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.)
Consulting a lawyer about one’s specific situation is never a bad idea. I think we are at the point where a good number of grantees should be trying to set up legal counsel if they do not already have someone. That is doubly true for anyone who is thinking about taking any action that could be seen as hiding the ball in any form or fashion. Sending money to the Caymans or other sheninigans are very likely to be a bad idea.
That being said, the facts in the Girardi matter seem rather extreme. Her husband wrote a check for $750K out of a client trust account for the earrings, and she still had the very same earrings. These facts had been established by court proceedings and evidence, not by a generic press release. So the origin of the property was clearly and 100% a fraud (not from a source that contained a mix of equity investments, fees, and customer funds), and the property retained its distinct character up until the time of the turnover demand. That is, the earrings had not become commingled with Girardi’s other assets. And Giradi’s receipt of the earrings seems to have been without any even arguable consideration of any kind.
Even on those extremely unfavorable facts for Girardi: I looked at the transcript of oral decision and didn’t see the bankruptcy judge specifically find that there was criminal liability for retaining them as long as she did. (“I don’t believe that Mrs. Girardi, at least for our purposes, knew that this was—you know, the diamonds were stolen property.”). The lawyer for the estate may have taken that position, but that’s not the same as a judge accepting it. I didn’t see a judgment for the triple damages you mentioned. (Admittedly, I didn’t look at either exhaustively.) You didn’t mention a prosecutor going after her criminally either; trying to defraud the bankruptcy court by turning over other earrings would be a different kettle of fish. Her lawyers are appealing even the turnover order, which seems a foolhardy strategy if they think she has serious criminal exposure. And I’m still not aware of any prosecutions for going about one’s ordinary business and at least waiting for a demand letter from the bankruptcy estate.
As for the spent/unspent distinction—I assume that at least smaller grantees commingled the grant monies with their other funds. Although the answer may be obvious in some cases, how do you propose that they figure out whether they have “spent” the FTX dollars rather than other money that was in their account? St. Benedict trotted out the usual “we spent it already” defense, but the court opinion doesn’t describe the donation as restricted—only as conditional on naming an auditorium for the fraudster’s parents. And likely St. Benedict kept $2MM on hand at all times, so it isn’t clear to me how we would figure out if it was Petters’ donation that had been spent.
Incidentally, there may be some individual grantees who want to send money back by December 31 for tax reasons. I haven’t thought much about that, but I know for executive salary clawbacks the tax treatment is cleaner and more complete if the money is clawed back in the same year.
All EA funds need to return donations from SBF. I myself am in the process of drafting an application to the Longterm Future Fund but cannot with a good conscience submit it until I know I will not be receiving money that should really be returned to FTX investors who have lost their savings and been really hurt by SBF’s wrongdoing. I do not want to be complicit in what John Ray, who is now steering FTX through bankruptcy proceedings, called plain old-fashioned embezzlement in his testimony to the House. EA needs to act decisively and speedily here in order to provide clarity to potential applicants.
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.)
Consulting a lawyer about one’s specific situation is never a bad idea. I think we are at the point where a good number of grantees should be trying to set up legal counsel if they do not already have someone. That is doubly true for anyone who is thinking about taking any action that could be seen as hiding the ball in any form or fashion. Sending money to the Caymans or other sheninigans are very likely to be a bad idea.
That being said, the facts in the Girardi matter seem rather extreme. Her husband wrote a check for $750K out of a client trust account for the earrings, and she still had the very same earrings. These facts had been established by court proceedings and evidence, not by a generic press release. So the origin of the property was clearly and 100% a fraud (not from a source that contained a mix of equity investments, fees, and customer funds), and the property retained its distinct character up until the time of the turnover demand. That is, the earrings had not become commingled with Girardi’s other assets. And Giradi’s receipt of the earrings seems to have been without any even arguable consideration of any kind.
Even on those extremely unfavorable facts for Girardi: I looked at the transcript of oral decision and didn’t see the bankruptcy judge specifically find that there was criminal liability for retaining them as long as she did. (“I don’t believe that Mrs. Girardi, at least for our purposes, knew that this was—you know, the diamonds were stolen property.”). The lawyer for the estate may have taken that position, but that’s not the same as a judge accepting it. I didn’t see a judgment for the triple damages you mentioned. (Admittedly, I didn’t look at either exhaustively.) You didn’t mention a prosecutor going after her criminally either; trying to defraud the bankruptcy court by turning over other earrings would be a different kettle of fish. Her lawyers are appealing even the turnover order, which seems a foolhardy strategy if they think she has serious criminal exposure. And I’m still not aware of any prosecutions for going about one’s ordinary business and at least waiting for a demand letter from the bankruptcy estate.
As for the spent/unspent distinction—I assume that at least smaller grantees commingled the grant monies with their other funds. Although the answer may be obvious in some cases, how do you propose that they figure out whether they have “spent” the FTX dollars rather than other money that was in their account? St. Benedict trotted out the usual “we spent it already” defense, but the court opinion doesn’t describe the donation as restricted—only as conditional on naming an auditorium for the fraudster’s parents. And likely St. Benedict kept $2MM on hand at all times, so it isn’t clear to me how we would figure out if it was Petters’ donation that had been spent.
Incidentally, there may be some individual grantees who want to send money back by December 31 for tax reasons. I haven’t thought much about that, but I know for executive salary clawbacks the tax treatment is cleaner and more complete if the money is clawed back in the same year.
All EA funds need to return donations from SBF. I myself am in the process of drafting an application to the Longterm Future Fund but cannot with a good conscience submit it until I know I will not be receiving money that should really be returned to FTX investors who have lost their savings and been really hurt by SBF’s wrongdoing. I do not want to be complicit in what John Ray, who is now steering FTX through bankruptcy proceedings, called plain old-fashioned embezzlement in his testimony to the House. EA needs to act decisively and speedily here in order to provide clarity to potential applicants.