SDNY Wants SEC, CFTC To Postpone Cases Against Bankman-Fried

Prosecutors in the Southern District of New York (SDNY) have asked the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to postpone their cases against the disgraced founder of FTX, Sam Bankman-Fried. 

Prior to filing for bankruptcy on Nov. 11, FTX was one of the biggest cryptocurrency exchanges in the world. After being arrested in the Bahamas in December, Bankman-Fried was extradited to the United States, where he currently faces eight federal charges related to financial fraud.

Additionally, the SEC filed a civil lawsuit against Bankman-Fried on Dec. 12 last year for violating anti-fraud provisions. A day later, the CFTC filed a lawsuit against the founder for fraud and material misrepresentations.

Attorney Damian Williams of SDNY noted in a court filing that civil lawsuits could allow Bankman-Fried to “improperly obtain impeachment material regarding the Government’s witnesses, circumvent the criminal discovery rules, and improperly tailor his defense in the Criminal Case.”

Williams also noted that it Bankman-Fried’s attorneys could benefit from civil proceedings and use the opportunity to improve his defense in the federal case. As such, he requested to temporarily halt civil cases while federal investigations continue.

Aaron Kaplan, the co-CEO of Prometheum, a NYC-based fintech company building a Federal Securities Law compliant, blockchain native, public market and custodial infrastructure for digital assets told Blockworks that in criminal white collar fraud cases, it is common to deny criminal defendants the ability to use civil cases for discovery.

“This can be used in the defense of the criminal matter,” Kaplan said. “Prosecutors regularly argue that abuse of civil discovery processes, including by way of depositions, is used by defendants to intimidate prospective witnesses in the criminal matter.” 

This sentiment is shared by David Maria, the general counsel and chief legal officer at Bittrex.

“It is routine to seek to delay civil proceedings when criminal proceedings are pending. If the government doesn’t ask to stay the civil proceedings, the defendant facing criminal charges typically will,” Maria said.

This is not the first time that US prosecutors have requested a halt in action from civil cases. In July 2018, the SEC paused its investigations into crypto scammer Renwick Haddow after it was determined that both the civil and criminal cases were rooted in the same set of circumstances.

No contact allowed with the outside world

The former FTX founder pleaded not guilty to the charges against him in December last year. He is currently out on bail for $250 million.

Despite being under house arrest, many guests have been able to visit him in his family residence, including prominent financial journalist Michael Lewis — the author of Wolf of Wall Street. 

It was also revealed that Bankman-Fried had been contacting past and present FTX and Alameda employees through messaging app Signal. 

As the court believed that his messages were obstructive and could influence witnesses, judges decided to forbid the founder from using any communication tools to contact the outside world, other than his immediate family members. 

Bankman-Fried’s lawyers filed a joint request on Monday to modify his bail conditions so that he could be allowed to use unencrypted text messaging services under the circumstances that his phone was monitored.

This was met with resistance from federal officials, who have since denied his request “without prejudice,” meaning Bankman-Fried is free to make the same or a similar request again in the future.

Updated, Feb. 8 at 7:45 am ET, with additional comments.

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