FTX Lawyers Escalate Threats To Politicians: Return Donations Or Be Sued

Authored by Kevin Stocklin via The Epoch Times,

FTX bankruptcy attorneys sent out private letters last week to politicians and PACs who received donations from the company, giving them until Feb. 28 to return the money voluntarily or face legal action.

According to a company statement, “to the extent such payments are not returned voluntarily, the FTX Debtors reserve the right to commence actions before the Bankruptcy Court to require the return of such payments, with interest accruing from the date any action is commenced.”

Based on data from the Federal Elections Commission (FEC), Coindesk, a cryptocurrency news site, identified 196 U.S. senators and representatives who accepted FTX donations. Meanwhile, Unusual Whales, a retail trading platform, compiled their own tally of political recipients of FTX money, who donated to whom, and whether or not the money was returned.

Largest donations by Sam Bankman-Fried to Democratic PACs (blue), GOP PACs (red), and Independent PACs (purple); data compiled by Unusual Whales. (UnusualWhales.com / Federal Election Commission)

Legal experts say it would probably be wise for the politicians to comply with FTX attorneys’ request before things go to court.

“John Ray [CEO of FTX in bankruptcy] and his team will likely pursue fraudulent transfer litigation against politicians and PACs if they do not return the funds, as FTX has repeatedly requested,” Thad Wilson, a partner and bankruptcy expert at King & Spalding, told The Epoch Times. Even though politicians may have a legal defense, he said, going to court would be expensive, and those who received only a few thousand dollars “would probably be better off returning the money. For larger recipients, like PACs and parties, the economics may look very different.”

Donations by Bankman-Fried to candidate PACS, Democrats (blue), and Republicans (red). (UnusualWhales.com / Federal Election Commission)

Wilson cited the precedent of Craig Berkman, a financier charged by the SEC with defrauding investors, who had donated to the presidential campaigns of John McCain, Mitt Romney, Mike Huckabee, and Rudy Giuliani in 2007-2008.

“After Berkman filed for bankruptcy in 2009, many of the campaigns and candidates who received funds from Berkman were sued and/or returned the funds to Berkman’s bankruptcy trustee,” Wilson said.

Collapse of FTX

FTX Founder Sam Bankman-Fried, together with other top FTX executives, lavished more than $70 million on politicians and political organizations leading up to the 2022 midterm elections, making FTX the third-largest political donor and Bankman-Fried the second-largest donor to the Democratic Party after George Soros.

According to data collected by the Committee to Unleash Prosperity, led by economist Stephen Moore, Bankman-Fried himself gave $40 million, mostly to Democratic candidates. His co-CEO, Ryan Salame, reportedly gave more than $20 million to Republicans and conservative groups. And FTX engineering director Nishad Singh reportedly gave nearly $13 million to Democrats and left-wing causes.

Bankman-Fried was arrested for securities fraud in December, following the collapse of FTX, his Bahamas-based cryptocurrency exchange, and Alameda Research, his crypto hedge fund. He was subsequently extradited to the United States to face criminal charges that included securities fraud, wire fraud, money laundering, and campaign finance violations. He was quickly released on a $250 million bond and is residing at his parents’ home in California, which was put up as collateral for the bond.

‘Timing of the Charges’

Currently, the House Financial Services Committee is itself investigating the FTX investigation. Committee Chairman Patrick McHenry (R-N.C.) and Oversight and Investigations Subcommittee Chairman Bill Huizenga (R- Mich.) issued a letter on Feb. 10 to SEC Chairman Gary Gensler demanding to know why Bankman-Fried was arrested just prior to his scheduled testimony before the House of Representatives on Dec. 13 and instructing him to preserve all records between the SEC and the Justice Department in connection with Bankman-Fried’s arrest.

“The timing of the charges and his arrest raise serious questions about the SEC’s process and cooperation with the Department of Justice,” the letter states. It was assumed that Bankman-Fried would be questioned at this hearing regarding, among other things, his political ties and donations.

At the height of his fame, Bankman-Fried was hailed as a financial genius and selfless philanthropist, worth $16 billion at one point, who vowed to give all his wealth away to progressive causes like saving the environment and preventing pandemics. He was also a strong supporter of a bipartisan bill to regulate the crypto market known as the Digital Commodities Consumer Protection Act.

This bill was sponsored by Sens. Debbie Stabenow (D-Mich.), John Boozman (R-Ark.), Cory Booker (D-N.J.), and John Thune (R-S.D.), all of whom received at least $5,800 in political donations from Bankman-Fried. Stabenow was the top recipient of individual donations to lawmakers, having received more than $25,000.

Among the largest overall recipients was President Joe Biden’s 2020 election campaign, to which Bankman-Fried reportedly donated more than $10 million in various forms. Asked if Biden planned to return that money, White House Spokesperson Karine Jean-Pierre refused to answer, stating: “I’m covered here by the Hatch Act.” Jean-Pierre added that she was “limited on what I can say and anything that’s connected to political contributions.”

The Hatch Act, passed in 1939, bans the use of federal funds for electoral purposes and also bans federal officials from coercing political support with the promise of public jobs or funds. It is unclear how the Hatch Act prevented Jean-Pierre from answering reporters’ questions.

‘You Have to Be Just’

According to Bruce Markell, a former bankruptcy judge and currently a law professor at Northwestern University, the answer to whether or not FTX would succeed in clawing back political donations in court is “a strong maybe.” FTX lawyers will likely claim that the donations were a fraudulent transfer according to bankruptcy laws that allow “debtors in possession” to recover donations made, in some cases, up to two years before the bankruptcy was filed.

To make a case for fraudulent transfer, FTX lawyers would likely argue that the company was already insolvent at the time of the donations and therefore that money rightly belongs to FTX creditors.

“The words have been used, ‘you have to be just before you’re generous,’” Markell said. Companies that are insolvent “have to pay creditors before you make donations.” With FTX accounting in notorious disarray and the high volatility of the valuations of FTX assets, however, the timing of the company’s insolvency could be a gray area.

“Google can make all the donations in the world they want because after they make donations, they have enough money left over to pay the creditors,” he explained. “FTX is an accounting nightmare.” Reaching a resolution in the courts, if it goes that way, would probably take years.

Some recipients have decided not to gamble and have returned the donations to FTX or to the U.S. Treasury Department. Others say they have donated the money to charity, but giving the money away may not get them off the hook.

‘Donation to a Third Party’

“Recipients are cautioned that making a payment or donation to a third party (including a charity) in the amount of any payment received from a FTX Contributor does not prevent the FTX Debtors from seeking recovery from the recipient or any subsequent transferee,” FTX warned.

“Making a charitable contribution is a nice public relations ploy to try distance yourself or your campaign from allegedly corrupt contributors,” Wilson said. “But giving the money to charity does not absolve a politician or her campaign from liability under the Bankruptcy Code or applicable state law.”

“The charities who receive money from politicians could be considered ‘subsequent transferees’ for fraudulent transfer purposes, and thus, they could get sued, too,” he said. “In fact, the politicians and PACs could be making things worse for the charities to which they are donating.”

The PACs themselves could be on the hook to repay millions even if the money has already been spent.

“As a ‘transferee’ of the funds, they would be liable for the payment if a court determines it was a fraudulent transfer,” Wilson said. And beyond that, the vendors or organizations that were paid by PACs could also be on the hook as “subsequent transferees.” Bankman-Fried and his family could potentially be held liable if they received FTX funds, or if they are found to be “aiding and abetting” fraudulent transfers.