Discussing the FTX asset recovery process from a legal perspective

January 19, 2023
Cryptocurrency

As the FTX indictments unfold, Pawel Kuskowski, CEO of Gatenox, talks to top US and UK criminal lawyers Anthony Metzer KC, Eric Lewis, Adam Kaufmann and Philip Kazantzis about recovering assets from the FTX scandal.

Comparisons are made to the Madoff ponzi scheme and a discussion follows onto Sam Bankman-Fried's extradition and sentencing.

Adam Kaufmann is a former prosecutor at the Manhattan District Attorney's office where he was the Chief of the Investigation Division. Eric Lewis is currently the chair of an international litigation boutique where both he and Adam carry out complex financial fraud and asset tracing. They are both based in New York and Washington. Philip is a barrister based in England working just outside London. He is a sole practitioner and has great expertise in dealing with fraud trials and confiscation proceedings in the UK. Anthony is a senior barrister and a King's Counsel has expertise in extradition and asset recovery.

The discussion started off by hypothetically estimating what can be recovered in the assets lost, defrauded or stolen in the process for coming to FTX. Answering the question as to what one can do if their funds are part of the FTX broadcast, Eric says that it is a complicated situation because it looks like at least eight billion dollars of customer funds were funnelled out of FTX into Alameda and that they have made some very large and risky bets which may be lost. Nonetheless, the primary question arising at this standpoint is what priority do the customers have under their contracts? These are personal assets and not deposits in a bank which would mean they are treated as a debt. If someone lost money as an FTX customer, they could at least file lawsuits (either class actions or seek first priority for deposits).

However, unless they can find counterparties or complicit parties who can be sued for participating in the fraud, no one can tell how much is going to be recovered. This is very different from the Madoff situation where most of the money was traceable.

Eric thinks there are going to be very large losses because funds were transferred to other entities like Alameda. Since there is a disconnect between where the funds were put and who ultimately benefited from it, the funds are going to be difficult to recover.

When Adam shared his thoughts on recoveries of these funds in the US, he mentioned that people are ultimately going to be very disappointed that the total pool of recoverable funds won’t be enough. The media has focused on incredible houses and real estate properties which may get hundreds of millions of dollars in recovery in different jurisdictions but considering billions were lost, a recovery of 100-150 million dollars is really not going to go very far. Compared to Madoff, he states that in that case, a lot of money was clawed back from the feeder funds.

FTX-Alameda trading had an exposure to a risky crypto investment with Terra, so when Terra crashed, Alameda was exposed. Adam also says that to cover it up, they dipped into FTX funds to try to prop up terra. That money is probably gone and unfortunately equivalent to billions of dollars of account holder money that is most likely not recoverable.

On the possibilities of going after some of the entities involved, the problem with going down this route is that if there was insider or internal fraud, then these entities may simply say, ‘How can you come after me? There's all of this internal fraud’.

In the UK, crypto would be treated as property but because FTX was not a registered company with the Financial Conduct Authority, they sit outside regulation. If FTX was regulated, there would be a limited amount of cover from the Financial Conduct Authority. The difficulty though is if there are no assets or a very limited amount of assets, there is nothing left to freeze.

Would it therefore be a good idea to throw more good money after bad one?

Anthony adds that these are difficult assets to trace and the traditional way in England and Wales is to seize assets. Money or stocks which can be traced can be sought to be restrained and recovered, but the difficulty with cryptocurrency is that it has an ethereal quality which is very hard to trace, however, not impossible.

However, as with the HSBC scandal, the massive resources expanded by the United States in relation to a very large fraud is probably not something that would be matched in the United Kingdom.

The discussion concluded with the speakers agreeing that more interesting things are yet to come out from the FTX case. However, what needs to be understood is who put the money and supported the entire project.

Watch the whole discussion: FTX asset recovery process from a legal perspective

Discussing the FTX asset recovery process from a legal perspective

January 19, 2023

As the FTX indictments unfold, Pawel Kuskowski, CEO of Gatenox, talks to top US and UK criminal lawyers Anthony Metzer KC, Eric Lewis, Adam Kaufmann and Philip Kazantzis about recovering assets from the FTX scandal.

Comparisons are made to the Madoff ponzi scheme and a discussion follows onto Sam Bankman-Fried's extradition and sentencing.

Adam Kaufmann is a former prosecutor at the Manhattan District Attorney's office where he was the Chief of the Investigation Division. Eric Lewis is currently the chair of an international litigation boutique where both he and Adam carry out complex financial fraud and asset tracing. They are both based in New York and Washington. Philip is a barrister based in England working just outside London. He is a sole practitioner and has great expertise in dealing with fraud trials and confiscation proceedings in the UK. Anthony is a senior barrister and a King's Counsel has expertise in extradition and asset recovery.

The discussion started off by hypothetically estimating what can be recovered in the assets lost, defrauded or stolen in the process for coming to FTX. Answering the question as to what one can do if their funds are part of the FTX broadcast, Eric says that it is a complicated situation because it looks like at least eight billion dollars of customer funds were funnelled out of FTX into Alameda and that they have made some very large and risky bets which may be lost. Nonetheless, the primary question arising at this standpoint is what priority do the customers have under their contracts? These are personal assets and not deposits in a bank which would mean they are treated as a debt. If someone lost money as an FTX customer, they could at least file lawsuits (either class actions or seek first priority for deposits).

However, unless they can find counterparties or complicit parties who can be sued for participating in the fraud, no one can tell how much is going to be recovered. This is very different from the Madoff situation where most of the money was traceable.

Eric thinks there are going to be very large losses because funds were transferred to other entities like Alameda. Since there is a disconnect between where the funds were put and who ultimately benefited from it, the funds are going to be difficult to recover.

When Adam shared his thoughts on recoveries of these funds in the US, he mentioned that people are ultimately going to be very disappointed that the total pool of recoverable funds won’t be enough. The media has focused on incredible houses and real estate properties which may get hundreds of millions of dollars in recovery in different jurisdictions but considering billions were lost, a recovery of 100-150 million dollars is really not going to go very far. Compared to Madoff, he states that in that case, a lot of money was clawed back from the feeder funds.

FTX-Alameda trading had an exposure to a risky crypto investment with Terra, so when Terra crashed, Alameda was exposed. Adam also says that to cover it up, they dipped into FTX funds to try to prop up terra. That money is probably gone and unfortunately equivalent to billions of dollars of account holder money that is most likely not recoverable.

On the possibilities of going after some of the entities involved, the problem with going down this route is that if there was insider or internal fraud, then these entities may simply say, ‘How can you come after me? There's all of this internal fraud’.

In the UK, crypto would be treated as property but because FTX was not a registered company with the Financial Conduct Authority, they sit outside regulation. If FTX was regulated, there would be a limited amount of cover from the Financial Conduct Authority. The difficulty though is if there are no assets or a very limited amount of assets, there is nothing left to freeze.

Would it therefore be a good idea to throw more good money after bad one?

Anthony adds that these are difficult assets to trace and the traditional way in England and Wales is to seize assets. Money or stocks which can be traced can be sought to be restrained and recovered, but the difficulty with cryptocurrency is that it has an ethereal quality which is very hard to trace, however, not impossible.

However, as with the HSBC scandal, the massive resources expanded by the United States in relation to a very large fraud is probably not something that would be matched in the United Kingdom.

The discussion concluded with the speakers agreeing that more interesting things are yet to come out from the FTX case. However, what needs to be understood is who put the money and supported the entire project.

Watch the whole discussion: FTX asset recovery process from a legal perspective

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