The sudden arrest of disgraced FTX founder Sam Bankman-Fried ensnarled Washington on Tuesday, as Democrats and Republicans began to sort through the political wreckage — and looked to distance themselves from one of their chief benefactors in the 2022 election.
But lawmakers came to find that Bankman-Fried presided over a deeply troubled enterprise, one whose flaws had eluded scrutiny in Washington until FTX declared bankruptcy last month. Then, mere hours before Bankman-Fried was supposed to answer Tuesday for his actions at a congressional hearing, federal prosecutors secured his surprise arrest in the Bahamas for eventual extradition to the United States — filing charges alleging he misled investors and mishandled billions in funds.
The news rocked Capitol Hill, where lawmakers in both parties blasted Bankman-Fried for his alleged crimes — and expressed fears about further, rampant abuse in the largely unregulated crypto industry.
“My fear is that we will view Sam Bankman-Fried as just one big snake in a crypto Garden of Eden,” Rep. Brad Sherman (D-Calif.) remarked at the House hearing where Bankman-Fried had been due to appear. “The fact is, crypto is a garden of snakes.”
For others in Washington, the FTX founder’s arrest carried immediate political implications, since federal officials coupled their fraud charges against Bankman-Fried with allegations he conspired to commit multiple violations of campaign finance laws involving donations in the “tens of millions of dollars.”
In the two years leading up to last month’s elections, the crypto executive donated $40 million to candidates and campaign groups, according to federal records. Most of his money went to Democrats, though Bankman-Fried has alluded to additional, undisclosed contributions to Republicans. His publicly reported giving to Democratic-aligned groups was surpassed this election cycle only by that of George Soros, the liberal financier.
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What charges is Sam Bankman-Fried facing?
- Federal prosecutors in the Southern District of New York unsealed an eight-count indictment against Bankman-Fried, alleging fraud and conspiracy.
- The Commodity Futures Trading Commission filed fraud charges against him, seeking restitution for investors and customers in civil court.
- The Securities and Exchange Commission lobbed its own civil charges at Bankman-Fried for allegedly “orchestrating a scheme to defraud equity investors.”
‘Plain old embezzlement’
- Sam Bankman-Fried dropped his objection to extradition from the Bahamas and is expected to face charges in a federal court in Manhattan.
- FTX customers will not fully recover their money, the company’s new CEO, John J. Ray III, told the House Financial Services Committee.
- Ray sees the alleged crimes of the crypto company’s collapse as simple, despite the seemingly complex nature of the circumstances. “This isn’t sophisticated whatsoever. This is just plain old embezzlement,” he said.
What does this mean for the crypto industry?
- Bankman-Fried gave about $40 million in political donations this cycle. See who benefited.
- The collapse has focused new scrutiny on the lack of oversight and regulation in an industry that has operated outside conventional banking rules.
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Two of Bankman-Fried’s biggest beneficiaries in 2022 were the House Majority PAC and the Senate Majority PAC, which help elect Democrats to their respective chambers. Those organizations alone received about $7 million from him over the past two years, federal data shows. Yet neither group — along with a raft of other Democratic and Republican organizations — would say Tuesday whether they planned to return the cash.
“Anybody who received political contributions from this person ought to be worried about whether everything was aboveboard,” said Noah Bookbinder, chief executive of Citizens for Responsibility and Ethics in Washington (CREW).
The scramble again laid bare the consequences of lawmakers’ own inattentiveness to the rise of cryptocurrency. Once a fad form of investing among a cadre of digital natives, the ecosystem of digital wallets, tokens and other tools has evolved into an increasingly powerful, profitable force — one shaping the country’s political and financial systems in real time.
Before its collapse, FTX had been the third-largest crypto exchange in the world by volume, amassing massive sums that its top executive, Bankman-Fried, allegedly misused in ways that brought down the company and others connected to its fortunes. In response, federal prosecutors indicted him on eight criminal counts Tuesday, while financial regulators — the Securities and Exchange Commission and the Commodity Futures Trading Commission — each brought civil charges.
As federal officials unfurled their allegations, lawmakers on Capitol Hill embarked on their own probe, despite Bankman-Fried’s absence. The scene was striking, coming one year — almost to the exact day — after the FTX founder last appeared in front of the same committee and promised to work alongside Congress to have a “positive impact on the world.”
Opening the marathon gathering, Rep. Maxine Waters (D-Calif.), the powerful chairwoman of the House Financial Services Committee, said she was “deeply troubled to learn how common it was” for the former chief executive to “steal from the cookie jar” at FTX. She blasted Bankman-Fried for his impropriety, which allegedly included the use of company funds to pay for his “lavish” lifestyle.
Across the Capitol, Senate lawmakers prepared for their own hearing Wednesday — a session of the Banking Committee that Bankman-Fried had intended to skip before his arrest. Some panel members said they hoped the FTX scandal might inspire lawmakers to pay more attention to the nascent digital field.
“I’m sure as heck glad we didn’t rush to some loose regulatory structure that would have potentially allowed crypto a legal way into our financial networks,” said Sen. Mark R. Warner (D-Va.), promising that he had “a lot of questions” for crypto executives in the days ahead.
Another panel member, Sen. Tina Smith (D-Minn.), said lawmakers going forward needed to “fill the gaps where there are gaps,” adding: “You can’t gamble with your customers’ money. We need to make sure that applies to crypto exchanges, if [it doesn’t] already.”
Yet many lawmakers faced questions of their own, having benefited from the $40 million in Bankman-Fried’s known federal donations — and tens of millions more from other top executives at FTX. The problems were more than mere optics, since federal officials charged the former chief executive with multiple campaign finance violations. That included allegations that Bankman-Fried illegally sourced some of the funds from his related crypto hedge fund, Alameda Research, then reported the contributions in the names of others, according to the Justice Department.
“All of this dirty money was used in service of Bankman-Fried’s desire to buy bipartisan influence and impact the direction of public policy in Washington,” said Damian Williams, the U.S. attorney for the Southern District of New York.
Federal Election Commission regulations require that committees refund illegal contributions, including those improperly made in the name of another donor, within 30 days of the date on which the illegal giving was discovered. If the committees lack sufficient funds, they are required to use the next dollars they receive.
The charges came days after the watchdog organization CREW filed a formal complaint with the FEC, pointing to Bankman-Fried’s public comments that he had donated significant sums to “dark money” groups to elect Republicans. Such groups do not have to disclose their donors.
It is unclear to whom Bankman-Fried donated those sums, and the extent to which the organizations also may have broken the law in accepting them. Yet even those who received his money in more public-facing, legal forms found themselves grappling with whether they should keep it.
Two key lawmakers, Sens. Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.), on Tuesday confirmed their offices had donated or would donate the money they had received from Bankman-Fried to charity. The two had worked hand-in-hand with the now-disgraced crypto mogul on legislation seen as friendly to the industry.
Bankman-Fried also gave $6 million to the House Majority PAC, the main super PAC supporting House Democrats; $1 million to the Senate Majority PAC, which supports Senate Democrats; and about $1 million to the Democratic National Committee and an allied group. He also gave $1.3 million to a super PAC backing Latino House candidates and $2 million to a super PAC supporting mostly Democratic candidates seen as friendly to cryptocurrency.
A spokeswoman for the Senate Majority PAC declined to comment about the cash from Bankman-Fried. Representatives for the other groups did not respond to requests for comment.
Bankman-Fried directed millions in contributions through Protect Our Future, a group that boosted candidates committed to pandemic preparedness and other causes under the umbrella of a philanthropic approach known as effective altruism. The former FTX chief has acknowledged in recent weeks that his philanthropy was shaped by business imperatives, saying in an interview at the New York Times DealBook Summit: “We thought about ourselves as legitimately trying to do good, but we also thought about what we could do to make sure that our image reflected that.”
Protect Our Future gave to a broad array of candidates, party committees and left-leaning causes. Those ranged from a super PAC that backed Carrick Flynn, who ran unsuccessfully in the Democratic primary for an open House seat in Oregon, to the campaign arm of Everytown for Gun Safety, the gun control advocacy group.
The Flynn-aligned super PAC did not respond to a request for comment. Max Steele, a spokesman for Everytown, said Bankman-Fried’s in-kind contribution took the form of polling conducted in the spring. He said there was no cash to return.
Along with Bankman-Fried, another FTX executive, Ryan Salame, gave publicly — and prolifically — to GOP groups, shelling out about $25 million in the 2022 election cycle. Representatives for the main GOP super PACs competing for control of Congress, which received money from him, did not respond to requests for comment. Salame also did not respond to an email seeking comment.
Brad Deutsch, who served as general counsel to the 2020 presidential campaign of Sen. Bernie Sanders (I-Vt.), said groups have several options for handling “tainted money,” beyond seeking to return the cash to its source. They can disgorge the money to the Treasury Department, he said, or send it to charity.
“We’re still very early in this story,” Deutsch cautioned. “For all we know, the funds are his personal funds. If I were advising a client, I would say it’s a PR thing. Put out a press release saying, ‘At the time we accepted, we had no idea of the alleged wrongdoing.’”
Even before his arrest, though, some lawmakers had started trying to separate themselves from a man who had once been in their better graces.
Rep. Hakeem Jeffries (D-N.Y.), who is set to become House minority leader in the next Congress, donated his contributions to the American Diabetes Association several weeks ago, according to an aide. Sen. Joe Manchin III (D-W.Va.) contributed his sums to a local food bank before Thanksgiving, the office said. And Sen. Kirsten Gillibrand (D-N.Y.), a longtime crypto advocate, gave her donation last month to a nonprofit fighting poverty, according to a spokesman.
Tory Newmyer and Shayna Jacobs contributed to this report.