Anyone Who Took Money From FTX Ought to Repay It

It was never Sam Bankman-Fried's to spend.

AccessTimeIconJan 5, 2023 at 6:37 p.m. UTC
Updated Jan 5, 2023 at 7:04 p.m. UTC
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In his testimony before the House Financial Services Committee, current FTX CEO Jay J. Ray III laid out the most convincing case that fraud was committed while former FTX CEO Sam Bankman-Fried held the reins at the bankrupt crypto exchange. Evidence strongly suggests FTX user funds were commingled, Ray wrote, in part to fund a lavish “spending binge” by the “FTX Group” beginning in late 2021.

Some $5 billion alone was spent by SBF’s “hedge fund” Alameda Research, with billions more currently unaccounted for as Ray traces outflows from FTX, SBF and various shell companies. Some of that money – used to invest in startups, line politicians’ pockets and pay out personal loans to employees – conceivably came from profits made by the exchange and trading shop.

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The rest, presumably, were misappropriated funds from customers and financiers – FTX, since its founding, had raised at least $2 billion (supposedly from some of the sharpest investors around). This is just one leg of the case brought by U.S. investigators against Bankman-Fried on Dec. 13, in addition to charges of money laundering, campaign-finance violations as well as wire and securities-related conspiracies. (He has pleaded not guilty to all charges.)

To a large extent, these allegations are now concerns for the court to weigh. But there is a separate, extrajudicial question for those bankrolled by Bankman-Fried to decide: whether to proactively return the money they received from the millennial Bernie Madoff. FTX liquidators have said they’ll be pursuing clawbacks in and out of court, though the legal situation is murky if people accepted and spent funds in good faith.

Ethically, however, things could not be more clear: Anyone who took funds from Bankman-Fried should feel compelled to return them. Upward of a million customers were affected by the collapse of FTX. Their money was likely misappropriated to fuel one of the largest financial frauds in history. If “dollars were fungible” in Mr. Bankman-Fried’s universe, then all money that flowed out of his coffers should be considered tainted.

Anyone who took funds from Bankman-Fried should feel compelled to return them

A sham reputation

Bankman-Fried spent big building a sham reputation as a philanthropist and business operator with a keen sense of acumen. It was this persona that helped shield the fraud as it developed. He attempted to buy out the U.S. political apparatus, giving at least $40 million in the last election cycle, and funneled money to media outlets like ProPublica, Fox Media, the Intercept, Vox, upstart publication Semafor and crypto-native company The Block.

While his business was a fraud, the money SBF spent was real. The self-professed “Effective Altruist” looked to maximize the impact of a dollar given away – often to good causes. Political pundit Matthew Yglesias said the FTX Future Fund was perhaps the largest philanthropic entity while it operated – giving millions to causes as diverse as animal welfare, climate research and pandemic prevention. But how good could a charity be if financed by fraud?

In a forum post for the Effective Altruist community, Molly Kovite, manager of legal operations at Open Philanthropy, suggested that Future Fund recipients not spend the money if it could be avoided, putting aside the moral argument, because it’s likely FTX’s liquidators will likely ask for the money back. Is anyone else depressed that the conversation is about sequestering funds rather than returning them?

A number of SBF’s recipients have already returned their funds, or pledged to. That is a sound strategic move for politicians and paid influencers looking to mitigate the reputational damage in being associated with a criminal enterprise – even if those criticisms aren’t always justified. Most recently, Semafor announced it would “redeem” the cash it received from SBF as part of its $25 million seed round – which may clear the air of accusations of bias.

Untangling funds

No doubt it can be challenging for companies – especially in the notoriously cash-strapped media industry – to untangle their financial relationships. But it seems like a necessary step; FTX’s ability to pay its debts and make customers whole depends on it.

This is of course complicated by the fact that much of the capital has already been spent – like at Vox’s Future Perfect project, a recipient of funds from Sam and his brother Gabriel’s nonprofit Building a Stronger Future. Unlike, say, The Block’s former CEO Mike McCaffrey, who was essentially bribed with “loans” to fund the outfit and buy real estate, Vox cannot just liquidate an ill-gotten Bahamian apartment. Future Perfect’s reporting was paid for and published (and a lot of it is great). The project is on pause, but perhaps Vox can redirect a portion of advertising dollars to the bankruptcy estate.

If that sounds naive, know that it’s only because I’m arguing for a very simple solution to what is apparently a very complicated process. Semafor, for instance, claimed not to know who to give the funds back to – it sure didn’t want to reimburse SBF himself. There are more than 100 entities tied up in the FTX bankruptcy process, many spun up with the apparent purpose of funneling money around, which is made all the worse by FTX’s criminally shoddy record-keeping. But when an apparent injustice falls, the right thing to do is to do what you can.

Again, I should note the legal situation around clawbacks is at best murky. John J. Ray may have authority to request or roll back funds that were transferred out of the company in the days and months before the bankruptcy occurred – including $5 billion in withdrawals during the so-called “run” on FTX. Ray may also be able to argue that just about every political and charitable donation SBF made is what’s called a “fraudulent transfer,” within a window of two to four years under various bankruptcy laws.

But, really, the question isn’t whether the FTX bankruptcy estate can or should take back the funds. The money was never Sam’s to spend.


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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.

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