U.S. Scrutinizes Political Donations by Sam Bankman-Fried and Allies

WASHINGTON — Federal prosecutors in Manhattan are seeking information from Democrats and Republicans about donations from the disgraced cryptocurrency entrepreneur Sam Bankman-Fried and two former executives at the companies he co-founded.

In the days after Mr. Bankman-Fried was arrested on Monday and charged with violations including a major campaign finance scheme, the prosecutors reached out to representatives for campaigns and committees that had received millions of dollars from Mr. Bankman-Fried, his colleagues and their companies.

A law firm representing some of the most important Democratic political organizations — including the party’s official campaign arms, its biggest super PACs and the campaigns of high-profile politicians such as Representative Hakeem Jeffries — received an email from a prosecutor in the United States attorney’s office for the Southern District of New York. The email sought information about donations from Mr. Bankman-Fried, his colleagues and companies, according to people familiar with the request, who insisted on anonymity to discuss an ongoing law enforcement matter.

The prosecutors have reached out to representatives of other Democratic campaigns that received money linked to the cryptocurrency exchange FTX, which Mr. Bankman-Fried co-founded, according to two other people familiar with the matter. Prosecutors are also investigating donations to Republican campaigns and committees by another FTX executive who was a top financier on the right, according to a person familiar with the situation.

So far, Mr. Bankman-Fried is the only executive to face charges. Since emerging as a leading political megadonor in the months before the 2020 election, he has donated nearly $45 million, primarily to Democratic campaigns and committees that are now scrambling to distance themselves.

There has not been any suggestion that political campaigns and groups engaged in wrongdoing related to the donations they received. The Justice Department’s inquiries appear to be an effort to gather evidence against Mr. Bankman-Fried and other former FTX executives, rather than against their political beneficiaries.

But the prosecutors’ requests widen what has quickly become one of the biggest campaign finance scandals in years, as both Democrats and Republicans grapple with questions about their eagerness to tap into a stream of cash from a murky and largely unregulated industry that emerged suddenly as a powerful political player.

The fallout has been swift and is only growing, as lawmakers, operatives for political action committees and their lawyers try to minimize the damage.

Some politicians — including Mr. Jeffries, the incoming Democratic leader in the House, and Representative-elect Aaron Bean, a Republican from Florida — either returned donations linked to FTX or gave the money to charity after the company became embroiled in scandal. Other groups say they are setting the cash aside for possible restitution to victims of the alleged scheme.

Prosecutors said FTX was a “house of cards” through which Mr. Bankman-Fried and others diverted customer money to buy expensive real estate in the Bahamas, invest in other cryptocurrency firms, provide themselves with personal loans and make political contributions of tens of millions of dollars intended to influence policy decisions on cryptocurrency and other issues.

What to Know About the Collapse of FTX

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What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.

Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.

How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.

What led to FTX’s collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.

Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.

The indictment of Mr. Bankman-Fried accuses him of conspiring with unnamed others to violate campaign finance laws that prohibit corporate donations to candidates’ campaigns and bar donations “in the names of other persons,” commonly known as straw donations. He is also charged with wire fraud, money laundering and securities fraud related to his management of FTX and another company he co-founded, Alameda Research.

At a news conference on Tuesday, Damian Williams, the United States attorney for the Southern District of New York, called on “any person, entity or political campaign that has received stolen customer money” to “work with us to return that money to innocent victims.”

Federal Election Commission regulations require political campaigns and committees to give back donations that are later determined to be illegal, even if the funds have already been spent and new money needs to be raised to pay for the refunds.

The idea behind the law “is to essentially get tainted money out of the system, even when the committees that accepted it are not at fault,” said Sean J. Cooksey, an F.E.C. commissioner.

But that could be difficult for some political campaigns and committees, because the donations were among their biggest and because such groups typically spend almost all of their cash in the run-up to major elections.

More revelations are expected as previously undisclosed donations linked to Mr. Bankman-Fried, FTX and Alameda are exposed. For instance, a Biden-allied nonprofit group called Future Forward USA Action, which is registered under a section of the tax code that does not require it to disclose its donors, received $1.65 million that was linked to FTX, according to a person familiar with the funding.

The group’s PAC arm, which is required to report its donors, previously disclosed that in 2020, it received $5 million from Mr. Bankman-Fried and $1 million from another former FTX executive, Nishad Singh, out of a total of more than $150 million raised ahead of that year’s election.

Critics of the outsize role of big money in politics, as well as skeptics of cryptocurrency, have seized on the donations as further evidence that the campaign finance regulatory landscape is riddled with loopholes that create what is essentially a pay-to-play system with only the veneer of transparency.

“It shows fundamental weakness in our campaign finance laws,” said Craig Holman, an official at the watchdog group Public Citizen who focuses on ethics, lobbying and campaign finance rules. “And on the receiving end, you’ve got candidates and officeholders who should have been suspicious of the sudden influx of funds from the crypto industry.”

FTX, a cryptocurrency exchange Mr. Bankman-Fried co-founded, spent heavily on sports sponsorships, with the Miami Heat’s arena renamed the FTX Arena. Credit…Marco Bello/Reuters

The prosecutors are seeking information related to donations to dozens of campaigns and political committees, not just from Mr. Bankman-Fried but also from FTX and Alameda, as well as from Mr. Singh and Ryan Salame, another former FTX executive, according to the people familiar with the request.

The email was sent to the Elias Law Group, a firm started last year by one of the Democratic Party’s top lawyers, Marc E. Elias, that has quickly emerged as the leading political law firm on the left.

Mr. Elias’s firm did not respond to requests for comment.

The email asks for records that could be used to determine whether the FTX executives lied in their responses to disclaimers commonly featured on political committee websites. The disclaimers ask donors to attest that the money they are giving is their own, and that they are not being reimbursed by a corporation or another person, which would be illegal.

The FTX executives had given few donations before they burst onto the big-money political scene in the weeks before the 2020 election, as their company was expanding. Since then, Mr. Bankman-Fried’s donations went primarily to Democratic campaigns and committees, while Mr. Singh gave nearly $9.7 million, mostly to the party’s candidates and groups.

Mr. Salame donated $24 million, primarily to Republican candidates and committees.

Even as a group linked to Mr. Salame promoted him as a “budding Republican megadonor” this year, he told an activist who raised money from the cryptocurrency industry that he was not particularly interested in politics and suggested that his donations had been encouraged by others at FTX, the activist said.

The Aftermath of FTX’s Downfall

The sudden collapse of the crypto exchange has left the industry stunned.

  • A Spectacular Rise and Fall: Who is Sam Bankman-Fried and how did he become the face of crypto? The Daily charted the spectacular rise and fall of the man behind FTX.
  • How FTX Operated: FTX called itself an exchange. But it was vastly different from stock exchanges, which are highly regulated and barred from engaging in many of the activities that the crypto company pursued. 
  • Parental Bonds: Mr. Bankman-Fried’s mother and father, who teach at Stanford Law School, are under scrutiny for their connections to their son’s crypto business.

Other people who worked with FTX executives had privately expressed concern in an encrypted group chat, images of which were reviewed by The New York Times, about whether donations from Mr. Bankman-Fried and Mr. Singh were made in compliance with campaign finance rules.

Mr. Salame and his lawyer did not respond to requests for comment. Neither did Mr. Singh nor a spokesman for Mr. Bankman-Fried.

Groups funded by Mr. Bankman-Fried or his associates donated to at least one nonprofit organization focused on reducing the role of money in politics and increasing its transparency. That group, the Campaign Legal Center, received a total of $2.5 million last year from groups linked to Mr. Bankman-Fried. The center’s board voted on Friday to put the money into a separate account “until instructions are received from bankruptcy courts,” Brendan R. Quinn, a spokesman for the center, said in a statement.

Mr. Quinn said the center had accepted the funding “after careful vetting,” including conferring with other nonprofit organizations that “vouched for his apparent legitimacy at the time,” but he added that the allegations against Mr. Bankman-Fried “betray C.L.C.’s mission.”

Mr. Bankman-Fried is the only FTX executive who has been charged, but federal prosecutors have suggested that more indictments are likely.Credit…T.J. Kirkpatrick for The New York Times

The political groups represented by Mr. Elias’s firm that received funding from FTX executives include the Democratic National Committee, which received hundreds of thousands of dollars from Mr. Bankman-Fried; the Democratic Congressional Campaign Committee, which received $250,000 from him; and the Democratic Senatorial Campaign Committee, which received more than $100,000 from him and Mr. Singh.

The D.N.C. and D.S.C.C. said in separate statements that they were setting aside the money and intended to return it “as soon as we receive proper direction in the legal proceedings.”

Returning the money could be easier said than done for some of the groups that received larger donations from FTX officials. For instance, House Majority PAC, a leading super PAC that supports Democratic House candidates and is represented by the Elias Law Group, received $6 million from Mr. Bankman-Fried, but the group ended last month with less than $500,000 in the bank.

In a statement, the group, which spent upward of $180 million on this year’s elections, said it was “watching and waiting for guidance from the government in the ongoing legal proceedings, and maintains our fullest commitment to complying with the law.”

Precedent for the current campaign finance controversy are limited.

A much smaller-scale example occurred when, from 2002 to 2014, the company Cancer Treatment Centers of America reimbursed its executives for political contributions totaling about $700,000 to more than 30 campaigns. Even though the F.E.C. found no evidence that the recipient committees knew of the scheme, they were nonetheless required to give up the money after the company acknowledged the violations in 2017 and paid a civil penalty of $288,000. It took several years for all the committees that received the illegal cash to get rid of it.

Karl J. Sandstrom, a former member of the F.E.C., said the FTX case had the potential to be “the largest corporate conduit case we have had.”

Mr. Sandstrom, who advises Democratic campaigns and committees for the law firm Perkins Coie, where Mr. Elias was previously a partner, said he was advising clients to put money in escrow matching the amounts they received from Mr. Bankman-Fried.

Mr. Sandstrom said he had not received any inquiries from the Justice Department “yet.”

Kenneth P. Vogel reported from Washington, and Ken Bensinger from Los Angeles.

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