This article first appeared in Forum, The Edge Malaysia Weekly on April 8, 2024 - April 14, 2024

Last week, Sam Bankman-Fried, the founder of the now defunct FTX crypto exchange, was sentenced to 25 years’ jail for perpetrating a US$8 billion fraud.

FTX collapsed in November 2022 due to liquidity issues as Bankman-Fried diverted customers’ money into risky assets managed by a sister company, Alameda Research.

The trial started a year after the collapse, in November 2023. It concluded within a month and sentencing was fixed for last week. The 32-year-old, who maintained his innocence, was sentenced to 25 years in jail.

All in all, it took the US judiciary less than 16 months to lock up the biggest name in the crypto world and serve him a heavy custodial sentence. It is the second longest sentence for financial fraud in the US after Bernie Madoff’s 150-year sentence meted out in 2009.

The US attorney for Manhattan Damian Williams, who oversaw the trial, stated that Bankman-Fried’s fate should serve as a warning to would-be fraudsters involved in cryptocurrency schemes of any kind.

Cryptocurrencies may be a new financial instrument but the fraud committed is as old as time, with the perpetrators luring investors and then diverting the money elsewhere. Coin investors brushed off the FTX scandal as an anomaly in the highly obscure world of cryptos.

What is evident from the FTX and Bankman-Fried episode is that it did not dampen the sentiment for cryptos. Bitcoin, which is the flag bearer for the crypto world, is trading at US$67,000. At the height of the FTX crisis in 2022, it went as low as US$20,000.

There are several reasons for it.

First, in January this year, the US allowed for Bitcoin exchange-traded funds (ETFs), a measure that paves the way for a wider group of investors to take a position on the coin without having to actually own it. Secondly, coin enthusiasts can take comfort in the fact that any fraud will be dealt with by the real-world judiciary system and the penalty is heavy.

Any country that deals with corporate fraud decisively will always earn the confidence of investors. It shows that the country has a robust legal system that does not tolerate corporate crime.

In most instances, when fraud is committed, investors and bankers are at the losing end and do not recover their money. But the severity with and speed at which the perpetrators are dealt with serve as deterrents for future fraudsters.

For instance, stock manipulation happens all the time on Bursa Malaysia. This continues to occur even though some companies were investigated by the tax authorities about three years ago.

The biggest losers are retail investors who put in money based on speculation. Nobody cares because the victims are not banks or high-profile investors.

Large-scale manipulation happened in Singapore in 2013. The mastermind was a Malaysian, Soh Chee Wen. The authorities went hard on Soh and at one stage refused to even allow remand. He was jailed for 36 years in December 2022.

The severity of the sentence is surely a deterrent to any other manipulators.

Unfortunately, there is no such precedent in Malaysia. Most of the time, a fraud case drags on for so long that its significance is forgotten.

There are instances when the prosecutors for corporate crime in the Securities Commission Malaysia (SC) push for criminal action but are not supported by their counterparts in the Attorney-General’s Chambers (AGC).

A case that many would remember is the collapse of Serba Dinamik Holdings Bhd. The oil and gas service provider owed banks about RM5 billion when auditors raised the red flag over its accounts for the financial year ended Dec 31, 2020. The amount in question was the company’s revenue of RM6 billion, which included receipts from overseas projects.

Among the banks that extended loans to Serba Dinamik were foreign names such as Standard Chartered Saadiq, HSBC Amanah and United Overseas Bank. The company is still unable to repay its debts and the lenders have filed multiple lawsuits to recover the loans.

The key executives of Serba Dinamik were initially slapped with criminal charges in December 2021. However, in March 2022, the AGC withdrew the criminal charge and instead preferred to issue a compound against the four. The reasons were that the evidence was “circumstantial in nature” and public interest would be better served with a compound.

In April 2022, the SC imposed fines of RM3 million each on the four key executives and the company itself for submission of false statements in relation to the accounts for the financial year ended Dec 31, 2020.

Among the key executives were group managing director Datuk Dr Mohd Abdul Karim Abdullah and its vice-president of accounts and finance, Muhammad Hafiz Othman. The latter was also fined an additional RM1 million for falsifying the accounting records of the company’s subsidiary, Serba Dinamik Sdn Bhd.

The total fines of RM16 million are a pittance compared with the billions in losses incurred by the lenders and investors.

What’s worse is the oil and gas industry continues to carry a huge trust deficit with bankers. Brent crude has been averaging above US$70 per barrel since 2021 but banks continue to shy away from lending to companies in the sector.

The collapse of Serba Dinamik and Sapura Energy Bhd’s never-ending debt restructuring are events that have done a great disservice to the oil and gas industry.

“Prior to 2014, fabrication yards would take on jobs with a deposit of only 20% as they were confident that banks would fund the rest. Now, oil and gas service providers have to pay up to 80% before taking delivery of the vessels. There are not many companies with a large enough capital to build assets,” says an executive familiar with the industry.

It is not only cases such as the Serba Dinamik fiasco that affect investor sentiment. The ongoing 1Malaysia Development Bhd (1MDB) trial also continues to test the resilience and robustness of the country’s judiciary system.

The losses resulting from 1MDB amount to more than US$4.5 billion. It is easily one of the biggest financial frauds in the world and Malaysian taxpayers continue to bear the debts.

Former prime minister Datuk Seri Najib Razak was sentenced to 12 years’ jail and fined RM210 million for his role in the scandal. He is still facing three other charges related to 1MDB.

Najib was sent to jail in 2022. In February this year, his sentence was halved to six years, which was seen to adversely affect the reform agenda of the current government led by Datuk Seri Anwar Ibrahim.

Last week, Najib filed a suit seeking to serve the rest of the sentence under house arrest, claiming it was part of the Pardons Board’s decision.

Investors are surely waiting to see how the AGC handles Najib’s latest legal suit.

M Shanmugam is a contributing editor at The Edge 

https://www.theedgemarkets.com/node/707307