The Meaning of the Bankman-Fried Indictment

Just like everybody else, Mr. Bankman-Fried and his colleagues are entitled to the presumption of innocence. But being clever in seeking to avoid particular Beltway regulatory schemes doesn’t mean one is immune from prosecution.

The Journal reports:

U.S. prosecutors on Tuesday charged FTX founder Sam Bankman-Fried with eight counts of fraud and conspiracy, in what they called a scheme to defraud his crypto exchange’s customers and his hedge fund’s lenders.

The indictment, brought by the U.S. attorney’s office for the Southern District of New York, accuses him of misappropriating FTX.com customers’ deposits and using those to pay expenses and debts of Alameda Research, his crypto hedge fund… Also on Tuesday, the Securities and Exchange Commission and the Commodity Futures Trading Commission sued Mr. Bankman-Fried for fraud…

The world of digital coins can seem very complicated. But the man brought in to clean up this mess explains the problem in a way that sounds quite simple:

… John J. Ray III, the new chief executive of FTX, said at a congressional hearing Tuesday that FTX has incurred losses “in excess of $7 billion.” Mr. Ray said funds were taken from FTX and misused by affiliated trading firm Alameda Research, which incurred trading losses.

FTX presents as “old-fashioned embezzlement,” Mr. Ray said. “It’s taking money from customers and using it for your own purpose.”

No doubt the lawmakers listening to Mr. Ray today will be inspired to draft all manner of legislative proposals in response, but let’s hope they don’t act on any of them. This column understands the urge to legislate. After all, if congressional committees are not threatening to craft far-reaching changes to existing law, how can committee members raise campaign funds? But a frenzied congressional response to financial scandals two decades ago demonstrates the danger when a bipartisan Beltway crowd agrees that something must be done.

Earlier this year John Berlau and Josh Rutzick wrote in the Journal on the 20th anniversary of the enactment of the Sarbanes-Oxley law:

Coming on the heels of scandals at Enron and WorldCom, it was touted as a method for cracking down on accounting fraud at big companies and firms.

Twenty years later, legitimate entrepreneurs and ordinary investors are punished by the law’s costly mandates. Sarbanes-Oxley has permanently altered the landscape of business growth and development.

It was a perfect Washington failure. The law was written while the adjudication of the Enron and Worldcom frauds had really just begun. Over the course of years, the cases resulted in numerous criminal convictions based on laws that had been in place at the time of the frauds. Yet people and businesses who never had anything to do with either fraud and never committed any fraud at all have been paying the price for Sarbanes-Oxley ever since. Mr. Berlau and Mr. Rutzick observed:

Academic studies and annual reports show that the law has caused auditing costs to double, triple or even quadruple for many companies. A 2009 study by the Securities and Exchange Commission found that smaller public companies have cost burdens more than seven times those of large ones.

The disproportionate burden on small and midsize companies has spurred bipartisan criticism of Sarbanes-Oxley. As the Obama administration [jobs and competitiveness council] noted: “Regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies.”

Right now it’s impossible to say whether a rush to legislate an answer to FTX would elevate or suppress cryptocurrencies and related technology, or how much such legislating might cost consumers and investors. But if justice for FTX customers is what people want, Congress should leave it to the courts.

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What Would We Do Without Experts?
“Recent coyote attacks in Southern California the fault of people, expert says.” That’s a headline from KTLA in Los Angeles. Josh DuBose reports:

“Typically, coyotes are very shy and want to avoid people. They’re skittish,” Rebecca Dmytryk, CEO of Humane Wildlife Control Inc., told KTLA’s John Fenoglio.

A coyote expert, she’s on a mission to prevent unwanted encounters with the highly intelligent animals.

“The real story here is how humans caused this behavior in the coyotes,” Dmytryk said.

Surely there must be a way to apportion a share of the blame to global warming.

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James Freeman is the co-author of “The Cost: Trump, China and American Revival.”

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(Lisa Rossi helps compile Best of the Web. Thanks to Eric Pease.)

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