Will SBF become a "prisoner" because of the FTX crash?

Less than a week after FTX’s bankruptcy, Sam Bankman-Fried (SBF) and FTX are already under investigation by at least five U.S. regulators: the U.S. Securities and Exchange Commission ( SEC ), the Department of Justice, the Commodity Futures Trading Commission ( CFTC ), the Texas State Securities Board, and the California Department of Financial Protection and Innovation. On November 14, a source told Reuters that prosecutors working with the U.S. Department of Justice’s Southern District of New York have launched an investigation into FTX’s implosion.

The crypto community's shock at FTX's sudden collapse is turning into anger, as SBF used customer funds to "transfuse blood" to other affiliated companies, and the person who was once the most trusted in the crypto field became a scammer who embezzled customer funds. The question now is, what criminal consequences will SBF face? In addition to financial penalties, will SBF go to jail for the FTX disaster?

Professional lawyers say any criminal conviction would need to overcome two potential obstacles.

The first is jurisdiction. One challenge facing U.S. prosecutors is to show that they have jurisdiction over FTX.

FTX is an offshore business based in the Bahamas that claims not to serve U.S. users, so defense lawyers could argue that its executives’ actions were beyond the reach of U.S. law enforcement.

However, Randall Eliason, a law professor at George Washington University and a former U.S. prosecutor, told Fortune that the U.S. Department of Justice is very good at finding “clues” that connect overseas defendants to the U.S. For example, contacts between FTX and U.S. banks, emails, meetings held in the U.S., or other interaction histories.

Specifically, when funds are transferred through U.S. banks or even when emails related to the crime pass through the U.S. The most flexible charge prosecutors can use is wire fraud, which requires only that a false statement be made using an electronic communication.

The second potential obstacle to criminal prosecution is criminal intent. Mismanaging a company and causing large financial losses is not a crime, and this happens all the time in financial markets. For a criminal case, the necessary element is the existence of deception.

Specifically, any conviction will depend on whether SBF was simply incompetent or careless, or whether it intentionally concealed and deceived investors.

Based on the information we have learned so far, the most fatal blow to FTX may be the act of lending customer funds to Alameda Research.

FTX’s terms of service tell its users: “Any digital assets in your account are not the property of FTX Trading and should not or may be loaned to FTX Trading.”

Regulated securities and derivatives markets generally prohibit the use of customer funds for proprietary trading or lending without the investor's consent. In the unregulated crypto market, no such customer protection rules exist. However, legal experts say using customer funds for undisclosed purposes could constitute fraud or embezzlement.

"It's going to come down to, was there an intentional lie to convince depositors or investors to part with their assets? Was there false statements made that the makers knew were false and were made with the intent to defraud investors?" Samson Enzer, a former Manhattan federal prosecutor, told the Wall Street Journal.

The internet has memory. The attorney said prosecutors could base their investigation on statements SBF made on Twitter, in which he said FTX was “fine” and customer assets were safe (although those tweets were later deleted), and prosecutors only had to prove that SBF intentionally misled customers when he wrote those tweets.

“This is all potentially strong circumstantial evidence,” Aitan Goelman, a partner at Zuckerman Spaeder LLP and a former federal prosecutor and CFTC enforcement chief, told the Wall Street Journal.

An unnamed crypto lawyer told Fortune that SBF’s actions and FTX’s business practices clearly indicate fraud, as evidenced by FTX’s terms of service, the company’s investor presentations, and SBF’s public statements.

The crypto lawyer added that all the elements are in place for the U.S. Department of Justice to file a lawsuit under Section 1343 of the federal criminal code, which covers wire fraud — a variety of fraud committed with the help of electronic tools. The statute carries a maximum sentence of 20 years in prison.

SBF has not been charged with any offences and is presumed innocent until formally found guilty in a court of law.

If the U.S. Department of Justice does bring criminal charges, the agency would also have to arrest FTX executives involved in any wrongdoing, which would require finding them and arranging extradition. Semafor, a news agency invested by SBF, cited people familiar with the matter as saying that several FTX executives have flown to Hong Kong, but SBF remains in the Bahamas.

There is no shortage of Ponzi schemes, frauds and rug pulls in the crypto field. The bankruptcy of FTX is just a repeat of history. Facing the questions from retail investors and institutions, SBF only expressed in a tweet that he was "sorry" for the whole situation. However, entrepreneurs who have no moral bottom line will eventually be ruined and even go to jail, no matter how glorious they are for a while.