Bankman-Fried charges showcase U.S. prosecutor’s growing role in crypto enforcement

By Luc Cohen and Chris Prentice

NEW YORK (Reuters) – When he took office as the top federal prosecutor in Manhattan in late 2021, Damian Williams pledged to prioritize “rooting out corruption in our financial markets.”

Now, with the fraud charges filed earlier this week against Sam Bankman-Fried, the founder of the bankrupt FTX exchange, Williams has further solidified his office’s growing role in prosecuting financial crimes involving cryptocurrency, according to interviews with a half-dozen former prosecutors.

“Every U.S. attorney is defined in the public eye by some of the biggest cases that they bring,” said Harry Sandick, a partner at law firm Patterson Belknap and former Manhattan federal prosecutor. “This will forever be connected to the current U.S. attorney.”

The indictment against Bankman-Fried – who was charged with using billions in stolen customer funds to buy real estate, pay debts for his hedge fund, Alameda Research, and donate to political campaigns – situates Williams as a primary adversary for the high-profile entrepreneur whose downfall has captured public attention and led to calls for greater regulation of cryptocurrency platforms.

Bankman-Fried, 30, has acknowledged risk management failures at FTX but said he does not believe he has criminal liability. His lawyer said he is evaluating his legal options. On Tuesday, a judge in The Bahamas ordered him detained there while he contests a U.S. extradition request.

Williams led the Southern District of New York’s (SDNY) securities and commodities task force before being nominated as the district’s top prosecutor by President Joe Biden. Williams, SDNY’s first Black U.S. attorney, earned his law degree from Yale and clerked for former Supreme Court Justice John Paul Stevens as well as current Attorney General Merrick Garland when Garland was an appellate judge.

Earlier this year, Williams brought the first-ever insider trading cases involving digital assets with charges against a former employee of non-fungible token trading platform OpenSea as well as a former product manager at Coinbase (NASDAQ:) Global Inc, an FTX rival.

Both those defendants have pleaded not guilty.

SDNY has long been known as one of the most muscular enforcers of financial crimes, and some former prosecutors compared Williams’ string of crypto-related prosecutions to the focus on insider trading by Preet Bharara, who served as U.S. Attorney from 2009 to 2017 and secured convictions of fund managers such as Raj Rajaratnam.

Williams was a prosecutor on several high-profile financial crimes cases during Bharara’s tenure, including the insider trading conviction of former Goldman Sachs (NYSE:) board member Rajat Gupta and the fraud conviction of a former portfolio manager at Visium Asset Management LP.

“Crypto is the Wild West, but at the end of the day fraud is fraud,” said Mike Ferrara, a former prosecutor and now an attorney with Kaplan Hecker & Fink LLP in New York. “Damian is doing a good job of saying, ‘we’re going to push the envelope in crypto,’ the way Preet was aggressive about insider trading.”

A spokesman for Williams’ office declined to comment.

‘COME SEE US BEFORE WE COME SEE YOU’

Pursuing cryptocurrency-related prosecutions is not without challenges. Defense lawyers may argue that because the sector is relatively new and questions about how it will be regulated are still being worked out, their clients were not clear on how laws crafted for traditional finance applied to them.

“The government is having trouble keeping up and making clear to participants in the industry what they’re supposed to be doing,” said Elise Maizel, a professor at NYU School of Law and former white-collar defense lawyer. “With these criminal cases, a lot of the time they’re regulating through enforcement.”

In one setback for prosecutors, three former founders of crypto exchange Bitmex and its first employee – who pleaded guilty to charges brought by Williams’ predecessor of failing to establish an anti-money laundering program – earlier this year received lighter sentences than prosecutors requested.

The judge in that case said that while the crime was serious, prosecutors had not brought more weighty charges of money laundering or fraud, and there were no identifiable victims.

To be sure, Williams’ office has pursued more traditional financial crimes cases as well, with charges filed this year against the founder of Archegos Capital Management for lying to banks to obtain loans before the firm’s meltdown, and against the former chief investment officer at a unit of Germany’s Allianz (ETR:) SE for inflating fund results.

Both pleaded not guilty.

In the wake of Bankman-Fried’s arrest, Williams has made clear he would plow on with cryptocurrency enforcement. On Wednesday, he announced wire fraud conspiracy charges against the founders of two separate cryptocurrency mining and trading companies he called Ponzi schemes.

The five individuals charged in one of the cases have pleaded not guilty, while the three individuals charged in the other have not yet entered pleas.

On Tuesday, Williams told reporters more charges in the FTX probe were possible.

“This investigation is very much ongoing and it is moving very quickly,” Williams said. “To anyone who participated in wrongdoing at FTX or Alameda Research and who has not yet come forward, I would strongly encourage you to come see us before we come see you.”

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