Why Samuel Bankman-Fried’s Parents May Have To Pay Treble Damages For Any Assets They Received From FTX

I’ll start this text with the very critical caveat that I do not know whether or not Samuel Bankman-Fried’s dad and mom obtained any belongings from FTX, Alameda Analysis, or any of the quite a few enterprise entities affiliated with that group. That is essentially, due to this fact, a hypothetical dialogue of what may occur if they’ve obtained such belongings. There have been recommendations within the media, as an illustration, that Bankman-Fried’s dad and mom obtained the title to a $16.4 million home within the Bahamas that was supposedly meant to accommodate FTX employees, and that Sam’s father, Joseph Bankman, “obtained funds from FTX and was closely concerned within the doomed platform’s operations”, in keeping with a minimum of one article. I disclaim any data of whether or not that’s true or not ― that’s for FTX’s de facto chapter trustee John Ray to determine ― however as an alternative we’ll proceed underneath the purely hypothetical assumption that Joseph Bankman and Barbara Fried did in reality obtain belongings from FTX.

Now with that the prolonged lawyer’s caveat out of the best way ― by no means a nasty thought when speaking about points probably instantly affecting Stanford regulation professors ― let’s transfer on to the enjoyable stuff.

Bankman-Fried’s dad and mom reside in California, which implies that there’s a excessive chance that California regulation will apply to them in an assortment efforts by FTX or its collectors. That is dangerous sufficient for them, since California has maybe probably the most comprehensively-drafted and creditor-friendly judgment enforcement legal guidelines in america, if not the complete world. However on this specific case, California’s regulation is far worse for Bankman-Fried’s dad and mom.

The ache arrives by the use of a civil reason behind motion often known as “civil theft”. Mainly, California Legal Code § 496(a) supplies that an individual who knowingly receives stolen property is responsible of a criminal offense. That is dangerous sufficient, however then § 496(c) goes on to say that any one that has been injured by the theft “might convey an motion for thrice the quantity of precise damages, if any, sustained by the plaintiff, prices of swimsuit, and affordable legal professional’s charges.”

How § 496(c) works was not too long ago defined by the California Supreme Courtroom in Siry Inv., L.P. v. Farkhondehpour, 13 Cal. fifth 333 (2022), the place one companion in an actual property partnership basically embezzled cash from the partnership to the detriment of the opposite companions. Whereas noting that civil theft didn’t apply to peculiar industrial defaults or breach of contract instances, and the creditor has to show {that a} crime occurred, the California Supreme Courtroom lastly concluded that, “A plaintiff might get better treble damages and legal professional’s charges underneath part 496(c) when property has been obtained in any method constituting theft.”13 Cal. fifth at 361.

Right here, Samuel Bankman-Fried has been indicted ― however not convicted ― of the theft of buyers’ moneys within the billions of {dollars}. Whether or not or not he’s finally convicted, if collectors can show that the theft occurred then they’ll assert their civil theft declare in opposition to Bankman-Fried’s dad and mom and search treble damages plus their attorneys charges. Thus, on receiving title to the $16.4 million home within the Bahamas alone, Bankman-Fried’s dad and mom may face potential civil legal responsibility upwards of $49.2 million. The dad and mom will surely have quite a few authorized defenses obtainable to them in opposition to such a declare, such that they did not know that Sam was stealing cash from buyers, however with Joseph Bankman’s allegedly deep involvement in FTX’s operations, proving this kind of protection is perhaps an uphill climb.

Whether or not such a civil theft award would finally be collectible is a completely completely different query. Bankman-Fried’s dad and mom have already indicated that simply funding Sam’s authorized protection alone might wipe them out. Bankman-Fried’s dad and mom are themselves additionally more likely to face substantial authorized payments making an attempt to defend themselves in opposition to creditor claims. When the mud lastly settles, as it will definitely does in all of those instances, it could very properly be that there’s merely nothing there to gather in opposition to with regards to Bankman-Fried’s dad and mom.

Observe that civil theft theories should not restricted to California, as quite a few states acknowledge the reason for motion. California’s model simply occurs to be one of many extra onerous statutes due to the treble damages provision. Additionally notice that civil theft might generally qualify in chapter proceedings as a nondischargeable declare, such that if Bankman-Fried’s dad and mom had been to be discovered liable on such a declare, then it’s nothing like a positive factor that they may have it discharged in private chapter proceedings. For a debtor, that’s the worst of all worlds: A big judgment that one can by no means eliminate, which means nearly limitless years of harassment by collectors.

There is a crucial lesson in all this, which works to those that are supplied items from these household and associates in different finance such a crypto or different opaque funding schemes: Watch out as as to whether to simply accept such a present in any respect, as at this time’s fortunate windfall may properly turn into tomorrow’s scorching potato. Or, to cite Dune’s Barron Harkonnen, “When is a present not a present?”