Why The Political Campaigns That Received FTX Donations Will Have To Pay Those Funds Back To FTX
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A decade ago, I wrote an article entitled Elephants and Donkeys Find Unhappiness In Sir Scam-A-Lot's Court (October 30, 2012), about the decision of the U.S. Fifth Circuit Court of Appeals in Janvey v. Democratic Senatorial Campaign Committee, Inc., 2012 WL 5207460 (5th Cir., Oct. 23, 2012). This decision required various Congressional and Senatorial campaign funds of both political parties to turn over to the receiver the moneys that they had received from a notorious Ponzi schemer by the name of Allen Stanford.
History repeats, again. Fast forward to the present where there have been many millions of dollars in political donations made by FTX, its founder Samuel Bankman-Fried, by its affiliated companies such as Alameda Research and by affiliated insiders. This appears to have been more-or-less bipartisan in nature as large amounts of money were donated to both Democratic and Republican committees. Reportedly, FTX ― which is now under the supervision of bankruptcy courts in both the United States and the Bahamas ― will attempt to claw back these donations for the benefit of FTX's investors and depositors. This article will explain the technical background of these clawbacks, and why they are likely to be successful.
We'll ignore Bahamas law and the Bahamas bankruptcy, which seems to have been done only so that Bahamanian depositors could get their money out of FTX before the company's assets were frozen, and at any rate will not play much of a role in clawbacks against U.S. recipients of FTX's donations.
Under U.S. law, whether under the U.S. Bankruptcy Code or state fraudulent transfer law, a transfer may be set aside (the technical term is avoided) under what is known under the Insolvency Test if two elements are met: First, the debtor was insolvent at the time of the transfer; and, second, the debtor did not receive reasonably equivalent value in exchange for the transfer.
As far as the insolvency prong goes, FTX is reportedly $8 billion in the hole which easily satisfies that requirement. That takes us to the only other element, which is that FTX did not receive reasonably equivalent value in exchange for its political donations. This too is a gimme. Political donations are inherently gifts; if there was a quid pro quo to be received in exchange for it making political donations, that would be a bribe and thus implicate the criminal laws. So, an easy case can been made that FTX's political donations are avoidable.
Once a creditor (in this case, ironically, FTX) has made a case for avoidance, then the burden shifts to the transferees ― being the political committees which received FTX's donations) ― to prove their one defense, known as the transferee's good faith defense. This defense has two elements: First, the transferees were in good faith; and, second, the transferees gave reasonably equivalent value in exchange for the transfers. Both elements of the test have to be established for the test to apply. But, of course, we've already established that FTX did not receive any reasonably equivalent value in exchange for its donations, so the political campaigns will never be able to satisfy the elements of this defense.
In other words, the political committees that received money from FTX have to give it all back. But wait! There is a plot twist.
When FTX failed, the politicians who received money from FTX decided that the money was a political hot potato ― gotta get rid of it quick! But instead of returning the money to FTX for the benefit of its investors, depositors and other creditors, these politicians and their affiliated committees started donating the money to various charities. So, if the FTX is not held by the political campaigns, but it now held by these charities, against which can FTX recover? That is a trick question, for the answer is both of them.
The fraudulent transfer laws provide creditors with a wide range of remedies, but the most important two are the aforementioned avoidance, which means that the transfer is unwound, with the other being a money judgment against the transferee. If the transferee no long holds the money, as with the political committees here, then FTX can still get a money judgment against the political committees which would require them to pay money equal to the amount they received, even if they later donated it. So, the political committees will still be on the hook without regard to what they did after receiving the money.
How about the charities? They are also liable to FTX. The fraudulent transfer laws basically allow a creditor such as FTX the power to pursue down a chain of transferees and recover fraudulently transferred assets ― at least until they come to the first transferee who is able to assert the good faith defense. But, again, the good faith defense requires that the transferees paid reasonably equivalent value for what they received, and these charities paid nothing to the political campaigns or to FTX either. So, when these charities received these moneys from the political committees, they should have said, "Thanks for nothing."
This is not any new or theoretical law when it comes to charities. Trustees and receivers in Ponzi schemes are often able to force charities to disgorge moneys that they have received as donations from the schemer. This is tough on the charities, as after receiving donations (and particularly large donations) these charities start to make plans on how to be deploy these moneys towards their charitable purpose. When somebody later shows up at the charity demanding that the money be returned, often they have trouble coming up with the money.
The lesson here for charities is that when they receive "hot potato" money in these situations, they should set that money aside for the event that somebody they may have to pay it back. This money should be kept set aside at least until the typically four-year extinguishment period for challenging voidable transactions has lapsed.
Note, however, that a creditor cannot make a "double recovery" or recover more than the value of the asset transferred by the debtor. However, a creditor can elect to pursue a transferee, a transferee-from-a-transferee (known as a subsequent transferee), other subsequent transferees down the line, or all of them simultaneously. But at the end of the day, the creditor's recovery has the hard ceiling of the value of the asset transferred by the debtor.
In this case, it is likely that FTX will go after the political campaigns only and for reasons that have nothing to do with fraudulent transfer law, namely, that everybody (including judges) like charities, but nobody is particularly fond of political campaigns. This will not please the political campaigns because ― having already donated the money to the charities ― they will have to pay FTX back out of other donations that were supposed to be utilized for the 2024 campaigns. For the same reason that the optics of a political campaign asking for donations back from the charities they gave to is bad, those campaigns probably will not ask (as least publicly) for the return of their donations. In other words, the political campaigns may end up both having to pay FTX for the money they received, and also basically pay a penalty in the amount that they received from FTX by way of their donation of the money to the charities.
Instead of giving the money to the charities, it would frankly have been easier if the political campaigns had just returned the money to FTX in the first place, which was the right thing to do. But of course simply not accepting donations in the first place from a shady entity like FTX that was obviously just attempting to buy influence would have been an even more right thing for these politicians and affiliated campaign committees to do.
Paint me cynical, but somehow I doubt that will be the subject of any Congressional investigation.
Article Summary
Discusses the fraudulent transfer implications of FTX's political donations.