Jurors in New York found Sam Bankman-Fried guilty of engaging in a massive fraud related to the collapse of his FTX crypto exchange. Bankman-Fried’s arrest last December, weeks after his exchange filed for bankruptcy, marked a dramatic escalation in the efforts by regulators and prosecutors to rein in what they perceive as excesses in the industry.
His case was far from the first – or last – time that crypto founders and executives found themselves in legal hot water related to their digital-asset activities.
On the docket:
Terraform Labs co-founder Do Kwon was charged by US prosecutors with orchestrating a yearslong fraud that wiped out at least US$40bil (RM189.18bil) in market value, one of the triggers of the crisis at FTX. Kwon, already a fugitive from charges in his native South Korea, was arrested in Montenegro in March when he tried to board a private jet en route to Dubai. In June, he was sentenced to four months in prison by a Montenegrin court for attempting to travel with a forged passport.
Kwon and the company he founded have also been sued by the US Securities and Exchange Commission for allegedly offering and selling unregistered securities and carrying out the alleged fraud that wiped out the project’s market value. This week the SEC asked a federal judge for a summary judgment in the case. Kwon’s lawyers have said that the US regulator’s lawsuit is unfounded.
Alex Mashinsky, the former chief executive of cryptocurrency lender Celsius Network, was arrested in July and charged with wire fraud and other crimes by US prosecutors. He is accused of waging a multiyear scheme to mislead customers before Celsius collapsed with more than US$1bil (RM4.73bil) in debt. Prosecutors also accused him of pumping up the price of his firm’s cryptocurrency to entice customers to the platform so he could line his pockets with tens of millions of dollars. He has pleaded not guilty to the charges. The trial has been set for September 2024.
Su Zhu, co-founder of the bankrupt Three Arrows Capital hedge fund, ended up in jail in Singapore last month after liquidators decided to apply maximum pressure following months of sparring over locating the failed company’s assets. The directive that landed Zhu in jail is a Singapore committal order that carried a four-month prison term. Teneo, the liquidator, said in September that it had obtained such orders for Zhu and Three Arrows’ other founder, Kyle Davies. The orders are civil matters and neither man has faced any criminal charges in Singapore.
Three Arrows imploded in 2022 as leveraged bets blew up, stoking a US$2 trillion (RM9.46 trillion) digital-asset rout that contributed to a spate of other collapses in the sector. Liquidators have accused Zhu and Davies of failing to cooperate meaningfully with their probe and are seeking to recover US$1.3bil (RM6.15bil) from the two. Zhu has previously said that his and Davies’ good-faith efforts to cooperate with liquidators “was met with baiting” and counsel to the former hedge fund executives have said that court orders the liquidators have obtained are “baseless.”
Thomas Smith, Kyle Nagy, and Braden Karony – the people behind the crypto token SafeMoon – were accused by federal prosecutors this week of using millions of dollars of investors’ funds to buy luxury homes and McClaren sports cars. The US Department of Justice and Securities and Exchange Commission sued them in federal court in Brooklyn, alleging that they defrauded investors in the once-popular token.
Prosecutors said that they diverted and misappropriated millions of dollars’ worth of SafeMoon, which once boasted a 19,000% price gain amid the 2021 crypto frenzy. Karony was arrested in Utah, and Smith was arrested in New Hampshire, according to the office of the US Attorney for the Eastern District of New York. Nagy remains at large, the office said. Lawyers for the plaintiffs did not respond to a request for comment.
Jail time:
San Francisco-born Ross William Ulbricht, aka Dread Pirate Roberts, is serving life in prison without possibility of parole for operating Silk Road, an online marketplace where people could use Bitcoin to buy drugs, hacking tools and fake passports. The former Eagle Scout was arrested in 2013 and convicted of charges including distributing narcotics and conspiring to commit money laundering and computer hacking in 2015, when he was 31 years old. The narcotics distributed on Silk Road have been linked to at least six overdose deaths across the world, prosecutors said.
Charlie Shrem, the former chief executive of crypto exchange BitInstant, was sentenced in 2014 to two years in prison for his role in knowingly transmitting nearly US$1mill (RM4.73mil) in Bitcoin intended to facilitate drug trafficking on Silk Road. Prosecutors also accused Shrem – who had served as vice chairman of the Bitcoin Foundation – of using the illegal online marketplace to buy drugs for himself. Shrem has long been released, and is a crypto venture capitalist.
Mark Karpeles, former chief executive officer of the bankrupt crypto exchange Mt. Gox, was found guilty of tampering with financial records by a Japanese court in 2019 and sentenced to more than two years in prison. The sentence was suspended and Karpeles avoided prison time, although he had previously spent nearly a year in pre-trial detention.
Karpeles, a central figure in the early days of Bitcoin, sometimes mixed his personal finances with those of the exchange and fiddled with its accounts, allegedly to hide the fact that the platform had lost money to hackers, according to the Tokyo District Court. The court cleared Karpeles of embezzlement charges, concluding that the Frenchman had acted without ill intent.
Nathaniel Chastain, a former employee at the nonfungible token marketplace OpenSea, was sentenced in August to three months behind bars after his conviction in the first-ever insider-trading case involving digital assets. Chastain, who used confidential information as head of product at OpenSea to make thousands of dollars, was found guilty in May of wire fraud and money laundering. He was also ordered to forfeit 15.98 Ethereum tokens, worth about US$26,000 (RM122,967), and pay a US$50,000 (RM236,475) fine.
Faruk Fatih Ozer, who ran collapsed Turkish crypto exchange Thodex until it imploded in 2021, was sentenced to 11,196 years in prison by a Turkish court earlier this year. His charges included aggravated fraud, leading a criminal organisation and money-laundering. Ozer, a high-school dropout who founded Thodex in 2017, fled to Albania after the exchange went bust, and was extradited back to Turkey. – Bloomberg
