Did Sam Bankman-Fried’s mother enable the FTX straw-donor scheme?

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Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.

Since it took over the smoldering wreck of the crypto empire in November, the FTX bankruptcy estate led by John Ray III has been methodically launching lawsuits to recover hundreds of millions of dollars from former executives and companies that had been the recipients of the exchange's riches. The complaints have often seemed like PR campaigns in their own right, packed with juicy details about the excesses and failures of Sam Bankman-Fried's inner circle. None have matched the revelations of yesterday's bombshell.

Targeted at Bankman-Fried's parents, Joe Bankman and Barbara Fried, the lawsuit alleges that the two Stanford professors not only played a crucial role in FTX's rise but profited handsomely from its success, siphoning millions of funds—as well as Bahamas property, $1,200-per-night hotel rooms, and a Larry David Super Bowl ad cameo.

While Joe Bankman, a tax law expert, served as the primary lightning rod for the accusations, Barbara Fried was not spared. As Tuesday's lawsuit lays out, Fried served as Bankman-Fried's primary political advisor as he embarked on his campaign of influence in D.C., describing herself as her son's "partner in crime of the noncriminal sort."

Campaign finance violations are one of the central pillars of federal prosecutors' case against Bankman-Fried and members of his inner circle, including the former co-chief of FTX, Ryan Salame, and the former director of engineering, Nishad Singh. Prosecutors allege that the executives directed hundreds of millions of misappropriated funds to political donations, often through illegal "straw donor" schemes, where money is masked through a proxy to circumvent spending limits.

In yesterday's lawsuit, the FTX bankruptcy estate makes a stunning accusation: That structure may have been devised by Bankman-Fried's mother, a renowned philosophy scholar focused on ethics who has written pieces titled "The Limits of Personal Responsibility" and "Beyond Blame." Before FTX's rise, she had founded a nonprofit called Mind the Gap, which directed millions to Democratic candidates. And during her son's ascent, she helped sculpt his identity as one of the nation's leading donors.

According to the lawsuit, Fried suggested—and even encouraged—Bankman-Fried and Singh to falsify disclosure records. In one instance from April 2021, she recommended that a $1 million pledge to Mind the Gap come from Singh rather than Bankman-Fried. "We'd have a slight preference for that on our end, now that my connection to Sam is publicly known," she wrote in an email. "We don't want to create the impression that funding MTG is a family affair." In two other instances, she tells her son not to donate in methods that disclose his name, recommending that he substitute someone else's, including Singh's and former Alameda head Caroline Ellison's. Singh has since pled guilty to campaign finance violations.

In a statement shared with Fortune, the lawyers for Fried and Bankman characterized the lawsuit as a "dangerous attempt to intimidate Joe and Barbara," arguing that the claims are "completely false." When asked about the apparent campaign finance violations, a spokesperson declined to comment.

With the lawsuit only representing civil charges against Bankman-Fried's parents, the question moving forward is whether prosecutors will tack on criminal charges as they continue to tighten the screws around the disgraced crypto founder. With his trial just two weeks away and no sign of a plea deal in sight, pressure on his parents could represent a tactic that proved ineffective with his former friends and colleagues. And if the allegations against Fried prove true, then Singh may have been an unwitting fall guy in a disastrous family affair.

Leo Schwartz

This story was originally featured on Fortune.com

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