Lawmakers, primarily Democrats, are under pressure to part ways with millions of dollars worth of donations from FTX founder Sam Bankman-Fried following the company’s spectacular collapse.
Bankman-Fried, 30, was vaunted by some as the second coming of legendary investor Warren Buffett and did not shy away from spending his fortune on politics. All told, Bankman-Fried spent nearly $40 million on campaigns this election cycle. Among those donating mainly 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 several federal and congressional investigations into the possible misuse of funds and defrauding of customers, questions have arisen about whether the candidates and organizations Bankman-Fried bankrolled will end up giving up the money.
Some lawmakers have already said they are donating the money given to them by Bankman-Fried.
Those reluctant to give back the funds may be forced to do by a court, said Kathy Bazoian Phelps, a partner at Raines Feldman LLP.
“There is a legal basis potentially to seek the return of those monies that were transferred under both the bankruptcy code and state statutes, what are called fraudulent transfer laws,” she told the Washington Examiner. “There are defenses that can be asserted, there are certain exemptions, so there is a chance that a lot of those issues will get played out in court, but those transfers will certainly be examined.”
Sen. Dick Durbin (D-IL) and Rep. Chuy Garcia (D-IL) told the Daily Beast that they are donating Bankman-Fried’s contributions to them to charity and Sen. Kirsten Gillibrand (D-NY) said she was donating the money to a nonprofit organization that promotes “individual wealth and economic development in low-to-moderate income communities.”
Rep. David Schweikert (R-AZ), who also accepted money from Bankman-Fried, said that he planned to part ways with the funds.
“If the person who made an individual contribution engaged in bad acts, yeah, 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 committed by Bernie Madoff and was worth more than $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 has been able to claw back more than 75% of the approved claims, or roughly $17.5 billion. An appeals court ruled in 2020 that investors who profited off of the scheme without knowledge that it was a Ponzi scheme still have to pay back their profits.
Phelps, who wrote The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, said that if there is a concerted attempt to recoup the FTX funds, it is unclear how much will ultimately be returned, given the variability of success. She said that returns in past cases have ranged from 0% to 100%, although she said that more often than not the number is under 50%.
“The size and scope of it makes it stand 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 about 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 taking advantage of what the lawsuit called “unsophisticated investors.”
“The deceptive and failed FTX Platform was based upon false representations and deceptive conduct,” the suit reads.
John Ray, the new CEO who took over the company from Bankman-Fried after it filed Chapter 11, revealed his surprise at the extent of the mess at FTX in a filing this week in federal bankruptcy court. Ray has overseen some of the largest 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 trustworthy financial information as occurred here,” Ray said.
“From compromised systems integrity and faulty 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.
