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After a two-week trial, and just four hours of jury deliberations, Sam Bankman-Fried was found guilty on seven counts of fraud and conspiracy on November 2nd for his role in the collapse of cryptocurrency exchange FTX.
Bankman-Fried was convicted of “defrauding customers who placed billions of dollars with the fallen cryptocurrency exchange and of fleecing its investors,” reported Law360.
The FTX and Bankman-Fried saga was a complicated journey through the new world of digital currency, which uses encryption technologies to secure transactions without relying on any central authorities to uphold the currency. But in many ways, the criminal proceedings involved simple charges that go back to the earliest days of jurisprudence.
At its core, the case against Bankman-Fried was that he misappropriated and embezzled billions of dollars of FTX customers’ money for himself through Alameda Research, a cryptocurrency trading firm that he founded in 2017 as a launch pad into the crypto space. FTX investors lost nearly $10 billion, making it one of the largest financial frauds in history, according to PBS.
“These players like Sam Bankman-Fried might be new, but this kind of fraud, this kind of corruption, is as old as time,” US Attorney Damian Williams said to CNN.
FTX’s new CEO, John J. Ray III, had set the tone for the simple explanation behind the Bankman-Fried fall from grace with an eyebrow-raising court filing soon after he arrived on the scene in the fall of 2022.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote. Ray previously oversaw the liquidation of Enron and other bankruptcy cases involving alleged financial fraud.
In-house counsel have a crucial role to play to ensure that proper corporate controls are in place to reduce the risk to their organizations of a problem occurring in the first place. But when a question arises regarding underlying accounting documentation, reporting anomalies, questionable financial activity or potential fraud, in-house counsel must be prepared to take the lead in launching an immediate internal investigation.
An in-house counsel’s key ally in conducting an internal investigation into possible financial irregularity in the organization is to work with experienced forensic accountants. Available through the Lexis+® platform, Practical Guidance content offers "Internal Investigations: Retaining and Working with Forensic Accounts Checklist" from contributors Elissa M. McClure, Sydne Collier and Jean-Michel Ferat with specific steps that in-house counsel should follow. These tips include:
Typical investigations where a forensic accounting team might be helpful include allegations concerning bribery, kickbacks, corruption, embezzlement, theft, asset misappropriation, complex financial transactions and fund tracing, or audit failure cases.
The scope of the internal investigation should determine the scope of work for the accounting team. This might include: Forensic skills, such as analyzing financial statements or tracing monetary outflows; Investigation skills, such as information that must be tracked down from key sources or financial analyses that must be conducted; and/or Expert Witness skills, such as reviewing documents or data to provide an independent assessment in the case.
Consider the size and geographic reach of a potential firm, its relevant licensing and subject matter expertise, experience working with regulators or enforcement agencies, and track record as a provider of consulting or expert witness services in similar previous cases.
Before retaining forensic accountants, make sure there are no conflicts or appearances of a conflict between the firm and your organization. Also check your insurance coverage to identify any requirements for choosing professionals from a pre-approved list. Be mindful about sharing too many facts or details without first clearing these issues and then have outside counsel retain the firm in order to preserve privilege during the internal investigation.
Once engaged, establish clear timeline expectations and working procedures with the forensic accounting team. Provide them with access to all documents and information relevant to their analysis, confirm document retention procedures are in place, and ensure they protect their work appropriately to preserve the attorney-client privilege.
The findings from the forensic accountants can be delivered to the legal team either orally or in writing, with clear descriptions of the initiating event, the process followed by their team, and their findings relating to any financial/accounting issues. The in-house counsel should then incorporate those findings into the final report of their internal investigation.
LexisNexis offers a wide range of resources to assist in-house counsel with conducting internal investigations in the new In-House Advisor practice area, which is available on Lexis+® General Counsel Suite. This includes access to a vast collection of legal resources, breaking business and legal news, and practical guidance content that includes practice notes, templates and checklists. It also features practice videos, such as this video that provides tips relating to running an internal investigation and an overview of the investigation process.
In-House Advisor is an all-in-one information resource designed for the modern GC. Experience the new In-House Advisor practice area for yourself by signing up for a free 7-day trial of Lexis+ General Counsel Suite.