A highlight from UNCHAINED: Why FTX Might Try to Claw Back Funds From Retail Customers


Thanks for listening to Unchained, your no -hype resource for all things crypto, on the CoinDesk podcast network. You can also listen to the episodes on the Unchained feed earlier if you subscribe there. Plus check out all our content on our website, unchainedcrypto .com. These are all fraudulent transfers, potentially while the debtor was insolvent, potentially while it was coming to lift funds, so clearly all that money has to come back. I think that's pretty easy. The question is, like, what's it worth now and who can actually pay it back? With Toku, you get unmatched legal and tax tech support to grant and administer your global team's tokens. Make it simple today with Toku. Today's episode is brought to you by Overtime Markets, your premier Web3 sportsbook. The innovative protocol is changing the game one match at a time. Powered by Thales, explore more at OvertimeMarkets .xyz. Arbitrum's leading Layer 2 scaling solution offers you ultra -cheap and lightning -fast transactions, all with security rooted on Ethereum. Visit arbitrum .io today. With the Crypto .com app, you can buy, trade and spend crypto in one place. Download and get $25 with the code LORA. Link in the description. Today's guest is Thomas Brazile, founder of 117 Partners. Welcome, Thomas. Hey, Laura. Good to see you again. This week, FTX sued Joseph Bankman and Barbara Fried, the parents of former FTX CEO Sam Bankman Fried. Alleging that Bankman was intimately involved in a number of the allegedly fraudulent schemes, such as silencing someone who threatened to expose the alleged FTX fraud, the purchase of property in the Bahamas, Barbara Fried encouraged the use of strong donors as campaign finance laws, or allegedly, and both were accused generally of either knowing or ignoring the red flags that FTX was insolvent. Was this development surprising or expected? Thanks for having me on, Laura. Good to see you, as always. Was it surprising? No, I don't think it was that surprising. I think what was in the lawsuits in bankruptcy referred to as adversary proceeding, but what was seen in the adversary proceeding was probably a bit shocking, the actual details, but I think people knew that they were pretty involved. I think that was some of the heat they were getting post him getting a criminal complaint against him was that, why is he hanging out with his parents? Weren't they involved in a lot of parts of the business and people were saying things like that. I don't think it's that unexpected. People, I think, long knew that there were some real estate transactions where they were gifted or given some certain real estate in the Bahamas, but to see it all laid out in the complaint or I should say in the adversary proceeding was interesting. Which items in particular really struck you? I guess just the involvement in the actual day -to -day stuff. I mean, if you come from a corporate background or were a tax lawyer, which his dad, I guess, was and is, that there wasn't more, I don't know, structure to the organization. I mean, the dichotomy between what people thought pre -petition, what John Ray sort of said post -petition and now some of the revelations coming out about the pre -petition activity. I mean, it's just kind of amazing to think about people that might have been a more corporate background and saying like, if the business was so profitable, why were you cutting corners? To be fair to these guys, like in the light of day, sunlight of bankruptcy court, which as people in bankruptcy say, like my parents would say, the last place you want to be as a criminal is in bankruptcy court because there's so much sunlight and everything. Everything gets scrutinized. To be fair to people, sometimes the stuff gets overly scrutinized and they cherry pick stuff that went on. But it seems pretty damning, some of the stuff and there's, let's see what the responses will be. I mean, it's good for the estate and it's good for creditors because I'm sure they want to see sort of retribution. But in terms of recoveries, I don't think it's going to be incredibly meaningful, 10, 20, 30, 40, 50 million dollars. I mean, that's, I don't know, maybe two months of bankruptcy fees. And so, earlier when we were talking about like how some of the things are particularly damning, like if you were to kind of say, FTX will win in court for these reasons, like which were the particular acts that you think probably will put things over the edge? Oh yeah. I think almost all the stuff though, the win on the merits of the fraudulent conveyance. I mean, these are all fraudulent transfers potentially while the debtor was insolvent, potentially while it was coming with funds, so clearly all that money has to come back. I think that's pretty easy. The question is like, what's it worth now and who can actually pay it back? Like if money was given to a charity, can you actually go and get it back? Like meaning, is it there? Has it been spent kind of stuff? And you can only squeeze whatever rocked so hard. So the question will be, what is the real estate in the Bahamas worth? The 10 million bucks or whatever that was gifted to them, where did that money end up going? Can they trace it? So, these things cost money to do and then the question is like, how much of an effort do you want to make? And of course, all that can be stopped by a criminal investigation, which there isn't a complaint, but clearly some of the activity could be considered criminal. And I think, I won't pretend to be a criminal lawyer or a lawyer at all, but when you're bringing lawsuits, I mean, basically these are kind of like preponderance of evidence standards versus like higher standards that you might have for criminal complaints. So, it's easier for John Ray to like stitch together some stuff they know and slap an AP and sue these guys, but it's a little harder from a criminal side. But all of it, just facially, I mean, of course, as my lawyer likes to tell me, like, facts matter Thomas. So, if more discovery happens than they take discovery, we'll see. But on the face of it, I mean, it looks pretty obvious that it's sort of slam dunk. Just the question is what they'll actually be able to recover. Yeah, I think one of the ones that stuck out at me, simply because I could very easily imagine myself in a similar position with my own parents and I could just picture what my mother would say. And it was when they purchased the Bahamas property and everything was just getting billed or allegedly in the complaint to FTX. And the parents didn't even make an attempt to pay to furnish their home themselves. And I could just imagine if something similar was happening with my mother, she would be like, wait, is this okay that we're doing this? Like, you know, she would have so many questions about the money and like what was okay, what was kosher, what was not. Like, I could just practically hear her in my head. But at least, you know, from what the complaint described, it didn't feel at all like the parents had any of those qualms. So that was... Yeah, it wasn't 100 % owner of FTX. So it is bizarre that those red flags wouldn't have been, or people wouldn't have been like, hey, I know that you think this is okay, but I don't. Like someone would have said something, maybe they thought it was a drop in the ocean, but if FTX was so wildly profitable and Alameda was so wildly profitable, they didn't need to cut in corners and have them picking up the checks. I mean, it would have been easy for Sam to just be like, no, I'm picking this up personally or something. Well, one thing that I also noticed is that the document hedges its language saying things like, quote, Banquin and Freed either knew or ignored bright red flags revealing that SPF and other insiders were orchestrating the scheme. And again, you know, I saw later again, it was like, they either knew or blatantly ignored. So, yes. Right. That's because the standard for these civil cases is much lower. You know, like if you were trying to criminally try them, you'd have to like really show that they knew because they're going to say they didn't know, they didn't know, right. But the standard for like breach of fiduciary duty or, you know, kind of unjust enrichment, it's a much lower standard. All you have to basically show is a reasonable person should have known, you know. Oh, oh, I see. Yeah. So, that's why they keep saying that. So, you're saying – So, basically, they don't know whether or not they knew, but it doesn't matter for what they're trying to do. Is that what you're saying? I will respectfully say that I'm not a lawyer, but a stress investor and what people usually say – is the standard is usually what a reasonable person should have known, steps a reasonable person should have taken, best practices that a board should have taken. So, like a board of directors, if somebody runs off with money in a company, they don't have to necessarily show that they knew the person stole the money, but did they take any steps a reasonable person would have taken to like verify that the money was there or that the person wasn't absconding with money or whatever. So, it's this reasonable person standard that I think you trigger under Delaware and there are a lot of jurisdictions for breach of fiduciary duty or breach of loyalty, duty of care that you have, mainly in the boardroom, but also I think as a C -suite executive and it sounds like he was sort of melding between the two. So, basically, yeah, they're just trying to meet that standard for their purposes. They don't need to go beyond. And Barbara Fried, you know, also – so, as far as I understand from reading this, you know, Sam Pinkman was definitely involved more in the day -to -day, you know, he was often listed with FTX management. He could make executive decisions on his own at one point saying, oh, I'm just going to make this decision without Sam, like we don't need to involve him, that kind of thing. So, Barbara Fried was not involved at that level. However, it did say that she was a key influence on the campaign donations and I wondered what your takeaway was in that regard in terms of, you know, her involvement there. campaign finance fraud. Yeah, I don't have too much to say other than it's just bizarre that, you know, so many corners were cut in regards to stuff. I don't have a real view on – again, it's like it helps them build a story that they can, you know, just slam dunk, take back any money that was taken out of the estate at any point in the last couple of years by Barbara and the husband. But I don't think that – I don't have a real view on that. Yeah. Okay. Yeah. And as far as I understand, I don't think they're married, they're domestic partners. Just to clarify, yeah. All right. So, in a moment, we're going to talk about what the consequences could be after, you know, from this document. But first, a quick word from the sponsors who make this show possible. Toku makes managing global token compensation and incentive awards simple. Are you designing your token compensation plan and grant templates with multiple law firms? Are you managing cliffs, vesting and taxable events in a spreadsheet? Are you distributing tokens to your team manually? 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