Lawmakers, mainly Democrats, are under pressure to part ways with millions of dollars in donations from FTX founder Sam Bankman-Fried after the company’s spectacular collapse.
Bankman-Fried (30) was labeled by some as the second coming of the legendary investor Warren Buffett and did not hesitate to spend his fortune on politics. In all, Bankman-Fried spent nearly $40 million on campaigns this election cycle. Among those who donate primarily to Democrats, he was second only to billionaire philanthropist and Republican bogeyman George Soros.
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But, in a twist, his entire cryptocurrency empire collapsed during the same week of the midterm elections, causing the company to declare bankruptcy and customers and investors to lose fortunes. As FTX faces multiple federal and congressional investigations into the possible misuse of funds and defrauding clients, questions have arisen about whether the candidates and organizations Bankman-Fried bankrolled will eventually give up the money.
Some lawmakers have already said they are donating the money Bankman-Fried gave them.
Those reluctant to return the money can be forced to do so by a court, says Kathy Bazoian Phelps, a partner at Raines Feldman LLP.
“There is a legal basis possible to seek the repayment of those monies that were transferred under both the bankruptcy code and state laws, which are called fraudulent transfer laws,” she said. Washington Examiner. “There are defenses that can be asserted, there are certain exemptions, so there’s a chance that a lot of those issues will be played out in court, but those transfers will certainly be scrutinized.”
Sen. Dick Durbin (D-IL) and Rep. Chuy Garcia (D-IL) have the Daily Animal that they donate Bankman-Fried’s contributions to them to charity and Sen. Kirsten Gillibrand (D-NY) said she is donating the money to a nonprofit that “promotes individual prosperity and economic development in low-to-moderate income communities.”
Rep. David Schweikert (R-AZ), who also accepted money from Bankman-Fried, said he plans to part with the funds.
“If the person who made an individual contribution was involved in bad deeds, yes, absolutely,” Schweikert said.
Some have compared the still-unfolding controversy with FTX to a Ponzi scheme, which is a type of fraud that involves paying off older investors with investments from newer investors.
The largest Ponzi scheme in world history was perpetrated by Bernie Madoff and was worth over $64 billion. In 2009, he was sentenced to 150 years in prison, where he died.
The Madoff case was notable in that attorney Irving Picard was able to recover more than 75% of the approved claims, or approximately $17.5 billion. An appeals court ruled in 2020 that investors who profited from the scheme without knowing it was a Ponzi scheme must still pay back their profits.
Phelps, who wrote The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, said that if there is a concerted effort to recover the FTX funds, it is unclear how much will ultimately be returned, given the volatility of success. She said returns in past cases have ranged from 0% to 100%, although she said the number is more often than not below 50%.
“Its size and scope set it apart. Both in terms of the amount of dollars involved and in terms of the number of people implicated,” Phelps said.
Picard declined to comment on FTX when contacted by the Washington Examiner.
This week, an Oklahoma resident filed a class-action lawsuit against Bankman-Fried and several celebrities, such as Tom Brady, who were involved in promoting the FTX platform and benefited from what the lawsuit calls “unsophisticated investors.” mentioned.
“The misleading and failed FTX platform was based on false representations and fraudulent conduct,” the suit states.
John Ray, the new CEO who took over the company from Bankman-Fried after it filed for Chapter 11, revealed his surprise at the extent of the mess at FTX in a filing this week in federal bankruptcy court. Ray oversaw some of the biggest corporate failures in United States history, including the collapse of Enron.
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“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as has occurred here,” Ray said.
“From compromised system integrity and flawed regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” he added.
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