Why Samuel Bankman-Fried’s Parents May Have To Pay Treble Damages For Any Assets They Received From FTX

I will begin this article with the very serious caveat that I do not know if Samuel Bankman-Fried’s parents received any assets from FTX, Alameda Research, or any of the numerous business entities affiliated with that organization. This is necessarily, therefore, a hypothetical discussion of what might happen if they received such assets. There have been suggestions in the media, for example, that Bankman-Fried’s parents received title to a $16.4 million house in the Bahamas that was allegedly intended to house FTX staff, and that Sam’s father, Joseph Bankman, “received payments from FTX and was heavily involved in the operations of the doomed platform,” according to at least one article. I disclaim any knowledge of whether or not that is true, that is to FTX’s de facto bankruptcy trustee, John Ray, but instead we will proceed under the purely hypothetical assumption that Joseph Bankman and Barbara Fried did in fact receive assets from FTX .

Now, with that lengthy warning from the lawyer—never a bad idea when discussing issues that may directly affect Stanford law professors—let’s get down to the fun stuff.

Bankman-Fried’s parents live in California, which means there is a high likelihood that California law will apply to them in a collection effort by FTX or its creditors. This is bad enough for them, as California has perhaps the most comprehensive and creditor-friendly judgment enforcement laws in the United States, if not the entire world. But in this particular case, California law is far worse for Bankman-Fried’s parents.

Pain comes through a civil cause known as “civil theft.” Basically, California Penal Code § 496(a) states that a person who knowingly receives stolen property is guilty of a crime. That’s bad enough, but § 496(c) goes on to say that any person injured by the theft “may bring an action for three times the amount of the actual damages, if any, sustained by the plaintiff, the costs of the suit . . , and reasonable attorney’s fees.”

The California Supreme Court recently explained how § 496(c) works. Siry Inv., LP v. Farkhondehpour, 13 cal. 5th 333 (2022), where a partner in a real estate partnership essentially embezzled partnership money to the detriment of the other partners. While noting that civil theft did not apply to ordinary business torts or breach of contract cases, and that the creditor must prove that a tort occurred, the California Supreme Court ultimately concluded that: “A plaintiff may recover treble damages and attorneys’ fees under section 496. (c) when property was obtained in any manner constituting theft.”13 Cal. 5th in 361.

Here, Samuel Bankman-Fried was charged, but not convicted, of stealing billions of dollars worth of investor money. Whether or not he is ultimately convicted, if the creditors can prove that the theft occurred, then they can assert their civil theft claim against Bankman-Fried’s parents and seek triple damages plus their attorneys’ fees. So by taking title to the $16.4 million home in the Bahamas alone, Bankman-Fried’s parents could face potential civil liability of more than $49.2 million. The parents would certainly have a number of legal defenses available to such a claim, such that they did not know Sam was stealing money from investors, but with Joseph Bankman’s alleged deep involvement in FTX’s operations, proving that this type of defense could be a rise

Whether such a civil theft award would ultimately be collectible is an entirely different matter. Bankman-Fried’s parents have already indicated that just funding Sam’s legal defense may end them. Bankman-Fried’s parents are also likely to face significant legal bills trying to fend off claims from creditors. When the dust finally settles, as it eventually does in all of these cases, it may very well be that there simply isn’t anything to glean when it comes to Bankman-Fried’s parents.

Note that civil theft theories are not limited to California, as numerous states recognize the cause of action. California’s version turns out to be one of the more onerous statutes because of the treble damages provision. Also note that civil theft can sometimes qualify in a bankruptcy proceeding as a non-dischargeable claim, so if Bankman-Fried’s parents were found liable on such a claim, then it doesn’t seem at all certain that they would be able to discharge it in bankruptcy staff procedures For a debtor, that’s the worst of all worlds: a big judgment that you can never get rid of, that is, almost endless years of harassment from creditors.

There is an important lesson in all of this, which goes to those who are offered gifts from those family and friends in alternative financing such as a crypto or other opaque investment schemes: Be careful about accepting such a gift, as today is lucky. The unexpected could well be tomorrow’s hot potato. Or, to quote Dune’s Barron Harkonnen, “When is a gift not a gift?”

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