How The Feds Will Investigate FTX

Host Rich Goldberg talks to former senior Justice Department criminal fraud prosecutor Justin Weitz about what's likely to come next for FTX and SBF.

The following is a transcript of today’s exclusive podcast episode. Let your colleagues, friends and family know we will have another FTX special edition interview tomorrow with the deputy editor of CoinDesk (which broke the first story that led to the collapse of FTX). Visit our Ricochet site to subscribe.

0:00:06.8 Rich Goldberg: And welcome back to Cryptonite. I'm your host, Rich Goldberg. We've got a lot of news to get to: The FTX collapse, the fallout on SBF, what is the future? You are not going to want toa miss this show and our next episode coming up. Just a little early teaser, we are all FTX all the time here at Cryptonite. We warned you. We had a lot of episodes, go back to episode one to learn the fundamentals of crypto, learn the warning signs, learn all the lessons that we took in from people like Michael Green and others along the way with a lot of flashing red lights of questions we should be asking. And of course, here we are today with perhaps a lot more shoes still yet to drop in the crypto and DeFi economy. Let's get to our headlines first and then to our special guest. CEO in charge of FTX Restructuring calls case an 'unprecedented' mess. The Wall Street Journal. "FTX suffered a complete failure of corporate controls that culminated in an unprecedented debacle," its new chief executive officer said Thursday. Meanwhile, House Committee to hold hearing on FTX collapse, also in the journal. The ranking members of the House Financial Services Committee, Representative Maxine Waters and Representative Patrick McHenry said they would hold a hearing in December to investigate the collapse of FTX.

0:01:25.4 Rich Goldberg: They will also expect to hear from FTX founder Sam Bankman-Fried, as well as his trading firm and rival platform, Binance. Good luck getting SBF to testify. I wonder how that's going to work out. Nobody knows where he is today. Wall Street Journal also, Binance chief scrambles to shore up crypto. Founder of the dominant crypto platform Binance has made a series of proposals in recent days seeking to restore order to the digital currency universe following the collapse of rival FTX. I'm not exactly a stranger to the fall of FTX as we'll learn. Binance, a key player here in precipitating the very rapid, rapid collapse of the company and of SBF's fortune. FTX, Sam Bankman-Fried sit in the crosshairs of US prosecutors, again in the journal. FTX's offshore status and its willingness to keep American traders off its Bahamas-based exchange in large part shield the company from strict US laws that govern trading and how investments can be sold to the public. Also in the journal, Fed's Michael Barr says crypto turmoil highlights potential risk to financial system. Turmoil, tumult in the crypto market represents a red flag to the broader financial system. The Federal Reserve's top banking regulator plans to tell lawmakers while pressing for tougher guardrails in the wake of the rapid collapse of crypto exchange FTX.

0:02:41.5 Rich Goldberg: Bloomberg, New York governor Hochul urged to sign two-year crypto mining ban. We've been covering this for a while. I can't believe it's still sitting on her desk, even after election day. Environmental activists and public officials rallied in front of New York Governor Kathy Hochul's Manhattan office Tuesday, calling for her to sign a bill that would institute a two-year state ban on some cryptocurrency mining facilities. And finally from Politico, Gillibrand preps stablecoin bill amid FTX debacle. They're still at it, they still want to legislate. Senator Kirsten Gillibrand of New York on Wednesday said she plans to introduce a bill to regulate stablecoins before the end of the year. New York Democrats working on the measure with Senator Cynthia Lummis from Wyoming, with whom she introduced a comprehensive crypto bill earlier this year as well as retiring Senator Pat Toomey, who released the draft language of a stablecoin bill this spring.

0:03:31.7 Rich Goldberg: Perhaps, everybody should take a step back and not do anything until we understand exactly what happened at FTX, what else is happening throughout the industry to understand better what a regulation bill should look like, just a little bit of advice. Let's get to our guest. Justin Weitz is a partner at Morgan Lewis, he spent nearly a decade in the US Department of Justice's criminal division, serving as the principal assistant chief of the fraud section's market integrity and major frauds unit. There he led 45 prosecutors who handled complex white-collar criminal investigations and prosecutions including securities and commodities fraud, financial fraud, market manipulation, procurement fraud, and government contracts, and public corruption matters, and as we'll learn, crypto fraud. He has a bit of expertise there as well and will talk to us at length about what we should be looking at, what he's looking at here in the FTX scandal. Prior to serving the DOJ's fraud section, Justin spent four years as a trial attorney in DOJ's public integrity section. He's an undergrad from Cornell, got his JD from NYU law. Justin Weitz, welcome to the podcast.

0:04:39.7 Justin Weitz: Glad to be here.

0:04:40.0 Rich Goldberg: Well, why don't we level set here? Tell our audience a little bit about yourself, your background, your experience in cases like these before we jump into the nitty gritty of what everybody's talking about.

0:04:54.4 Justin Weitz: Sure, so Rich, I joined my current law firm earlier this year after spending 10 years at the Department of Justice in Washington DC. I worked primarily on fraud and public corruption cases and spent much of the last couple of years managing and supervising cases involving all sorts of fraud, especially cryptocurrency-related fraud. Unbelievably there is fraud in the cryptocurrency and digital assets space, and we found quite a bit of it and I've been working to investigate and prosecute it. And so I supervised that for the last two or three years.

0:05:28.7 Rich Goldberg: I would love to hear to the extent you can talk about it, things that are public, obviously. What kind of cases were you seeing until now in the crypto Fintech space, what were their trends, patterns, things that you were saying like, you know what, there's something going on here where either a lot of tactics were being used or you were already catching on to saying that this is something that... A trend that's forming in this area.

0:05:54.6 Justin Weitz: Sure, so there are a whole... There are different buckets of cases involving cryptocurrency investigations and prosecutions, many of which are public. There are the whole... There's a whole bucket of cases that either have national security implications or just good old crime of the old-fashioned sort, drugs, guns, human trafficking, that kind of stuff, that uses cryptocurrency because it can be a very efficient way of moving money around, doing it without being detected. So put that aside for a second. I didn't do much of that. And frankly, while there are differences in how those cases are investigated from other types of guns, drugs, national security, human trafficking cases, DOJ and the FBI and the other law enforcement agencies have gotten much more sophisticated, but those are really... Those are cases in which crypto is a means to an end, it's a means to funneling money, laundering money, making sure it isn't detected. So put those aside, put the Silk Road-type cases from years ago aside. The focus of my unit and what we did really was on fraud related to crypto. And I think there are a few different areas of fraud related to crypto that were really prominent.

0:07:02.9 Justin Weitz: The most prominent, and I think you've seen a bunch of these cases and you'll see more and more of these cases, are good old investment fraud cases involving cryptocurrency. So there's a long American tradition of fraudsters finding ways to deceive investors or potential investors. Sometimes it's magic beans and sometimes it's cryptocurrency. And these are cases where fraudsters deceive investors both in the US and around the world with different types of coins, different types of crypto products. And in some cases, you had investors who were gullible, in other cases you had investors who were sophisticated, but across these cases what you see is the commonality of fraudsters lying to investors about the nature of their coin, about the prospects for their coin, about how widely used their coin was. And you see people plunging millions if not billions of dollars into completely unknown points. So that's one area, and you see a lot of cases earlier this year in June, DOJ unveiled a whole takedown of various investment fraud Ponzi scheme-type cases. That's one area and you've seen a lot of that and you'll continue to see a lot of that in the way that there will always will be fraudsters. And these are just another kind of magic beans.

0:08:16.1 Justin Weitz: The second area of fraud that you're seeing more and more of and I think DOJ has gotten really sophisticated and good at both detecting this and then prosecuting it. Detecting, investigating, and prosecuting I should say, is manipulation of crypto tokens. So it's one thing when you have a coin and... We could call it Goldberg coin if we want, and you make it up, and you sell it like magic beans to some investors. There are ways to do that as a fraud and you probably can get caught, but market manipulation where there's a coin of some kind and it's being traded on and exchanged, being traded through other means and someone is coming up with ways of manipulating the price of that token so that the price that the average consumer sees is manipulated for lack of a better term. It's not the actual price that should be in the market. That's really hard to do and hard to detect, but if you can do it, you can make a lot of money because there's such volatility in crypto markets and there's anonymity in crypto markets.

0:09:14.1 Justin Weitz: If you take a specific position, and then jack up the price or find a way to lower the price rapidly, you can really make a lot of money. And what I think you'll see... You've seen a little bit of it already, but you'll see a lot more in the next 6-12 months is DOJ bringing these kinds of... And frankly, the SEC and other agencies as well, bringing these kinds of aggressive market manipulation cases that are very sophisticated, and that now law enforcement and regulators have the tools to be able to investigate and understand.

0:09:44.0 Rich Goldberg: For these cases... For a case obviously like FTX now in the news, what's the cycle of events that takes place that launches an investigation just speaking generally, obviously, without getting into details of past cases. What are you looking for? What tips you off? Is it just, "Oh it's big in the news, it's CNBC, FTX, let's just launch some subpoenas." Is there something you have to see on the surface that gives you an inclination of there may be something wrong here. Somebody calls the office saying, "Hey, I'm an insider, this is terrible or I got defrauded." What usually prompts DOJ to open an actual investigation like this?

0:10:26.1 Justin Weitz: Cases come from every direction. FTX, and we'll talk more about FTX, I know, but FTX is unusual because it not only was in the paper, it's consumed the news cycle for the last 10 days. I feel like I've seen more about FTX than I've seen about the midterm elections, Ukraine, Twitter, and there are a million things going on but it seems like FTX consumes the cycle. So part of it is you may see something on the front page of the Wall Street Journal or somewhere else in the media and the FBI or DOJ sees it and says, "Oh, we should look into that." There are parts of the government that are actively monitoring various tokens and when they see massive spike or something unusual, the data analytics have gotten good enough that they can see, "That's something suspicious, we should look into that." And then what you get a lot of is victims who come forward and say, "I invested money in this token and I think it's a scam. I saw something very unusual in this market, I think it's a scam." And that can often launch an investigation.

0:11:28.0 Justin Weitz: The last way cases come in is either somebody gets caught doing something else and says, "By the way I'm also involved in this crypto scam. So we should talk about that because I want to cooperate and help myself." Or somebody gets caught doing something else and the FBI opens up their phone with a search warrant and finds texts, WhatsApp messages, other evidence of a crypto scam and that launches into an investigation. And you'd be surprised at how often criminal investigations of all sorts are launched, essentially because of a lucky break that the FBI or DOJ gets.

0:12:00.8 Rich Goldberg: Once you decide to open investigations or ask more questions in a case like FTX, for example now, what kinds of questions are you asking? Who are you asking? What are you looking for exactly?

0:12:16.4 Justin Weitz: So in a case, whether it's a high profile one like FTX or less high profile, DOJ and their law enforcement partners and I believe it's the FBI most of the time but it's not always the FBI. There are other law enforcement agencies: Secret Service, Homeland Security. There are other ones, postal inspection service, that do a lot of the Lord's work on this, but DOJ and their law enforcement partners will do a few things. So their first goal is usually, from an investigative perspective, is to locate as much concrete evidence as they can. And by that I mean texts, emails, any kind of evidence that is not... It can disappear, but can speak for itself. And so they'll do that through a few means. They can get search warrants, they can go to a judge and get a search warrant for a phone, for email account. Now, people are smart. Criminals tend to be smart and so they're usually not doing things... Not always, sometimes they are, but they're usually not using their Gmail account to send emails about criminal behavior and so you have to get more sophisticated. You may have to go and actually grab somebody's cell phone to see if their signal or WhatsApp messages are on it. But the primary focus at first is how do you get as much concrete evidence as you can?

0:13:28.4 Justin Weitz: And then at the same time, what you're doing as a prosecutor or as an investigator and usually they're working hand in hand, in these kinds of complex investigations is, you'll go out there and you'll interview as many people as you can. And so that's people of all sorts. It's people who may be targets of the investigation, people involved in the actual criminal conduct but also folks who worked with them, folks who they may have lied to, folks who might be witnesses. It's the thing where you do your best to get as many statements up front as you can. And the reason you do that is largely that stories change. And so you want to lock somebody in on their story as soon as you can most of the time to get the most real sense of what actually happened. And then you put those pieces together. So, you're getting documents, you're getting emails, whether it's from phones or email accounts, or from subpoenas that DOJ may have sent to various parties. You're getting these statements as best as you can, and you're trying to piece together enough to determine whether you have sufficient evidence to eventually charge anybody.

0:14:28.7 Justin Weitz: You make that decision about whether you're going to charge someone really based on the evidence that there is, and whether you have the evidence to prove it at trial. Now one thing that is really complicated in crypto cases is that almost all crypto cases have a serious international component. So, in FTX, the business is in the Bahamas, and the US government has various treaties for legal assistance with most countries, Bahamas is one of them, but it's not like you can just send the FBI with a warrant signed by a US federal judge to go raid FTX's headquarters in the Bahamas. And I'm pretty confident that if FTX's headquarters were located within the US, that probably would have happened already but you can't do that. The FBI doesn't have the jurisdiction and neither does the judge. And so it's a complicating factor in any kind of case which is that you don't always have access to all of the evidence, all the information that you might want. It might be abroad, FBI can't go knock on someone's door in a foreign country. That's a real challenge in these kinds of crypto cases. And there are cases where you may not be able to even identify the people who you're looking for and the accounts or other information you're looking for because it's all located abroad.

0:15:40.1 Rich Goldberg: So, we did a lot of top line there on how you approach generally crypto fraud cases. Let's zoom in a little bit on FTX. Based on what you know, what you've seen so far, what's come out, give us your overall impression then we can drill down a little bit. But what are you seeing in this picture right now, as you take a look at the pieces?

0:16:05.1 Justin Weitz: Sure. And so, with the reservation that I know what everyone else knows which is what's been in the public square. And so this is speculative to some extent. So what do we know? We know that a lot of money is missing. And a lot of money is missing from FTX users and a lot of money seems to have been funneled from FTX into Alameda. Now, we know more than that, but that basic fact that there's a lot of money that's missing seems to be at the core of what DOJ is investigating. The only question in my mind as to whether DOJ will be able to have the evidence to charge someone in this case is whether they feel they have the evidence of someone and in this case, it's most likely Sam Bankman-Fried of someone's criminal intent.

0:16:48.8 Justin Weitz: So the hardest thing about any kind of white-collar case whether you're doing a fraud case or a corruption case or a crypto case. The hardest thing about any kind of white-collar case is showing the criminal defendant's intent. There are times and there's times for anyone who's been in the business of criminal prosecution or defense where you might have a gut feeling that someone committed a crime, but if you don't have the evidence as a prosecutor to prove to a jury of 12 strangers beyond a reasonable doubt that somebody committed a crime, you can't bring the case. You need to be able to have that strong evidence. People tend not to put their intent on paper. They don't say, "I acted with the intent to defraud someone or with the intent to manipulate or deceive a market."

0:17:32.3 Justin Weitz: And so the whole inquiry for those prosecutors right now is what is Bankman-Fried and what was Bankman-Fried's intent. I think you've seen a bit of a media campaign coming from the FTX camp or I should say from his camp, the former FTX camp, because he's not at this point the CEO. You've seen a bit of a media campaign to suggest that he was in over his head, he made some mistakes, he's 30. Obviously, he has some... He's inexperienced to some degree. And if that's true, if he was just an inexperienced person who made mistakes, that may not mean that he had the intent to defraud. He may have just done a bad job and people make mistakes. And so the focus of what DOJ is doing now, I'm sure of it, because it's what any white-collar prosecutor would be doing is trying to lock down the evidence of that criminal intent that they can prove affirmatively. Now how do they do that? Bankman-Fried has done DOJ some favors in the last two weeks by tweeting and talking a lot. There was his conversation with a reporter I think from Vox that was published recently.

0:18:35.0 Justin Weitz: He tweeted quite a bit. He's made some other statements. Those statements are evidence, they're usable. They're usable evidence against Bankman-Fried in a trial, and they're inconsistent. They're all over the place. And so one of the ways in which prosecutors often will affirmatively show criminal intent because you can't get inside someone's head that easily is, are they telling multiple stories to multiple people? Are they making things up as they go along? Are they inconsistent in what they say? And it seems to me that he really has been in the way he's approached this. The other thing is that if he's lying at various points, and I haven't seen his past emails and the other things that I'm sure DOJ is looking for. But if things he's saying now are inconsistent with the truth of what's happened in recent weeks, months and years, that sets up a very nice contrast for DOJ to present to a jury. A jury I think instinctively understand that someone isn't lying about something later if they had nothing to hide. The last thing that I think is a really important component of showing criminal intent is showing that Bankman-Fried acted with some kind of purpose to benefit himself.

0:19:45.0 Justin Weitz: It's not really required, but it often is very helpful in showing the motive, the reason for the crime. And earlier today we're recording on Thursday and earlier today, the new CEO of FTX, John, Ray filed a pretty revealing affidavit in bankruptcy court in Delaware and I recommend if you haven't read it, and you're a nerd for this stuff like I am, it's a worthwhile 30 page read. And there are a lot of juicy things in there. But one of the juicy things was that Alameda research had a loan to Bankman-Fried of about $1 billion listed in the financials, you have to kind of look for it, but I think it's in a footnote. But there's a billion dollar loan. And I don't know if that's what was funding Bankman-Fried's lifestyle, but suddenly you get into a different story where it's not Bankman-Fried just the effective altruist. It's not about philanthropy, it's not about supporting causes but, money is fungible if he had a billion dollar loan from Alameda, and I don't know what the terms were, but that is evidence of his personal motive to keep the scheme going.

0:20:47.8 Justin Weitz: So, those are the big things that I see from the public side, but I am sure that DOJ is also doing something that we can't see which is looking for texts, signal messages, WhatsApp messages, those other types of communications. And, I don't know if Bankman-Fried has been more careful in that than he's been publicly but if he hasn't, there may be other things that are very revealing of his state of mind.

0:21:09.6 Rich Goldberg: And you mentioned that a lot of this evidence may be in the Bahamas, potentially outside FBI's reach, at least up front. But yeah, I'm imagining, I've seen some reporting on this that if you can find a nexus for the Bahamian government to say, "Hey, we think you've broken our laws." And for them to go start subpoenaing records have their own raid. Is that something that the FBI could potentially get their hands on at that point from the Bahamians?

0:21:40.1 Justin Weitz: Yes. So I'm not... I can't profess to know every detail of the US Bahamas Mutual Legal Assistance Treaty, but generally, there's a process through which and it can be expedited in sensitive cases. US authorities can transmit that request to the Bahamas authorities. I have to imagine this is the biggest thing that's ever happened for the Bahamas Securities Commission. This is their Super Bowl. So, I would be surprised if there haven't been requests transmitted, but there's another side to this which is, when people are aware that they're in trouble, things start to disappear. Emails start to disappear, messages start to disappear. There's been some reports that Bankman-Fried had encourage people to use auto delete services on their app so that those messages would be ephemeral, would disappear.

0:22:24.7 Justin Weitz: So, by the time Bahamian authorities or anyone else get their hands on things, a lot of it may be gone. Now, again, that can also be compelling evidence for prosecutors if you can show that somebody was acting to delete stuff. A jury instinctively understands you're not deleting things unless you have a negative intent and so, that can be very helpful but it's not the kind of thing where the FBI can just go in and grab it and run the forensics and say, "He deleted everything the day after he knew about the investigation." They may eventually be able to get some of that stuff from the Bahamians, but you get into very sensitive sovereignty issues when you're dealing with foreign countries. And so depending on the type of case, the Bahamas may not want US agents to come down and be acting on their soil. I am sure there's a very sensitive back and forth going on, but it involves not just DOJ and law enforcement, it also involves, most likely the State Department and other diplomatic parts of the government.

0:23:23.4 Rich Goldberg: Justin you mentioned that that recent filing when we talked a little bit about at the top of the show in our in our headline segment, but this to go deep was from Axios Cryptos summary of some key findings that were in there. There was no accounting department. There was little evidence of an HR department, though I know people who work there, I'm not sure how they got hired. SBF preferred to communicate with applications that auto deleted, urging employees to do the same as you just referenced, and there was no appropriate disbursement process payment requests were approved via emoji over chat. So, I guess my question is, is there any crime that just basically haphazard operations? Maybe it's... It may not be a fraud statute, but maybe there's other legal things that he's still on the hook for even if he don't have the intent maybe it's the SEC, it's other. The fact that he's operating with this much money with no controls, you would think with all these VCs and everybody else who's involved like, how does this even happen.

0:24:23.8 Justin Weitz: First of all, nothing I say is legal advice so don't go run out and mismanage your companies and say Justin told me I could. So, with a private company... It's different for public companies, if you're a publicly traded company, you have obligations in terms of managing your books and records and controls, but with private companies you generally don't.

0:24:42.4 Justin Weitz: It's not clear to me that there is an independent duty to be responsible on how you operate. There were some VC firms and people who probably knew that he operated this way and they said this is a risk worth taking. There are others who had no idea. Now what's going to be really interesting is when we see what he said to these various VC firms because there's two angles to the potential fraud investigation as I see it from the outside. One is what was he saying to the people who deposited their assets with FTX. And those might be the more sympathetic victims in a lot of ways. But the second angle is what is he saying to the independent VC firms, big money investors who he's raising money from. What do those decks say? Do those decks say, I have a poorly hidden Fiat account. My guess is they don't. Right? Because somebody invested and did at least some due diligence before they did way back when. A lot of this feels analogous in some ways to the Elizabeth Holmes and Theranos scandal, and another wonder came who was recently convicted of fraud.

0:25:50.5 Justin Weitz: And she was raising money and there are things that were being said that were incorrect and willfully incorrect I believe to various investors, big money investors. Now, I think that's an angle that folks aren't talking about as much, people are talking more about the victims who put their money in FTX and now it's gone, but there are people who invest and there are firms that probably invested millions, 10s of millions, 100s of millions of dollars on the premise that something was true when it wasn't. I think the question is, what do they know? I suspect that Bankman-Fried was not telling them, we disperse our money using emojis and we have no accounting controls in place.

0:26:31.0 Rich Goldberg: Now I imagine that there will be a number of civil suits filed. I think there already have been a couple already filed. Talk a little bit about the threshold difference between criminal liability and civil liability here.

0:26:45.0 Justin Weitz: So, criminal liability is usually much, much harder to prove. Both because of that intent requirement, the necessity of showing it beyond a reasonable doubt which is a really serious and heavy burden for the government to bear, and certain evidentiary rules which make it challenging. So in a criminal case, the government can't call Bankman-Fried or any other defendant to testify, but in a civil case, you can and you do, you call the opposing party to testify, and then they say whatever they say, and that usually is the basis for some good cross examination and some good evidence that supports your case.

0:27:23.8 Justin Weitz: So there's those structural differences. They're all... I mean, these lawsuits will be under various state and foreign laws and I'm not familiar with all of them, but generally in civil cases the much lower burden it's more likely than not. So you need to show 50% plus one as opposed to beyond a reasonable doubt. The biggest challenge of those civil cases will have though, is the goal of a civil case is to get money. And it's not clear to me where the money is, now I'm sure that DOJ and other law enforcement agencies and other regulators, probably not just in the United States have been spending a lot of time in the last few weeks trying to track down every last dollar or coin they can to freeze as much of it for eventual recovery and return to victims, but I don't know where you're going to find that money. And in civil cases, you don't have that same power necessarily that the government does to seize and discover assets and so it'll be a long road on civil cases, and I suspect that many of them will not be that fruitful for that reason, they may win win but they may not be that fruitful.

0:28:32.5 Justin Weitz: It'll be interesting to see if you are put... If there ends up being a situation similar to what happened in the wake of the Bernie Madoff scandal in the 08-09 financial crisis, where there was an independent clawback procedure put in place to clawback assets that people had successfully taken out before it all collapsed. I don't know if that will happen here. I don't know how that will interact with the bankruptcy proceeding that's going on. It's all very up in the air as to what will happen, but there are a lot of people who will want money back and it may not be there to get.

0:29:07.7 Rich Goldberg: I want toa zoom out a little bit away from FTX into the first ring and then more systemic to the industry and then we'll let you go. Other people, other entities that could potentially be under investigation, brought into the orbit of a criminal probe, likely to see subpoenas coming in, whether they're a target or not, I imagine it's the VC firms who have been involved, different other financial institutions, consiglieres, anybody who we know is sort of in his orbit who may have been pitched, who may have knowledge of something, what is the potential ripple effect downstream from FTX criminally and then I have a more systemic question about what's next for the industry.

0:29:54.8 Justin Weitz: I think in terms of the investigations because there's DOJ as an investigation, the SCC, the CFTC, various state attorneys general, I'm sure foreign governments as well. So I say investigations because there really are a lot of them right now as far as we know, there may be more. Anybody who interacted with FTX in any meaningful way should expect to be getting a call, now maybe a friendly call, and maybe we just want information, there is going to be a broad net, because I have seen speculation that Bankman-Fried may have been able to do this on his own. I don't know that that's totally true. I just don't know, but you can be sure that DOJ and those other regulators will be looking to find everybody who was involved. Everybody who might have known and even if there aren't ultimately criminal charges against all those people, they may have other regulatory penalties, they may have other exposure. So I would expect DOJ to be very broad and also very thorough in how they investigate this. And that includes VC firms, anybody who got this money, anybody who traded extensively in FTG, anyone who really was exposed to this world should expect some scrutiny and should be prepared to respond to that scrutiny appropriately.

0:31:12.0 Justin Weitz: The ripple effect beyond FTX is that whenever there's a financial crisis, I'm not talking about crypto I'm talking about things like the 2002 financial crisis that exposed wrongdoing at WorldCom and Enron and other companies that had accounting scandals or the 08 financial crisis which exposed the Madoff Ponzi scheme. Whenever there's a crisis of some kind in any sort of industry, you see that the emperor has no clothes and there tends to be exposure of these kinds of schemes. I don't know what's going to be next and it's beyond just the question of is there a structural problem with crypto, but no doubt there are a lot of other scams in crypto. We've seen it. There's the number of schemes in this space, this space seems in a lot of ways meant for it, right? Some things are poorly traceable. There's no underlying value to a lot of these assets and there's a frenzy of people with money trying to get in. This is a great space, if you're a criminal to work in. I think as you see crypto prices continue to decline as more subpoenas go out whether related to FTX or other investigations that lead to other investigations down the road, you'll see an incredible emphasis on crypto from DOJ.

0:32:33.3 Justin Weitz: I think they've already had that emphasis, but I think you're going to see more and more investigations. And I think you'll see more prosecutions because you are going to learn and we're already seeing it with Bankman-Fried who I don't think anyone, I don't think most casual crypto observers a month ago would have said FTX is the emperor with no clothes. There are definitely more emperors with no clothes out there, and I think they're going to be more investigations and prosecutions.

0:33:00.1 Rich Goldberg: Last question for you is this. Not to give legal advice to anybody, but just if you were, in a FinTech company, you were general counsel, you were looking at some of the stuff, you're seeing what's happening. What's the checklist in your mind of like, here's the 10 things that we have to make sure structurally are happening here to protect ourselves, to make sure everything is kosher here from accounting to different checks and balances or whatever it is. What is it that the industry should be thinking about as... And maybe regulators who may need to legislate more, regulate more should be thinking about is like what's the bare minimum?

0:33:38.5 Justin Weitz: You're saying if you're in a crypto company, any kind of crypto?

0:33:42.8 Rich Goldberg: Yeah, yeah in the FinTech space right now, what should you probably have because you probably raced with no clothes on to get a bunch of VC money and do some crazy thing out of college. And maybe you have a lawyer, I assume you have a lawyer but...

0:33:54.5 Justin Weitz: Yeah. You should have a lawyer. That's the first thing you should do is you should have a competent lawyer who knows how to take a look at your compliance policies, at the structure of your business. At the end of the day, a lot of these problems probably could have been averted, had FTX had an independent board of directors, independent auditor, all the things that help reputable businesses stay reputable. So when you buy shares of a publicly traded company. You have some assurance it was the financial statements were audited by an external auditor. There's the board of directors that at least is hopefully independent. None of that seemed to be the case here.

0:34:35.5 Justin Weitz: And so, the two things that I would say are a lawyer who can really kick the tires to make sure you don't have any glaring problems, because I have to imagine a competent lawyer, have they seen some of these things would have said we have a big problem a long time ago. And then the second thing is somebody who has the ability to push back on this kind of founder. That is a problem, think about Theranos, think about FTX. There needs to be somebody with the ability to push back and say, "This is not how we're doing things, this doesn't seem right, I'm concerned about this." So building a culture, I think is hard in any business, building a culture that is compliant is hard, but doing it in this space where everything is so frantic. There's a lot of inexperience is even more challenging and the right thing to do if you're in FinTech and frankly if you're doing nothing wrong in FinTech is to invest in that compliance advice early on because if you do that, you are much better positioned to avoid this kind of epic collapse later. And frankly, if there is wrongdoing going on or there are practices that are sketchy, you can often get ahead of them and reduce the structural risk to the company.

0:35:51.2 Rich Goldberg: Justin Weitz, thanks so much for joining Cryptonite, great discussion.

0:35:54.4 Justin Weitz: Thank you, Rich. Take care.

0:35:55.0 Rich Goldberg: And that's all for today's show. Make sure you are subscribed if this is your first time listening. If you have the time go back to day one, get the 101 lessons if you don't know it already. Start listening to some of our incredible experts we have interviewed here, and the warning signs that we had, not just from skeptics, but from supporters, from investors all along, we were asking the tough questions, we were asking the right questions, as it turned out, a lot of people now on television saying, oh, the warning signs were always there, we knew this was coming. Nobody said that just a month ago. So much money in the system, so much money being poured into Washington, into advertising, into the business networks, guests lined up, platforms, the financial institutions moving in, creating crypto accounts, crypto trading, 401 [k] is being opened up to crypto. "Oh, and no, we knew this was coming all along, oh this is just one terrible fraud." No, no, listen to what Justin just told us.

0:37:01.4 Rich Goldberg: This is not the last shoe to drop. There are others out there. We are going to stay on this, we're going to start talking to more people here. We're going to expose what's happening in this industry, because it's very important and ultimately why do we found this program, we founded it to understand what regulations we need while we're getting a lot of lessons learned right here from FTX's collapse. And that should inform legislation, that should inform regulation. Not the industry anymore, not the billions being spent, not their lobbying arms in Washington. No more. If you like our show please help us get the word out, subscribe on your favorite podcast app, leave us a five star review. Most importantly tell your friends because that's the best recommendation we can get. Until next time. I'm Rich Goldberg. This is Cryptonite.