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Campaigns that donate SBF contributions to charity could end up paying twice

FTX Cryptocurrency Derivatives Exchange CEO Sam Bankman-Fried Interview
Sam Bankman-Fried, founder and chief executive officer of FTX Cryptocurrency Derivatives Exchange, during an interview on an episode of Bloomberg Wealth with David Rubenstein in New York, US, on Wednesday, Aug 17, 2022. Crypto exchange FTX US is expanding its no-fee stock trading service to all US users, including non-crypto investors, in a move to expand its customer base and increase assets under custody. Photographer: Jeenah Moon/Bloomberg via Getty Images Bloomberg/Bloomberg via Getty Images

Campaigns that donate SBF contributions to charity could end up paying twice

December 20, 03:00 AM December 20, 03:01 AM

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Recipients of FTX founder Sam Bankman-Fried’s political contributions who rushed to offload those funds to charity could still be on the hook for that money.

Bankman-Fried, 30, and others associated with FTX donated millions of dollars to campaigns, political action committees, and individual candidates before his cryptocurrency company’s spectacular collapse. The sudden implosion resulted in many politicians and groups, fearing a public relations nightmare, donating the amount that was given to them to various charities.

But, given the bankruptcy process, the bankruptcy trustee may come knocking and ask for that money back. If those funds were already donated away, the recipient of the contributions may be forced to cut a check or face a suit by the trustee to wrest it back.

Doug Kelley is a Minnesota lawyer who was appointed to recover money lost from Petters Group Worldwide, which was operated by CEO Tom Petters, who was convicted of business fraud more than a decade ago. A Ponzi scheme run by Petters resulted in more than $2 billion in stolen funds, which Kelley was tasked with clawing back.

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Kelley explained that politicians shouldn’t just be giving away Bankman-Fried’s contributions given the likelihood that they will be compelled to return them. In the Petters case, Kelley said Sen. Amy Klobuchar (D-MN) donated some $80,000 she received from Petters to charity but was later forced to cut another check for $80,000 because she had already offloaded Petters’s contribution.

“The initial thing that most politicians did was consult with election-law lawyers who said contribute it to a charity and you’ll take care of your obligations that way — what they didn’t consider then was that I, as the trustee, had the duty to come and collect [the money] even if they had [donated] it, and so a number of politicians paid twice,” Kelley told the Washington Examiner.

Kelley said he thinks there is a high likelihood that politicians who already donated their Bankman-Fried contributions to charity will end up having to pay twice because of their knee-jerk decision to offload the funds.

Ilan Nieuchowicz, a litigator for law firm Carlton Fields, told the Washington Examiner that exactly how much of the political contributions can be clawed back will come down to whether fraudulent transfer laws end up being applied in this case. If it is concluded that FTX was part of a scam and that the transfers to politicians were fraudulent, all those funds could be fair game to be recovered.

If that is not the case, then the clawbacks would only apply to contributions made within 90 days of FTX’s collapse. That would equate to just over $8 million, according to Bloomberg.

While there could be demand letters sent out across a broad swath of those who received donations, there are limited resources at the disposal of those trying to retrieve the funds, so the smaller individual contributions to candidates might be seen as too small to sue for recovery. Still, it all depends on how aggressive the recovery process ends up being.

“Anyone who is solvent, who has assets, is a potential source for recovery if they received money from FTX that they shouldn’t have received,” said Nieuchowicz. “The trustee, their responsibility is to collect for the estate and distribute the funds for the benefit of all creditors.”

Kathy Bazoian Phelps, a partner at Raines Feldman LLP, said she has been a little surprised that some of these politicians have so readily donated the campaign funds without pausing to think about what that could entail down the road.

Phelps said lawmakers and recipients of Bankman-Fried’s money may want to withhold donating their funds given the possibility that they will be compelled to return the money.

“That would be the safest course of action, or to simply return it would probably be the wisest course of action,” she told the Washington Examiner.

Several candidates who received contributions from Bankman-Fried have already donated them.

Rep. Hakeem Jeffries (D-NY), the expected House minority leader, gave his Bankman-Fried contribution to the American Diabetes Association. Sen. Lisa Murkowski (R-AK) donated her contribution to Storyknife Writers Retreat in Homer, Alaska. Rep. Josh Harder (D-CA) is donating his Bankman-Fried funds to the Stockton Food Bank, his spokesman told the Washington Examiner.

Still, not all lawmakers are jumping on the bandwagon.

A Democratic staff member of one of the lawmakers who received contributions from Bankman-Fried told the Washington Examiner that the campaign hasn’t donated the money because of the complexities involved in the FTX case and the possibility that those funds will be ordered to be returned down the road.

“From our standpoint, it’s not our money to give to charity if it was in fact stolen,” the staff member said, adding that the most logical move from a compliance perspective is to just sit on the funds and wait to see how it can be given back to the victims of FTX’s collapse.

The Democratic National Committee, which received a heavy number of contributions, is taking a similar tack, holding the money in case the bankruptcy trustee ends up demanding it back.

“Given the allegations around potential campaign finance violations by Bankman-Fried, we are setting aside funds in order to return the $815,000 in contributions since 2020,” Daniel Wessel of the DNC said in a statement to USA Today. “We will return [them] as soon as we receive proper direction in the legal proceedings.”

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Similarly, the Democratic Congressional Campaign Committee said it is setting aside $250,000 amid the FTX collapse and investigation, and an aide for the Democratic Senatorial Campaign Committee said it is setting aside more than $100,000 and “will return it as soon as we receive proper direction in the legal proceedings.”

Bankman-Fried is currently in a Bahamian jail awaiting extradition to the United States to face fraud charges.

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