The spectacle of a shambling billionaire with an adolescent personality, an inconsistent memory, a fondness for using his depositors’ funds for his own personal purposes, and an eagerness to talk in self-destructive ways to the press has fascinated everyone. This column will leave to psychiatrists and journalists the assessment of Samuel Bankman-Fried’s (“SBF”) character, but important legal issues lurk in his case that are central to the field of white collar crime and that have seldom been explored adequately by appellate courts.
Let’s begin by looking at what has happened so far. The Southern District of New York’s U.S. Attorney’s Office (“SDNY”) moved with unusual quickness to indict SBF – indeed, only a month after the collapse of FTX.com (“FTX”) in November. Why such speed? Two reasons stand out: First, the scandal was not complex; at bottom, it was an unsophisticated embezzlement, and little effort had been made to disguise it. SBF owned both FTX and Alameda Research, which his indictment repeatedly describes as his “proprietary crypto hedge fund.” This seems a classic theft of other people’s money by a fiduciary. In contrast, Enron and WorldCom involved massive and carefully run entities where the fraud was elaborately planned and hidden (with Enron having a maze of subsidiaries and WorldCom employing very non-transparent accounting transactions).
Second, and even more important, SBF was out of the country and could flee at any time to jurisdictions from which it might have been difficult to extradite him. Thus, the prosecutors obtained a sealed indictment so as not to alert him. As a result, the SBF indictment is short (only 13 pages of text) and avoids the rhetoric and background narrative that have become common in the “speaking indictments” that the SDNY increasingly uses. Rather, the SBF indictment is a minimalist, bare bones effort.
Still, two things do stand out on the face of the SBF indictment. Of its eight counts, six are conspiracy charges. Yet, no other conspirator is named. Why? Possibly, the answer is that the prosecutors are negotiating for cooperation with potential witnesses and do not want to antagonize them at this stage. The looming tactical question here is what sort of deal will they offer to (or accept from) Caroline Ellison, who ran Alameda Research and was once romantically linked with SBF. She seems too deeply involved to get off without a plea to some charges, but her cooperative testimony could sink SBF beyond any hope of acquittal.
Does SBF have any plausible defenses? His most interesting defense involves the complicated issue of extraterritoriality. Numerous journalists have noted that Morrison v. Nat’l Austl. Bank Ltd. holds that the federal securities laws basically do not apply extraterritorially, but they have never quite understood Morrison’s reasoning or standard. As more fully explained in RJR Nabisco, Inc. v. European Cmty., a follow-up case, the Court has adopted a two-step test: Step one is to decide “whether the statute gives a clear, affirmative indication that that it applies extraterritorially.” If such an indication is given, the issue is resolved. But, absent such a clear indication, the second step comes into play and requires the court to determine “whether the case involves a domestic application of the statute.” In turn, this requires the court to evaluate the statute’s “focus” and whether conduct “relevant to the statute’s focus occurred within the United States.” When such “focus”-relevant conduct does occur in the United States, the Court accepts that some “domestic” application of the statute is permissible, “even if other conduct occurred abroad.”
A quick look at the SBF indictment shows that the SDNY is hoping to apply the federal wire fraud statute and the anti-fraud provisions of the federal securities laws extraterritorially against a defendant who largely acted outside the U.S. To succeed, prosecutors will need to rely on the second step analysis, as neither statute reveals on its face a congressional intent to apply it extraterritorially. The wire fraud statute was modelled after the mail fraud statute, which was passed in 1872, and that 1872 Act was primarily intended to protect the mails from corruption and misuse. Congress had learned that post offices were being used to further gambling, pornography, and the dissemination of counterfeit money, and it sought to put a stop to such use. In the case of the federal securities laws, the facts of Morrison show that the mere sending of mail by the defendant National Australia Bank into the U.S. was insufficient to satisfy Morrison’s “focus” test.
This proposed interpretation does face one problematic difficulty: In a pre-Morrison decision in 2005, the Supreme Court in Pasquantino v. United States,  upheld a wire fraud conviction in a scheme to evade Canadian import taxes by smuggling liquor into Canada from the United States. Most of the conduct occurred in the United States, involved interstate phone calls arranging to buy and transport the smuggled liquor, and clearly seemed “domestic” in character, even if the victim was a foreigner. Although the outcome seems obvious (i.e., uphold the conviction), Justice Thomas, writing for the majority, dispensed with these facts and argued that the wire fraud statute covers both fraud that occurs in interstate and “foreign” commerce, concluding that:
This surely is not a statute in which Congress had only domestic concerns in mind.
That conclusion seems illogical (even for Justice Thomas), and commentators have regarded it as only dicta. Moreover, Pasquantino was five years before Morrison, which articulated the critical presumption against extraterritoriality that will be at center stage in SBF’s case.
Hence, it seems safe to conclude that, in a wire fraud prosecution, the burden will be on the prosecution to show sufficient domestic contacts to satisfy the second step in the Morrison/RJR Nabisco analysis. Here again, however, a concession must be acknowledged: There is a seeming split in the circuits. In one Third Circuit case, United States v. Giorgio, the panel affirmed a wire fraud conviction in a case that at bottom was a standard stock fraud case, and it characterized the wire fraud statute, in light of Pasquantino, as expressing a clear extraterritorial intent. Indeed, it went so far as to state that “unlike the Securities Exchange Act, Section 1343 applies extraterritorially.” Giorgio was also prior to Morrison, and the Third Circuit thus had little reason to recognize that Justice Thomas’ statement was only dicta. The First Circuit reached a similar conclusion post-Morrison in 2014 in United States v. Lyons,  finding that there was a clear indication that the wire fraud statute applied extraterritorially.
Poorly reasoned as these two decisions may seem, they do not apply in the Second Circuit, which has held that the bank fraud statute, which, it noted, should be read in pari materia with mail and wire fraud, “does not purport to apply to extraterritorial conduct.” In Bascuñán v. Elsaca, the Second Circuit announced in 2019 that “[t]he mail and wire fraud statutes do not indicate an exterritorial reach” and thus private plaintiffs “can employ them only if …the conduct relevant to their ‘focus’ occurred in the United States.” Although the conduct in Bascuñán also involved an alleged misappropriation of the victim’s bank accounts by the defendant (as SBF is alleged to have committed), those bank accounts in Bascuñán were in the United States, and thus the “domestic” injury was clear. But the Second Circuit still stressed that, when extraterritoriality is at issue:
the use of the mail or wires must be essential, rather than merely incidental, to the scheme to defraud.
Accordingly, the issue becomes: Were the statements that SBF mailed or wired into the U.S. “essential” or “a core component of the scheme to defraud”? At this point, we cannot tell from the face of the SBF indictment. The most relevant statement in the SBF indictment comes in Paragraph 12 of Count Six, which alleges that SBF “on or about September 18, 2022… caused an email to be sent to an FTX investor in New York, New York that contained materially false information about FTX’s financial condition.” But even if the misinformation was material, was this statement “essential, rather than merely incidental, to the scheme to defraud” (as Bascuñán requires)? My own guess is that this allegation was more intended to justify venue in the SDNY than satisfy Bascuñán. In most cases involving public corporations, venue is easy for prosecutors to establish in New York because public corporations trade on either the NYSE or Nasdaq, both of which are located in theory in New York. However, in the case of a private corporation, there is no such trading, and thus some other act or conduct must be relied upon to establish venue (such as a mailing to a victim in New York).
Of course, the possibility that the current SBF indictment does not yet demonstrate that statements “essential” to, or at the “core” of, the fraud were made domestically is not necessarily fatal to the prosecutor’s case. They can (and likely will) file superseding indictments as they gain more information from their investigation (and also more cooperation from alleged co-conspirators).
Even more importantly, Bascuñán and like wire fraud cases are not the only authority on which prosecutors can rely. Passed as Morrison was before the Supreme Court, Section 27(b) of the Securities Exchange Act (“Extraterritorial Jurisdiction”) gives prosecutors an alternative basis upon which to assert liability that private plaintiffs lack in similar extraterritorial cases. Section 27(b)(1) authorizes the prosecutor (or the SEC in civil cases) to sue if it can allege:
conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors.
Of course, this statutory provision applies only to securities fraud allegations and not to allegations of wire fraud or other non-securities offenses.
Similarly Section 27(b)(2) then gives the government a second string to its bow if it can allege:
conduct occurring outside the United States that has a foreseeable substantial effect within the United States.
At this point the SBF indictment has not yet clearly alleged conduct “that constitutes significant steps in furtherance of the violation.” The one relevant allegation (noted earlier) is in Paragraph 12 of the SBF indictment, but it only alleges a single letter sent to an addressee in New York City. By itself, this may not amount to “significant steps.” In its civil complaint, the Commodity Futures Trading Commission (“CFTC”) has alleged that SBF’s conduct caused the failure of FTX, which in turn had a “substantial effect” under Section 27(b)(2) in the United States: namely, a sharp decline in the market for bitcoin (which did fall sharply in the wake of FTX’s bankruptcy). Prosecutors could follow the CFTC’s lead (both for purposes of commodities fraud and securities fraud), but in a criminal case this causal sequence would seemingly have to be proven beyond a reasonable doubt. That might result in a series of expert witnesses confusing the jury, whom prosecutors would like to keep focused on SBF’s embezzlement of customer deposits.
Given the recent adoption of Section 27(b), do the prosecutors really need their wire fraud counts (and thus need to rely on Bascuñán)? The answer is that they very much need to rely on wire fraud, because it is very uncertain that the Supreme Court (or other appellate courts) will consider crypto currencies to constitute “securities.” If currencies are not securities, then the wire fraud counts are the prosecutor’s last resort.
Prosecutors need to rely on Section 27(b) for their securities law counts and on Bascuñán for their wire fraud counts. Both articulate a basically similar standard: namely, that emails or wires sent into the U.S. amounted to more than an isolated occurrence and were in fact “essential” to the alleged scheme (under Bascuñán) or constitute “substantial” steps under the non-securities counts.
A bias towards legal realism leads me to believe that prosecutors can meet this burden with relative ease. SBF is an extremely inviting defendant who seems easily worthy of indictment. Moreover, running a scheme to defraud a few miles offshore of Miami in the Bahamas does not sound truly extraterritorial and will not offend other nations. Even if technically extraterritorial, the facts in the SBF case are a far cry from those in a case like Morrison, where the defendant was a legitimate bank in Australia. Although no court may state this, this disparity may still motivate them to uphold the government’s case. Still, prosecutors need to draft a superseding indictment to better deal with the problem of extraterritoriality.
Finally, the government has one big discretionary decision still to make: what to do with Caroline Ellison? No gentleman, SBF has been publicly stating that his former girlfriend ran Alameda Research. But even if that is true, the money had to be transferred from FTX to Alameda, and seemingly only SBF had the authority to do that. Ms. Ellison and her attorneys should be earnestly seeking to negotiate a cooperation-for-leniency plea bargain. Women are no longer exempt from indictment in white collar cases (as Elizabeth Holmes at Theranos has proven), and a guilty plea by her will likely be necessary.
Stay tuned! More interesting turns in this case seem likely.
 561 U.S. 247 (2010).
 579 U.S. 325 (2016).
 Id. at 337.
 The wire fraud statute does use the term “foreign commerce,” but this should not be given great weight, as it could show an intent only to reach a domestic defendant who sends wires to foreign victims (and not to reach foreign defendants).
 For a masterful treatment of the history of the mail fraud statute, see Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 Duquesne Law Review 771 (1980). Those who know the judge should urge him to stop whatever he is doing and finish Part II of this project.
 544 U.S. 349 (2005).
 Id. at 372. As Justice Thomas recognized, however, the issue of extraterritoriality was not raised by petitioners until their response brief. Id. at 371, n. 12. Hence, it was likely not at stage center.
 For an overview and a discussion of the view that Justice Thomas’ statement was dicta, see William S. Dodge, The New Presumption Against Extraterritoriality, 133 Harv. L. Rev. 1582 (2020).
 777 F.3d 125 (3rd Cir. 2015).
 Id. at 137.
 740 F.3d 702, 718 (1st Cir. 2014).
 See Bascuñán v. Elsaca, 927 F.3d 108 (2d Cir. 2019).
 Id. at 121.
 Id. at 122.
 In reality, both the NYSE and Nasdaq trade through computers located in the swamps of New Jersey. But that is a topic for a different column.
This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.