(Bloomberg) -- Embattled FTX founder Sam Bankman-Fried has staved off a case alleging he broke Texas securities laws, after a judge ruled that the state regulator lacks jurisdiction to act against him.
Most Read from Bloomberg
Merck Covid Drug Linked to New Virus Mutations, Study Says
Adani Crisis Deepens as Stock Rout Hits $108 Billion
Porsche Blunder Puts $148,000 Sportscar on Sale for Just $18,000
Plenty of Americans Are Drinking Bleach, Still for Sale on Amazon
Hong Kong to Give Away 500,000 Air Tickets to Revive Tourism
The ruling came in a case brought by the Texas State Securities Board claiming Bankman-Fried offered unregistered securities through FTX's yield-bearing cryptocurrency accounts and that he now owes refunds to Texas investors.
Administrative Law Judge Sarah Starnes has canceled a Thursday hearing at which Bankman-Fried had been ordered to testify and has given the securities agency until March 1 to file an amended complaint. Joe Rotunda, the agency's director of enforcement, didn't return messages seeking comment on the ruling, and it isn't clear whether he will refile.
Read More: States Lead Crypto Enforcement as Feds Deal With Inchoate Role
But the case reflects the early efforts some states are making to recover money from FTX and Bankman-Fried in the wake of the crypto exchange's implosion in November. The obstacles: a criminal fraud prosecution of Bankman-Fried and a sprawling FTX bankruptcy case.
"We're not going to take actions that interfere with the criminal process," Rotunda said in an interview last month, before the Jan. 19 ruling. "But at the same time, we have a job to do."
He added that he was "very happy to see the SEC move very, very quickly on FTX," referring to the US Securities and Exchange Commission. "But not knowing how that was going to play out, and knowing that Sam Bankman-Fried was not himself in bankruptcy, we brought our case."
Read More: Bankman-Fried Barred From Signal, Talking to FTX Employees
Because of the twin federal cases, state securities regulators have largely delayed their own investigations of FTX, even though some states have taken a leading role in crypto enforcement over federal authorities in recent years. California's Department of Financial Protection and Innovation, for example, initiated a probe in November but has yet to take any public enforcement actions.
Alabama and New Jersey, two leading state regulators in the crypto space, also haven't announced public actions against FTX. Texas and Wisconsin are the only states so far to seek to intervene in the federal bankruptcy case. Texas has filed a petition in the case seeking the appointment of a third-party monitor.
State securities regulators often coordinate their efforts in enforcement cases, letting one state or another take the lead, mostly to economize.
The Sting
Lawyers for Bankman-Fried, who has pleaded not guilty in the criminal case, argue that the state board alleges only that he "controlled various FTX entities and that certain FTX principals may not have disclosed material information to FTX customers," not that he violated any Texas securities regulations himself.
Starnes agreed, writing in an order that the state board had failed to meet the requirements for establishing personal jurisdiction over a non-Texas resident.
Read More: Bankman-Fried Says He 'Didn't Stash Billions,' Denies Theft
Rotunda told the judge Bankman-Fried "subjected himself to the jurisdiction of Texas' courts when he decided his business enterprise would offer and sell securities to Texas residents."
He added that he himself was one of those residents - a purchase he made as part of his investigation.
'Lot of People Hurt'
Rotunda revealed the Texas probe in October court filings in the bankruptcy of Voyager Digital Holdings, in which he objected to FTX's bid to purchase Voyager. In November, he filed the board's claims with the Texas State Office of Administrative Hearings, which resolves disputes involving state agencies.
By initiating an administrative hearing, Rotunda said, the board could seek refunds for clients without litigating the issue in a civil courtroom.
In addition to seeking a refund of principal to Texans who invested in the alleged unregistered accounts, his agency asked for administrative fines of as much as $20,000 per violation of state securities laws and as much as $250,000 for each illegal act involving a Texas resident 65 or older, as determined by the judge.
Read More: Bankman-Fried Fooled the Crypto World and Maybe Even Himself
"There's been a lot of people hurt," Rotunda said. "But the impact on Texas - while significant, and significant in the other 49 states - is going to be far less than what we saw in Voyager, what we saw in Celsius and what this could have been if it percolated for another couple months."
Bankman-Fried faces a trial in October. Meanwhile he is free on bail, living with his parents in California.
The case is Texas State Securities Board v. Sam Bankman-Fried, 312-23-06226, Texas State Office of Administrative Hearings.
Read More: Inside Sam Bankman-Fried's Bahamian Penthouse After FTX's Fall
--With assistance from Neil Weinberg and Austin Weinstein.
Most Read from Bloomberg Businessweek
A Billionaire's Son Battles a Turbulent WWE Over the Future of Pro Wrestling
Wall Street: We Want Lower Rates. The Fed: Not So Fast
A 3D Printer Isn't Cool. You Know What's Cool? A 3D-Printing Factory
Sean Penn's Disaster-Relief Charity Ended Up a Money Mess
A $500 Million Bet on Reinvigorating Japan's Aging Ski Industry
©2023 Bloomberg L.P.
