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SBF could walk on campaign finance violations, FTX may even be liable - CREW's Stuart McPhail

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(Kitco News) - The highly anticipated criminal trial of Sam Bankman-Fried begins in two weeks, on October 3. And while much of the media coverage in the runup to the court proceedings has been devoted to the massive sums the former FTX CEO spent on luxurious condo/office complexes, beachfront properties, shady startups, and other extravagances, tens of millions of dollars were also funneled into the political campaigns of dozens of Senators, members of Congress, even the President.

Along with the multiple felony charges brought by the Justice Department (DoJ) for wire fraud, , SBF was also charged with violations of campaign finance laws. After objections from the Bahamas that these additional charges themselves violated the terms of his extradition to the United States, they were dropped, but quickly brought back, this time under the umbrella of the original wire fraud charges.

On December 7, 2022, less than a month after FTX declared bankruptcy and days after Bankman-Fried gave an interview to crypto blogger Tiffany Fong in which he made a series of shocking and incriminating statements about his hitherto undisclosed campaign finance contributions to Republicans, Citizens for Responsibility and Ethics in Washington (CREW) filed a formal complaint with the Federal Elections Commission (FEC) “seeking an immediate investigation and enforcement action against Sam Bankman-Fried and Unknown Respondents for direct and serious violations of the Federal Election Campaign Act.”

In their complaint, CREW cited the interview in which Bankman-Fried claimed he transferred funds “to Republicans” to influence “primaries” because that’s “where the good candidates” are elevated “against bad candidates,” and said that he purposefully structured these donations to evade public reporting.

“Taking him at his word, Bankman-Fried was able to direct at least $37 million to influence federal elections while evading federal laws that require disclosure of the true source of the contributions,” said CREW Senior Vice President and Chief Counsel Donald Sherman at the time. “Bankman-Fried said the quiet part out loud. He admitted that he violated federal laws designed to ensure Americans have transparency into those funding elections and now needs to be held accountable.”

In order to gain a deeper understanding of how these alleged campaign finance violations could play out in court, and how they could both impact and be impacted by the other criminal charges, Kitco News interviewed Stuart McPhail, CREW’s senior council and the lawyer who submitted the FEC complaint as well as a statement for the record to the House Committee on Financial Services.

McPhail began by saying that CREW has heard nothing from the FEC since their acknowledgement that they received the complaint, but that no news from the regulator is often good news.

“The complaint process at the FEC is essentially a black box,” McPhail said. “You file the complaint and then you hear nothing more until either it dismisses your complaint, or they file a lawsuit. We have heard nothing from the FEC about our case except a letter saying they got it. That both means the FEC has not dismissed the complaint, and the time has passed where they should have, they should have decided on initial steps, taken a vote on whether to investigate. So chances are they’ve opened an investigation and are investigating, but we don't know that.”

He said it’s also possible that the Justice Department is involved in getting criminal charges for the campaign finance violations, in which case the FEC may hold its investigation while the criminal process plays out. “We don’t know if the DoJ has made that request to the FEC, but that's possible as well.”

McPhail said the Bankman-Fried case is also shedding light on some serious loopholes in campaign finance law.

“He’s been charged not directly with violating campaign finance law, but with either conspiracy to violate campaign finance laws or wire fraud,” he said. “And one reason for that is campaign finance law has particularly high standards for criminal charges. To show someone directly broke campaign finance law, they have to have not only engaged in a crime, something criminal. They have to know that it’s a crime; they have to know that it’s illegal.”

McPhail said that it’s illegal to make a straw donation campaign contribution, but the law technically only covers three actors. “It covers the donor, so it’s your money and you pass it to someone else to hide who you are. That's illegal, you broke the law,” he said. “It covers the conduit, the person acting as the straw donor, passing the money on; it covers them, but they have to knowingly act. And it covers the recipient, but again, they have to know it's in violation.”

“But notice that people it doesn’t cover,” he said. “Unless you have touched the money, you actually haven’t broken campaign finance law,” he said. “When we filed our complaint, it was based on [SBF’s] interview, where he said, ‘I gave money, it's my money. I'm the third biggest donor. It's my money, I didn't want to be identified, so I used some sort of fraudulent donor to hide the source.’”

Where this gets more complicated, McPhail said, and what the DOJ may be investigating, is the possibility that he didn't actually give any of his own money.

“If what he did was he stole customer money, that's actually much more difficult,” he said. “I don't know any precedent on that in campaign finance law because it's not simply his money. You could say the moment he stole it, and then he passed it on, he's covered. Or you could say no, it was never his in the first place, he never had control, especially, depending what the facts are, if he told his colleagues to go steal the money out of this account and then pass it on, and it never actually went through his hands. You have complex questions of control.”

“But to get technically covered by campaign finance law, or a direct campaign finance law violation, you have to show it's his money, or he touched the money, it passed through his hands.”

This then raises the question of whether FTX as a company could be liable for the campaign finance violations. “Potentially, though it depends on the facts,” McPhail said. “Is it just FTX’s money, or is it customer money? Whose money is it, actually? And who had or lost control?”

“And then, in the case of FTX, corporations can make contributions to super-PACs, but they can't make contributions to candidates,” he said. “So it's possible that if it's actually FTX's money, then that could be not only a contribution, but a lawful corporate contribution.”

“If this is money that FTX has lost control of, and it's from their treasury, I don't know the laws for that,” he said. “What is the law to treat that? Is that the bank's money, or is that the customer's money? There's a question there to figure out.”

So the civil and criminal ramifications of tens of millions in campaign contributions change depending on whether the money belongs to Bankman-Fried (individual contribution), FTX (corporate contribution or fraud), or customer deposits (theft and fraud). But because all of these scenarios are in dispute, McPhail said the presidential, congressional and senate campaigns that received the money are under no obligation to return it until its status is determined by the courts.

“Until there's a court order saying, ‘this is stolen money, this should be returned,’ there's no legal obligation for anyone to return this money,” he said. “You can dispute that it's stolen, or deny it. That's putting aside the whole appearances thing, where they want to give it back before there's a judgment, for their own reasons.”

McPhail made a point of emphasizing, however, that if the money was indeed stolen, either from FTX or its customers, the campaign contributions would be illegitimate regardless of the particularities and idiosyncrasies of campaign finance law.

“The fact that it’s a campaign contribution does not remove it from the general rules applied to stolen goods,” he said. “If it turns out that's stolen money, then it goes into criminal law issues. That would be stolen goods. You have to return it. The campaign finance law issue gets triggered when you were using a conduit to hide your identity in a criminal scheme, and you didn't want to be identified as the source, and you used someone else.”

McPhail said much of that money may be unrecoverable even if the court finds that it constituted ineligible campaign contributions. “Some of these candidates maybe lost and don't have a campaign, don't have a public face,” he said. “Some past campaigns closed down. I imagine if you talk to victims of financial crimes, it's probably a very long future if people are trying to claw back all the money. There’s no guarantee they're made whole.”

As the trial approaches, it’s also possible that Bankman-Fried’s lawyers are trying to work out a plea deal with the DoJ similar to those of former Alameda CEO Caroline Ellison, FTX cofounder Gary Wang and former FTX Director of Engineering Nishad Singh, which would likely include guilty pleas for many if not all the charges in return for leniency from the court.

McPhail acknowledged that this would greatly simplify the situation, and would speed up the court rulings regarding the status of the millions funneled to politicians, but it doesn’t mean the money will be coming back to its rightful owners any time soon.

“Even with this guilty plea, if you have an individual saying, in court under oath, ‘this is stolen money I gave,’ that itself is not a court order to force the recipient to turn the money over,” he said. “You have to ask the court to order this release against the recipient. People always assume, you win a judgment, the court says, great, you can pay a million dollars, or this person's guilty, that's it, you just walk out the next day. There's a lot more that can be done. My guess is, if you're a victim of a crime and SBF is found guilty of it, or SBF is found guilty and sent to jail, that doesn't put any money in the bank account.”

Whatever the outcomes of the civil and criminal proceedings turn out to be, McPhail said this case serves to underline the importance of updating the campaign finance laws, which he believes are too easy to skirt as currently written. “If it turns out that SBF didn't give any of his own money, and it was all stolen goods, and if the court were to say, ‘stolen goods aren't SBF’s goods, so he's not a donor,’ then technically, he would get off,” McPhail said. “The FEC couldn't go after him, and we couldn't go after him. He may not have actually broken campaign finance law if he was actually more criminal than we first suspected.”

“There's still SBF using other people, if it's a conduit issue, if it's hidden,” he added. “Some other people may be liable, it’s possible to go after one of these other colleagues if they were the conduit, and you can name FTX as a defendant if it's their money. But maybe SBF himself gets off.”

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