Gary Wang, Caroline Ellison cooperation ‘gives prosecutors real insight’ into FTX: Former prosecutor

Ian McGinley, Akin Gump Partner and Former SDNY Co-Chief of the Complex Frauds and Cybercrime Unit, joins Yahoo Finance Live to examine how Sam Bankman-Fried may be expected to testify following plea deal agreements from other FTX defendants.

Video transcript

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DAVE BRIGGS: All right. Let's take a deep dive on the FTX case. We're joined now by the former Head of Cyber for the SDNY, Ian McGinley. Prosecuted the first large-scale crypto case for the federal government. Now, a partner at Akin Gump. I have it on good authority that you don't like "esquire," that you like the "legendary" Ian McGinley. That's what they say. Well, let's start with this latest development.

IAN MCGINLEY: I'd love to meet them.

DAVE BRIGGS: Let's start with this latest development and the plea deal, specifically Caroline Ellison and Gary Wang. How significant is that for the case?

IAN MCGINLEY: Well, that is a huge, huge development. I mean, if you've been following the case, you know that recently Sam Bankman-Fried has been out there giving speeches, speaking to media. And he's essentially said, look, there may have been mistakes, but I didn't know. I didn't know anything was going wrong. I didn't know that we were using customer funds and sending it to Alameda.

Now, you have two of his business associates who have pled guilty. They've pled guilty to conspiracy charges. So presumably, they are going to point the finger at Sam Bankman-Fried. And it gives prosecutors a real insight into what was going on because the case starts out initially with documents and text messages. But now that they're cooperating, you have an insider view into what was going on. So it's a huge development.

DAVE BRIGGS: Yeah. It's really interesting. How long do you sense that that plea deal, that cooperation had been in the works? Because this has moved at lightning speed. Oftentimes, these take months, if not years, to get to this point.

IAN MCGINLEY: I mean, this is just incredible work by SDNY, the SEC, and CFTC in terms of speed. I mean, Sam Bankman-Fried was charged in about a month. Ellison and Wang signed cooperation agreements. Before those agreements are signed, it's a very long process typically.

Typically, what happens before you enter into a cooperation agreement is you meet with the prosecutors multiple times. They check what you've said against other evidence they have to make sure you're telling the truth. Because the idea is, when you sign a cooperation agreement, the government is vouching for you. They're saying, you're a witness I can put on the stand. And for them to enter into an agreement, they need to have certain indicia that you're telling the truth. And that usually takes quite a while, so that's impressive.

DAVE BRIGGS: You mentioned the media tour that SBF went on, interviews everywhere. What do you glean from those in terms of what a likely defense looks like?

IAN MCGINLEY: I don't know at this stage. It's hard to tell.

DAVE BRIGGS: Is there any defense?

IAN MCGINLEY: There are still allegations, and we will see. It is interesting that he waived extradition. That's not typical if you're going to mount a vigorous defense. His lawyer down in the Bahamas said that he wanted to make this right, so there is a world in which maybe this is resolved short of trial. But we'll see.

DAVE BRIGGS: What do you sense in terms of a likely sentence here if he is found guilty?

IAN MCGINLEY: It is very hard to tell, right? Because that comes down to a lot of things at sentencing. The prosecutors go before the judge. Defense counsel goes before the judge. The case has been compared by a lot of people to the Bernie Madoff case.

DAVE BRIGGS: Sure.

IAN MCGINLEY: Bernie Madoff was sentenced to 150 years. By some estimates, this fraud is just as big, if not bigger. So we'll see, but there's a likelihood of some--

DAVE BRIGGS: Decades in prison.

IAN MCGINLEY: --some substantial jail time here.

DAVE BRIGGS: Is this old-fashioned embezzlement as we heard at the Congressional hearing? What does crypto have to do with this crime, if anything?

IAN MCGINLEY: Well, it is in certain ways. And what you're referring to is John Ray, who now runs FTX post-bankruptcy, said, this is basically straight up embezzlement. And that seems right. The idea was that Sam Bankman-Fried promised investors one thing and did another with their money. That is the oldest fraud in the book. That's wire fraud 101. So what it has to do with crypto? I think crypto has gotten very popular. Crypto is the vehicle for a fraud like this. Because it's so popular, there's so much money there. There are so many cults of personality. So it's part crypto, but it's part just old school fraud.

DAVE BRIGGS: And you wrote that wire fraud is the most powerful law in crypto. Why is that?

IAN MCGINLEY: For this reason. There's been debates for this whole year about, is crypto a security?

DAVE BRIGGS: Right.

IAN MCGINLEY: Is it a commodity? Is it something else? Do we need new legislation? And in looking at the terrain and following a lot of what the media was reporting, it looked like it's just straight wire fraud that what's being reported, really. And wire fraud is lying to someone about what you're going to do with their money. And so if prosecutors have that at their disposal and they've had wire fraud at their disposal for centuries now, I figured they're going to use it and they did.

DAVE BRIGGS: What is the involvement of the SEC and the CFTC here?

IAN MCGINLEY: So they bring-- it's a good question. They bring what are known as "parallel actions" along with the DOJ. Now, there are certain differences in their actions from DOJ. They don't have a wire fraud statute, which is quite interesting. So in the SEC complaint that came out yesterday, last night, it was interesting because they allege that FTT, the utility token on FTX, is a security. And that is a big moment in crypto because there is a debate about whether those utility tokens are securities. The CFTC said the Ether and Bitcoin that was being traded is a commodity, so that's their hook into the case.

DAVE BRIGGS: If there's a guilty plea here, why would the DOJ have any reason to make a deal with Sam Bankman-Fried when they have the goods and two cooperating witnesses? And is there any sense that they want a trial, they want daylight shined on this crime to stop further crimes?

IAN MCGINLEY: Yeah. I mean, there might not be a plea deal, so to speak. The way it usually works, especially in the SDNY, there is no kind of bargaining deal for someone. They get leniency if they cooperate, like Ellison and Wang are doing now. And the way you cooperate is usually you help prosecutors build a case against someone else and you put your finger on the issue here. For Sam Bankman-Fried, he is the head of FTX. He is the top guy. So I don't know who he could cooperate against.

DAVE BRIGGS: Beyond this trial, do you expect a lot more similar federal charges in the crypto and NFT space and why?

IAN MCGINLEY: I think that's a fair bet. I mean, a few data points, right? You have the media and Crypto Twitter and a lot of sources pointing out all kinds of fraud in the space. So there's certainly a lot out there in terms of allegations. And then you have the resources to back it up. DOJ now has a crypto prosecutor in every office across the nation focused on crypto.

And if that's not a wake-up call for people, the SEC increased its number of crypto-focused attorneys by 50%. And they've said that they're going to focus on all types of potential crimes and areas, including NFTs, stablecoins. So I think this is the beginning not only of more crypto enforcement. But if you listen to the statements of the US attorney, Damien Williams, he said, I came out the first day. I told you there's going to be an announcement and there'll be more. Last night, he came out and said, I'll be coming out again. So I would stay tuned here.

DAVE BRIGGS: Well, you helped write the instruction manual for the SDNY, so it's good advice, good thoughts. Ian McGinley, great to have you here. Thank you. Jared.