jurisdiction, like a Delaware bankruptcy, but there may be very legitimate reasons why, for instance, this real estate company was set up in a manner that it really does belong in the Bahamas. Again, I haven't seen the documentation, but in complex bankruptcies it's not unusual to have these kind of fights. How long is this likely to take? Are we talking months? Are we
talking years? We're talking years. The reason is this follow us again iron a coming called CNDG Advisors that does this type of work, and we do forensic accounting, and we do restructuring and we trace that this and you know, we try to help fix companies or or sell them off. And you've got simple assignments that can take a year, or you have assignments that can take many years. When you're dealing with complexity. Complexity is not your friend in
these situations. It just isn't. And more often than not, when you see these levels of complexity, it's either intentionally or otherwise a way of obfuscation, and it's very, very difficult to trace through that. And you don't have unlimited money, you don't have unlimited resources, and even in a situation like this where you do have more resources than you
would typically have, there's a lot of posturing. There's a lot of digging, as you said, mining that goes on, and as much as we like it to get done quickly, the reality is the more entities involved, the more money involved, and the less record keeping, the harder it is to actually figure these things out. To put this in perspective,
because I've dealt with this in a recent case. When you don't have proper account owning records, it is incredibly difficult to figure out where you know the money went and to really understand the arguments for the payment or not for the payment because you don't have the normal record keeping that you would use to document the money out and the money in. I think they're in chapter eleven, But is this a restructuring or is this a liquidation? I mean, does anyone expect f t X to come back?
So that's a good question. Chapter eleven, as you point out, is designed primarily for restructuring companies, whereas Chapter seven is to liquid a company, and Chapter eleven can end up with the sale of the company outside through what's called Section three sixty three sale, but it is generally designed as a restructuring tool. In a situation like this, I do not expect f t X to come out as a viable company and exit bankruptcy and remain and operating entity.
And having said that, there's a hundred entities. So there's this this alleged real estate company, for instance. It's too early to say will there be any salvageable parts of this estate that could emerge and continue on in some form or fashion. I think it's unlikely. I think, as you point out, it's likely to just be a liquidation
over time. But the tools of investigation and forensic accounting and otherwise you will enable the bankruptcy judge and the trusty to dig deep to actually figure out what went on, even if the company does end up liquidating. So, on a personal note, is this the kind of bankruptcy you'd like to take over or is it like, are there challenges interesting or is it just too much? Well, it's for those of us who are in this space. I think that there is something challenging about being confronted with
the situation like this. So I would think that the complexity for those people to thrive on complexity and challenges would be intriguing. What I would find challenging here would be the fact that there are so many hurt people that I wouldn't be able to help. And one of the things that see in the cases that I'm working on is that sometimes we have the ability to really make a meaningful payment to creditors, and there's something very
satisfying about that. On the other hand, some of people on my team, for instance, get incredibly frustrated when it just seems like it's a wash and there's no money going back to creditors. And so what I think will be painful for people in this situation working on this is to the extent they are frustrated and unable to return material amounts of money. I think that's going to
be challenging. Do you think this is going to lead to more regulation of crypto you know, in my career because I started out as a corporate lawyer and was
very involved in antitrust and SEC enforcement. And know, there's always been a tension between lazy fear economics and you know, the a Rand belief in libertarian operations and that you know, the all powerful business community and the idea of trickle down economics and letting businesses really do what's you know, in their interests, because it's what's what's good for business
is good for the American people. Right, that's one extreme, and the other extreme is you know, real real hands on regulation that can cripple business because of the complexity of the regulation, it makes it so difficult to operate.
And so there's that balance, right. I think there are areas, you know, when we see in our country the ability to build high speed rail, for instance, where it's environmentally and otherwise really really difficult to get anything done, whether or it's John Stewart talking about getting things built in California, or the fact that it's still so hard to build affordable housing in California, You've got situations where regulation really
does need to be refined and pulled back. In the area of crypto, I think We have got a lot of work to do in terms of better regulation, and this hands off approach I think has been a mistake, and I think that we need to realize that balance regulation is important, and in this instance it's it's sad that so many people are going to be hurt by this, but I hope that the regulators wake up and realize that this has to be properly regulated like all other industries,
and that we will get back to a happy medium. Thanks for being on the show, Jim. That's Jim Bear, restructuring expert and president of CMBG Advisors. And that's it for this edition of The Bloomberg Law Show. Remember you can always get the latest legal news on our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, and at www dot Bloomberg dot com, slash podcast Slash Law, and remember to tune into The Bloomberg Law Show every
week night at ten b m. Wall Street Time. I'm June Grosso and you're listening to Bloomberg m