Liberal PACs and charities that got $260 million from FTX and its executives could be forced to give it all back
- FTX, Sam Bankman-Fried and Ryan Salame pumped millions into super PACs and campaigns.
- The company could deem the gifts "fraudulent transfers" and sue for refunds. It's happened before.
The Washington newcomer had a way of turning heads. Or at least his money did — the billions of dollars generated by his web of offshore businesses, and his willingness to write six-figure checks to political parties and lobbyists, sparked the interest of a lot of powerful people.
But in 2009, banker Allen Stanford's empire came crashing down when he was charged with running a $7 billion Ponzi scheme. For years afterwards, lawyers tried to recover the money that Stanford had dished out — suing Democratic and Republican fundraising committees, children's hospitals, and anyone else who'd taken his money.
In 2022, another fallen billionaire is in a heap of legal trouble. Sam Bankman-Fried, known as SBF, hasn't faced criminal charges. But like Stanford, his multinational conglomerate, centered on the crypto exchange FTX, is under court supervision, and experts consulted by Insider say anyone who benefitted from the cash it generated — including the liberal political groups and charities SBF lavished money on — could be on the hook to its creditors.
It's not clear how much FTX's creditors are owed, though SBF told Vox he was trying to raise $8 billion. The roughly $260 million that the company and its employees paid charities and political groups like the Democrats' House Majority PAC are only a small fraction of that amount.
But in bankruptcy, nothing is sacred. The same politicians and groups that happily received FTX's donations and welcomed SBF as an influencer in Washington, including Democratic PACs like the House Majority PAC and Women Vote and lawmakers like Debbie Stabenow, could soon find themselves forced to return those funds — and some are already lawyering up.
The law allows the company's new management or a bankruptcy trustee to claw money back even after it has changed hands, said Ilan Nieuchowicz, a lawyer at Carlton Fields.
"It's the trustee's duty to retrieve funds for the estate," he said.
SBF and Ryan Salame spent millions on politics
FTX, SBF and other deep-pocketed executives tried to shape Washington with over $70 million in contributions to federal candidates or committees, according to the Center for Responsive Politics. That's to say nothing of state-level expenditures, including about $12 million reportedly spent on a California ballot initiative to increase public health spending.
Most of that was in Bankman-Fried's name; he spent almost $39 million on 2022 elections, giving predominantly to Democratic groups. Ryan Salame, another FTX executive, contributed more than $20 million, mostly to Republican ones.
FTX and Guarding Against Pandemics, a public-health group that Bankman-Fried funded, spent more than $1 million to lobby federal officials. Guarding Against Pandemics even bought a $3 million house in Washington, DC, showing its intention to be a long-term presence in the capital, according to Puck.
Doug Kelley, a Minneapolis lawyer, was appointed by a court to recover funds spent by Minneapolis businessman Tom Petters after Petters's $2 billion Ponzi scheme was exposed. Kelley told Insider he approached politicians that Petters had donated to, including Minnesota Sen. Amy Klobuchar, whose campaign returned $80,000. Politicians generally returned the money, he said, although there were some candidates who lost their races and didn't have campaign funds available to pay.
Some political groups that Bankman-Fried and Salame supported are in a similar situation, with barely any money left. The Protect Our Future PAC, the top beneficiary of Bankman-Fried's giving, has just $570,000 on hand after receiving $28 million from FTX and its execs, and American Dream Federal Action, which Salame supported, has just $1.5 million left.
Michael Toner, a former member of the Federal Elections Commission, said trying to recover money from a pop-up super PAC could be harder than going after a party committee that is active each election cycle, which is what happened in the Stanford case.
"You can't get blood from a turnip," he said. "These political committees, absent any information to the contrary, they're victims in this just as much as anybody else."
Some lawmakers have donated the money they got from FTX and its affiliates to charity, Politico reported. That's a mistake, said Kelley, who said he had to break the news to politicians who did the same thing with money they got from Petters that they would have to repay creditors anyway.
Already, there are signs that beneficiaries of FTX's political generosity are seeking legal advice. One elections lawyer contacted for this story told Insider he couldn't comment because he was in talks to represent a client in connection with the fallout of FTX's collapse.
Clawbacks can go back years — and take years to hash out
When a company files for bankruptcy, the goal is to either hammer out a plan that allows some creditors to get paid and allows the company to keep doing business, or sell it for parts and use the money to pay back its creditors.
John J. Ray III, the $1,300-an-hour restructuring guru who was named FTX's new CEO earlier this month, has said parts of the business are in good shape and could be sold. But others are a trainwreck: "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information," he said in a filing earlier this month.
One of the tools at Ray's disposal is the power to reverse many payments made months or years before the company entered bankruptcy. Any creditor that got paid by FTX in the 90 days before it filed for bankruptcy — which could include the users who withdrew a reported $5 billion from FTX before its crash — can be hit with what's known as a preference claim. FTX's new management has up to two years to make these demands.
The other type of claim is a so-called fraudulent transfer claim. FTX could argue that almost every political and charitable donation that SBF gave through his companies would count as a fraudulent transfer and must therefore be returned, lawyers said.
The window to file a fraudulent transfer claim goes back two years under bankruptcy law and four years under Delaware law, where the bankruptcy cases were filed. But there is a chance it could extend even longer: "Good lawyers and the good trustees are always trying to find a way, if necessary, to make it go back further," according to Jonathan Perlman, a Florida lawyer who has worked as a receiver in several complex financial cases.
The FTX bankruptcy could be one of the most complicated in history. About 102 entities have filed cases in Delaware, saying they have perhaps one million creditors, a number that likely includes account holders whose funds were frozen earlier this month.
Bankman-Fried and other insiders will probably end up being individually targeted for recoveries. Ray, who took the reins of FTX and Bankman-Fried's hedge fund Alameda Research earlier this month, said the companies' books showed over $3 billion in loans from Alameda to Bankman-Fried and a company he controls called Paper Bird Inc., which is the majority owner of FTX's web of offshore businesses.
But charities and political groups could be ripe avenues for recovery, especially if what can be clawed back elsewhere isn't enough to make creditors whole. James Koutoulas, a lawyer who worked on the collapse of MF Global, told Insider he thinks FTX account holders stand to recover just 10 cents on the dollar.
Many of the charities and political campaigns received their funds through organizations one or two steps removed from FTX, such as the Future Fund, a project of the nonprofit FTX Foundation, which was founded by Bankman-Fried. But as long as a fraudulent-transfer claim is brought in time, there's theoretically no limit to the number of times money can be transferred that makes it impossible to claw back, said Kathy Bazoian Phelps, a lawyer who has written about Ponzi schemes.
There can be clawback risks even if a recipient thought everything was above-board. When lawyer Scott Rothstein was revealed to have stolen over $1 billion from his law firm, the trustee in that case both auctioned his Bugatti and sued the dealer that sold it to him. Several jewelers who sold Rothstein and his wife expensive gems paid five- and six-figure settlements, according to the South Florida Business Journal.
Just because a company or receiver can make a clawback claim doesn't mean that it definitely will. And even if they do, a business that accepted money in good faith and provided something of value in exchange would have a defense, Phelps said. And each transfer requires a new legal analysis; even if a super PAC didn't provide anything of value to FTX, the media buyers that it paid for political advertising could argue that they earned their keep.
FTX also supported charities
FTX and its affiliated hedge fund Alameda Research made Bankman-Fried and his executives, like Salame, Gary Wang, and Caroline Ellison, very rich. But instead of shopping for yachts and professional sports teams, Bankman-Fried and some colleagues talked about "effective altruism" — the utilitarian-adjacent movement that prioritizes giving money away to causes its followers believe will maximize the global good.
The FTX Foundation, one of the company's primary charitable vehicles, claims to have donated over $190 million, according to Forbes. Some of its giving was aimed at present-day needs, like combating parasitic worms in Niger and extreme poverty in Uganda. Other projects it supported were more think-tanky and leaned into causes associated with longtermism — focusing on averting unlikely but catastrophic events, like an artificial intelligence that goes rogue.
When Allen Stanford's Ponzi scheme went bust, investors got the green light to sue his favorite charities, including St. Jude Children's Research Hospital and Le Bonheur Children's Hospital, to try to recoup more than $6 million in investor money. The charities protested, but the cases ended up settling out of court.
Kelley told Insider that in the Petters case, he approached many charities to return six- and seven-figure donations they'd received. Minnesota legislators actually changed the law while Kelley was in the middle of his recovery efforts in an effort to protect charities from clawback demands. But at the end of the day, he said, many of them voluntarily returned the money.
"Think of it as: somebody robbed a bank, and took it across the street, and put it in a church collection plate," said Kelley. "Does that mean the church gets to keep it?"
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