Category Archives: Legal

FTX Sues Founder Bankman-Fried’s Parents

Legal, ,

Bankrupt crypto exchange FTX on Monday sued the parents of founder Sam Bankman-Fried, saying that Stanford professors Joseph Bankman and Barbara Fried used the company to enrich themselves at the expense of FTX’s customers, Reuters reported.

FTX, now being led by turnaround specialist John Ray, said that company founder Sam Bankman-Fried ran FTX as a “family business” and misappropriated billions in customer funds for the benefit of a small circle of insiders, including his parents.

According to Reuters, Sam Bankman-Fried has pleaded guilty to charges that he defrauded FTX customers by using their funds to prop up his own risky investments. He is currently jailed ahead of a trial scheduled to begin Oct. 3. Other former FTX executives have pleaded guilty to criminal charges.

Bankman and Fried’s attorneys, Sean Hecker and Michael Tremonte, said in a joint statement that FTX’s claims were “completely false” and the the new lawsuit was a waste of funds that could be returned to FTX customers.

FTX’s lawsuit alleges that Bankman and Fried accepted a $10-million cash gift and $16.4-million luxury property in the Bahamas from FTX, even as the company teetered on the brink of collapse. Bankman and Fried also pushed FTX to make tens of millions of dollars in charitable contributions, including to Stanford University, FTX said.

Fortune reported that in a late court filing on Monday, the bankruptcy estate of FTX sued the parents of Sam Bankman-Fried, seeking to recover millions of dollars that it alleges were fraudulently transferred and misappropriated.

In the 63-page lawsuit, the estate alleges that FTX was a self-described “family business” despite its appearance as a sophisticated cryptocurrency exchange that was “fueled by fraud.” Allan Joseph Bankman, Bankman-Fried’s father, is a top tax law professor at Stanford Law School, and the lawsuit alleges that he played a key role in “perpetuating this culture of misrepresentations and gross management” and in covering up allegations that would have exposed the fraud, Fortune reported.

According to Fortune, the lawsuit also alleges that Bankman-Fried’s parents “siphoned millions of dollars” from the crypto empire for “their own personal benefit,” with the estate now seeking to claw back the funds as part of its bankruptcy process.

The Block reported that bankrupt cryptocurrency exchange FTX has sued Joseph Bankman, and Barbara Fried, the parents of its founder Sam Bankman-Fried, aiming to recover millions of dollars in “fraudulently transferred and misappropriated funds.”

According to The Block, a Monday court filing showed that debtors of FTX and Alameda Research filed a complaint to recover damages caused by fraudulent transfers, breaches of fiduciary duties and other alleged misconduct.

“As Bankman-Fried’s parents, Bankman and Fried exploited their access and influence within the FTX enterprise to enrich themselves, directly and indirectly, by millions of dollars, and knowingly at the expense of the debtors in these Chapter 11 Cases and their creditors,” the filing said.

In my opinion, it seems very odd that the parents of Sam Bankman-Fried allegedly made what appears to be problematic decisions regarding the amount of money they received from FTX. One would assume that Bankman, who is a top tax law professor, would know better.

Internet Archive Files Appeal In Copyright Infringement Case

Legal,

As expected, the Internet Archive this week has submitted its appeal in Hatchette v. Internet Archive, the closely-watched copyright case involving the scanning and digital lending of library books, Publishers Weekly reported.

In a brief notice filed with the court, IA lawyers are seeking review by the Second Circuit court of appeals in New York of the “August 11, 2023 Judgement and Permanent Injunction; the March 24, 2023 Opinion and Order Granting Plaintiffs’ Motion for Summary Judgement and Denying Defendant’s Motion for Summary Judgement; and from any and all orders, rulings, findings and/or conclusions adverse to Defendant Internet Archive.”

According to Publishers Weekly, the notice of appeal comes right at the 30-day deadline – a month to the day after judge John G. Koeltl approved and entered a negotiated consent judgement in the case which declared the IA’s scanning and lending program to be copyright infringement, as well as a permanent injunction that, among its provisions, bars the IA from lending unauthorized scans of the plaintiffs’ in-copyright, commercially available books that are available in digital editions.

The copyright infringement lawsuit was first filed on June 1, 2020, in the Southern District of New York by Hachette, HarperCollins, Penguin Random House, and Wiley, and organized by the Association of American Publishers.

The Internet Archive posted on its blog: “Internet Archive Files Appeal in Publishers’ Lawsuit Against Libraries”. From the blog (posted on September 11, 2023):

“Today, the Internet Archive has submitted its appeal in Hatchette v. Internet Archive. As we stated when the decision was handed down in March, we believe the lower court made errors in facts and law, so we are fighting on in the face of great challenges. We know this won’t be easy, but it’s a necessary fight if we want library collections to survive the digital age.”

Statement from Brewster Kahle, Founder and digital librarian of the Internet Archive:

“Libraries are under attack like never before. The core values and library functions of preservation and access, equal opportunity, and universal education are being threatened by book bans, budget cuts, onerous licensing schemes, and now by this harmful lawsuit. We are counting on the appellate judges to support libraries and our longstanding widespread library practices in the digital age. Now is the time to stand up for libraries.”

The Verge reported that the appeal from the IA follows a settlement that saw the Archive limit access to some of its scanned books as well as a second suit filed by music publishers over the Archive’s digitization of vintage records.

According to The Verge, the March ruling found that the internet Archive’s scanning and lending of books didn’t fall under the protections of fair use law, and an August settlement required it to remove public access to commercially available books that remained under copyright.

In addition to affecting the Archive, the ruling cast doubt on a legal theory called “controlled digital lending” that would allow other libraries to offer access to digitized books they physically own – rather than relying on frequently expensive and limited lending systems like OverDrive.

In my opinion, it sounds like the publishers are out to get the Internet Archive. This makes me sad. There are currently plenty of people who suddenly favor book bans – even from physical libraries. I don’t like the direction this is going in.

Appeals Court Rules Government May Have Violated 1st Amendment

Legal, ,

A U.S. appeals court on Friday ruled several government entities including the White House, the FBI, the Surgeon General and the Centers for Disease Control and Prevention likely violated the First Amendment by pressuring social media companies to moderate their content on misinformation surrounding vaccines, The Hill reported.

In a decision issued Friday evening, the Fifth Circuit Court of Appeals said government actors “likely coerced or encouraged” social media companies to moderate their content, affirming a decision by a lower court with respect to the White House, the FBI, the CDC and the Surgeon General. According to The Hill, the three judges issuing the decision were all appointed by Republicans.

The White House in a statement said the Department of Justice was reviewing the decision and its options going forward.

“This Administration has promoted responsible actions to protect public health, safety, and security when confronted by challenges like a deadly pandemic and foreign attacks on our elections,” the statement said. “Our consistent view remains that social media platforms have a critical responsibility to take account of the effects their platforms are having on the American people, but make independent choices about the information they present.”

Here are some pieces of the United States Court of Appeals for the Fifth Circuit:

For the last few years – at least since the 2020 presidential transition – a group of federal officials has been in regular contact with nearly every major American social-media company about the spread of “misinformation” on their platforms. In their concern, those officials – hailing from the White House, the CDC, the FBI, and a few other agencies – urged the platforms to remove disfavored content and accounts from their sites.

And, the platforms, seemingly complied. They gave the officials access to an expedited reporting system, downgraded or removed flagged posts, and deplatformed users. The platforms also changed their internal policies to capture more flagged content and sent steady reports on their moderation activities to the officials. That went on through the COVID-19 pandemic, the 2022 congressional election, and continues to this day.

Enter this lawsuit. The Plaintiffs – three doctors, a news website, a healthcare activist and two states – had posts and stories removed or downgraded by the platforms. Their content touched on a host of divisive topics like the COVID-19 lab-leak theory, pandemic lockdowns, vaccine side-effects, election fraud, and the Hunter Biden laptop story. The Plaintiffs maintain that although the platforms stifled their speech, the government officials were the ones pulling the strings – they “coerced, threatened and pressured [the] social-media platforms to censor [them]” through private communications and legal threats.

So, they sued the officials for First Amendment violations and asked the district court to enjoin the officials’ conduct. In response, the officials argued that they only “sought to mitigate the hazards of online misinformation” by “calling attention to content” that violated the “platforms’ policies,” a form of permissible government speech.

USA Today reported that the decision from the conservative 5th Circuit Court of Appeals partly upheld an order from a Louisiana federal judge that blocked many federal agencies from having contact with companies like Facebook, YouTube, and X, formerly Twitter, about content moderation.

But the 75-page opinion from three-judge panel also significantly narrowed the scope of the order that was a major victory for conservatives. USA Today also reported that the Biden administration has 10 days to seek a Supreme Court review of the ruling.

In my opinion, social media platforms that allow people to post misinformation typically have options for users who don’t want to see that sort of content. For example, X gives users the ability to mute and/or block content they are not interested in.

Former Head of Product At OpenSea Sentenced To Three Months In Prison

Legal,

Nathaniel Chastain, a former head of product at OpenSea, was sentenced to three months in prison and fined $50,000 on Tuesday, according to Inner City Press, The Block reported.

Chastain, 31, was a “first time offender” and had a “potentially promising future,” a judge in the U.S. District Court for the Southern District of New York said on Tuesday, according to Inner City Press.

Chastain was convicted in May in what prosecutors called the “first ever digital asset insider trading scheme” following a trial that focused on his alleged NFT insider trading.

The U.S. Attorney’s Office Southern District of New York posted a press release “Former Employee Of NFT Marketplace Sentenced To Prison In First-Ever Digital Asset Insider Trading Scheme”. From the press release:

Nathanial Chastain Traded on Inside Information About NFT’s That Were Scheduled To Be Featured On The Homepage of the Largest NFT Marketplace

Damian Williams, the United States Attorney for the Southern District of New York, announced that NATHANIAL CHASTAIN, a former product manager at Ozone Networks, Inc. d/b/a OpenSea (“OpenSea”), was sentenced to three months in prison in connection with a scheme to commit insider trading in Non-Fungible Tokens, or “NFTs” by using confidential information about which NFTs were going to be featured on OpenSea’s homepage for his personal financial gain. CHASTAIN was previously convicted at trial of wire fraud and money laundering…

…According to court filings and statements made in court:

As part of his employment, CHASTAIN was responsible for selecting NFTs to be featured on OpenSea’s homepage. OpenSea kept confidential the identity of featured NFTs until they appeared on its homepage. After an NFT was featured on OpenSea’s homepage, the price buyers were willing to pay for that NFT, and for other NFTs made by the same NFT creator, typically increased substantially. In violation of the duties of trust and confidence he owed to his employer, OpenSea, CHASTAIN exploited his advance knowledge of what NFTs would be featured on OpenSea’s homepage for his personal financial gain.

From approximately June to September 2021, CHASTAIN used OpenSea’s confidential business information about what NFTs were going to be featured on its homepage to secretly purchase dozens of NFTs shortly before they were featured. After those NFTs were featured on OpenSea, CHASTAIN sold them at profits of two-to-five times his initial purchase price. To conceal the fraud, CHASTAIN conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts on OpenSea.

In addition to the prison term, CHASTAIN, 31, of New York, New York, was sentenced to three months of home confinement, three years of supervised release, a $50,000 fine and ordered to forfeiture the Ethereum he made trading the featured NFTs.

To me, it seems like an incredibly stupid idea to do what this man did. It seems impossible that he would have assumed that his company would never find out what happened to those NFTs.

U.S. Judge Sends FTX’s Sam Bankman-Fried To Jail

Legal, ,

Sam Bankman-Fried, the disgraced wunderkind whose cryptocurrency exchange platform FTX imploded last November, will go from house arrest at his parents’ home to jail, a judge has ordered ahead of his trial on fraud charges, Rolling Stone reported.

In a Friday hearing, Judge Lewis Kaplan of Federal District Court in Manhattan formally revoked Bankman-Fried’s bail, ending his residence with his family in Palo Alto, California, as he prepares a legal defense for a blockbuster case centered on the ruins of a company once valued at $32 billion. The 31-year-old, admired as a brilliant crypto kingpin until his downfall, had been extradited from the Bahamas, where FTX was headquartered, in December. He originally posted a bond of $250 million to be released into his parents’ custody.

Sam Bankman-Fried headed to jail on Friday after a judge sided with a request by federal prosecutors to revoke the FTX founder’s bail over alleged witness tampering, CNBC reported. Bankman-Fried was remanded to custody directly from a court hearing in New York and sent to Brooklyn’s Metropolitan Detention Center, Bureau of Prisons records show.

Judge Lewis Kaplan denied Bankman-Fried’s request for delayed detention pending on appeal. Unless the appeal is successful, he is expected to remain in custody until his criminal trial, which is due to begin on Oct. 2.

“My conclusion is there is probable cause to believe the defendant tried to tamper with witnesses at least twice,” said Judge Kaplan during his ruling.

According to CNBC, the government had requested that Bankman-Fried be remanded to a jail in Putnam, New York, where he’d have access to a laptop with internet access for defense preparation, as opposed to sending him to the Metropolitan Detention Center, the facility closest to the courthouse with limited internet access for prisoners.

CNN reported that prosecutors sought to revoke bail after what they described as a series of violations by Bankman-Fried, including contacting potential witnesses against him, using a virtual private network to subvert monitoring and speaking with a reporter about former FTX executive Caroline Ellison.

Ellison, who is also Bankman-Fried’s ex-girlfriend, is one of several former business partners who has taken an appeal deal and plans to testify against him.

According to CNN, Judge Kaplan on Friday sided with the prosecutors’ claim that Bankman-Fried was “covering his tracks” when he allegedly leaked Ellison’s personal documents to the New York Times by allowing a reporter to review them in-person. Kaplan added that leaking an ex-girlfriend’s intimate writings would only be done “to hurt, discredit and frighten the subject of the material.”

Since his arrest in December, he has repeatedly broken with standard legal advice when it comes to speaking to the media. CNN reported that he has blogged, tweeted, and appeared on live interviews to broadcast his version of FTX’s downfall. In his telling, he admits to making mistakes as CEO but says he never knowingly committed fraud.

I suppose the lesson of what happened to Sam Bankman-Fried is one that other CEOs of crypto companies should pay attention to. Some mistakes, whether done with intent or carelessness, can send a crypto CEO to jail.

SEC Charges Digital World SPAC For Misrepresentation To Investors

Legal, ,

The Securities and Exchange Commission announced settled fraud charges against Digital World Acquisition Corporation (DWAC), a special purpose acquisition company (SPAC), for making material misrepresentations in forms filed with the SEC as part of DWAC’s initial public offering and proposed merger with Trump Media & Technology Group Corp. (TMTG). The Commission finds that DWAC misled investors and the SEC by failing to disclose that it had formulated a plan to acquire and was pursuing the acquisition of TMTG prior to DWAC’s IPO.

According to the SEC, the purpose of a SPAC is to acquire an operating business. As such, steps were taken by a SPAC in furtherance of a particular acquisition are important to investors. According to the SEC’s order, DWAC filed an amended Form S-1 in support of its IPO in early September 2021 that stated that neither DWAC nor its officer and directors had had any discussions with any potential target companies prior to the IPO.

But, as found in the SEC’s order, dating back to February 2021, an individual who would later become the DWAC’s CEO and Board Chairman and others involved with the DWAC, had extensive SPAC merger discussions with TMTG. The SEC’s order further finds that while DWAC’s CEO and Chairman initially pursued these discussions with TMTG on behalf of another SPAC, he created a plan in the spring and summer of 2021 to potentially sue DWAC to propose a merger with TMTG and used this plan to solicit certain pre-IPO investors.

The order also finds that DWAC failed to disclose that the CEO had a potential conflict of interest based on an agreement he had signed with TMTG. As a result, DWAC’s amended Form S-1 was materially false and misleading…

CNBC reported that a SPAC, also known as a blank-check company, is a shell company that debuts on the public market with the stated intent to acquire an existing private company. SPAC’s are often used as a way for private companies to go public without the time-consuming and expensive process of raising money through a traditional initial public offering.

CNN also reported that last month, federal prosecutors arrested three investors charges related to Digital World’s deal with Trump’s media company. According to the indictment, the investors allegedly made more than $22 million by illegally trading on knowledge that DWAC would purchase TMTG – before it was public knowledge.

If I’m understanding this correctly, the DWAC was caught doing things that the SEC considered to be fraud. The fraud charges have been settled. The next step appears to get the acquisition done before whatever deadline they need to meet.

U.S. Department of Treasury Sanctions Russian Ransomware Actor

Legal, ,

The U.S. Department of the Treasury posted a press release titled: “Treasury Sanctions Russian Ransomware Actor Complicit in Attacks on Police and U.S. Critical Infrastructure”. From the press release:

Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), designated Mikhail Matveev (Matveev) for his role in launching cyberattacks against U.S. law enforcement, businesses, and critical infrastructure. Concurrently, the U.S. District Courts for the District of New Jersey and the District of Columbia unsealed indictments against Matveev. Additionally, the U.S. Department of State announced an award of up to $10 million for information that leads to the arrest and/or conviction of Matveev under its Transnational Organized Crime Rewards Program.

“The United States will not tolerate ransomware attacks against our people and our institutions,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. “Ransomware actors like Matveev will be held accountable for their crimes, and we will continue to use all available authorities and tools to defend against cyber threats.”

The press release continued: The impacts of ransomware attacks are far-reaching, with victims experiencing the loss and disclosure of sensitive information and disruption of critical services. Russia is a haven for ransomware actors, enabling cybercriminals like Matveev to engage openly in ransomware attacks against U.S. organizations.

According to analysis conducted by Treasury’s Financial Crimes Enforcement Network (FinCEN), 75 percent of ransomware-related incidents reported between July and December 2021 were linked to Russia, its proxies, or persons acting on its behalf. Russia-linked ransomware variants such as Hive, LockBit, and Baby, which Matveev helped to develop and deploy, have been responsible for millions of dollars in losses to victims in the United States and around the world. The Hive ransomware group alone has targeted more than 1,500 victims in over 80 countries, including hospitals, school districts, financial firms, and other critical infrastructure.

The U.S Department of Justice released news titled: “Russian National Charged with Ransomware Attacks Against Critical Infrastructure” From the news:

The Justice Department today unsealed two indictments charging a Russian national and resident with using three different ransomware variants to attack numerous victims throughout the United States, including law enforcement agencies in Washington D.C. and New Jersey, as well as victims in healthcare and other sectors nationwide…

…On or about June 25, 2020, Matveev and his LockBit coconspirators allegedly deployed LockBit ransomware against a law enforcement agency in Passaic County, New Jersey. Additionally, on or about May 27, 2022, Matveev and his Hive coconspirators allegedly deployed Hive against a nonprofit behavioral healthcare organization headquartered in Mercer County, New Jersey. On April 26, Matveev and his Babuk coconspirators allegedly deployed Babuk against the Metropolitan Police Department in Washington, D.C…

…Matveev is charged with conspiring to transmit ransom demands, conspiring to damage protected computers, and intentionally damaging protected computers. If convicted, he faces over 20 years in prison…

Engadget reported: In April of 2021, for instance, [Matveev] was linked to a Babuk ransomware attack that saw the computers of the Metropolitan Police Department in Washington DC locked out. Last May, Matveev, whose online pseudonyms include Wazawaka, Uhodiransomwar, m1x, and Boriselcin, was allegedly involved in a Hive ransomware attack that targeted a healthcare NGO in New Jersey.

Engadget also reported that the Department of Justice is offering a reward of up to $10 million for information that leads to the arrest of Matveev.

I always find it interesting when more than one official U.S. Department works together on fighting crime, especially when the crime involves ransomware attacks. Ideally, this coordination should make ransomware thieves think twice before (potentially) ending up in prison.