Responding to Jason’s comment asking for an example of potential criminal liability: a recent example comes from the ongoing Tom Girardi bankruptcy in Los Angeles, and what is happening with his ex-wife Erika Jayne’s $750,000 diamond earrings.
As background, Girardi was a prominent lawyer in California. It turns out he was stealing his clients’ settlement money and running his law firm as a Ponzi scheme. It imploded in 2021. The firm is now in bankruptcy, and Girardi (who has Alzheimer’s) is in a conservator ship.
Back in 2007, Girardi gave his wife Erika a $750,000 pair of earrings. The jewelry was paid for out of stolen client funds. The bankruptcy trustee wants the earrings returned, to be sold to benefit creditors. Erika claims she innocently received the jewelry and wants to keep it.
The bankruptcy judge ruled for the trustee, accepting the trustee’s argument that once Erika was informed the earrings were proceeds of stolen money, and refused to return them, she then had committed a potential criminal violation of California Penal Code 496 by refusing to return known stolen property.
Here is how the trustee phrased the issue: “Her refusal to turn over the stolen property [the earrings] upon demand when told of its status is a crime, freshly committed, under California’s Penal Code [section] 496(a); and, under 496(c) subjects her to treble damage civil liability.”
And later the trustee states: “when Mrs. Girardi refused to turn over the Earrings to the Trustee, and refused to relinquish her claim of ownership to the Earrings after being advised of her husband’s conduct, she violated California Penal Code [section] 496(a) (refusing to turn over stolen property, after demand, to the rightful owner upon learning the property was obtained by theft or fraud) subjecting her to potential criminal prosecution.”
Erika has appealed the bankruptcy judge’s ruling to the district court, where the appeal is pending.
This is all publicly available, the bankruptcy case number is 2:20-BK-21020-BR; the adversary action against Erika Jayne is 2:21-AP-01255-BR; Erika’s appeal to the district court is 2:22-CV-05176-DSF.
Erika may be in more trouble, according to public reports she may have surrendered less valuable earrings to the trustee than the ones that were purchased for $750,000.
The example that Jason cited does not address the retaining stolen property issue. Minnesota simply reduced its state civil fraudulent transfer statute of limitations to two years, to harmonize with federal bankruptcy law; previously the state statute of limitations had been longer. Significantly, St. Benedict college had spent the donated Ponzi funds years before, so the issue of retaining known stolen proceeds did not arise. That case cite is 901 F.Supp.2d 1233 (D. Minn. 2012).
If a person or entity is still holding unspent donated funds from FTX they may want to read the briefs in the Erika Girardi matter - and consult a lawyer.
(Again, I have never owned any cryptocurrency, and I have no connection whatsoever with FTX or any crypto entity, I am simply an outside observer.)
Disclaimer: I am a lawyer, but I am only able to advise on the law of England and Wales. I have no particular knowledge of the law of the Bahamas, New York or Delaware. What follows in any case are generic comments: any particular situation will depend on its own facts and you should take specific legal advice.
We have laws to decide what happens in this situation. These laws generally strike a reasonable balance between the interests of the various groups affected, which is necessarily complex given that some people are bound to get burnt in an insolvency. This will be a particularly complex case because of the numerous entities involved and the cross-jurisdictional elements.
There is probably a right answer. Charity trustees must use their funds for their charitable purposes, so unless they are obliged to return the funds, they may well be forbidden from doing so. If funds are returned, they must only returned to a person who can give good receipt for them, and there may be a dispute as to who that person is. I would suggest that no funds be returned until confirmation has been obtained from all relevant jurisdictions, and this may take some time. In particular, it's unclear to me how the US Attorney for SDNY is getting in on this.
In these circumstances, I would strongly suggest that for now, any funds which might be FTX customer funds or otherwise the proceeds of fraud should be held separately pending confirmation of the position. Where funds have already been disbursed it's probably unnecessary (and not legally possible) to require the grantees to return them, but having been put on notice that the funds may be the proceeds of fraud, making further disbursements risks an accessory liability (which may attach to the individuals responsible).
If a UK charity is uncertain how to proceed, it may well be worth consulting the Charity Commission. I think particularly it would be worthwhile getting the Charity Commission to approve anything which might look like a voluntary transfer (e.g. if the trustees were minded to comply with a request from a liquidator to return funds without being compelled to do so).