The federal government’s fraud case against a former CFO accused of secretly investing $35 million of company funds in a cryptocurrency-backed venture poses an important legal question: should executives face criminal liability for corporate investment decisions that fail?
Prosecutors contend that Nevin Shetty’s investment in HighTower Treasury—a firm in which he held a partial ownership stake—constitutes fraud because it allegedly defied Fabric’s conservative investment policy, but a debate has emerged that this case is more about business judgment than criminality, warning that prosecuting Shetty could set a troubling precedent for executive decision-making.
Shetty’s defense is focused on the investment in an account at HighTower Treasury, was tied to a stable cryptocurrency and, they say, made in good faith as a high-yield opportunity for Fabric.
The prosecution’s case is built around Shetty’s (alleged) failure to disclose his ownership interest and the perceived risk of cryptocurrency investments, exemplifies a growing trend of prosecuting failed business decisions as fraud. But critics warn that allowing the government to criminalize high-risk investments without clear evidence of criminal intent risks stifling innovation and undermining the autonomy of corporate executives.
Risk or Fraud?
Shetty decided to invest Fabric’s funds in an account at HighTower, a DeFi platform offering returns on stablecoins. Stablecoins like TerraUSD, typically pegged to the U.S. Dollar to maintain a predictable value, are generally marketed as an innovative and secure way to participate in the crypto ecosystem. Shetty has said he believed the investment was consistent with Fabric’s financial goals and reasonably safe.
But then, in a stunning turn of events, TerraUSD’s value collapsed, leading to $60 billion in financial losses.
In the wake of this collapse, the government has argued that Shetty’s decision to invest in cryptocurrency, a highly volatile asset class, constitutes wire fraud because it allegedly violated Fabric’s investment guidelines. His former employer and prosecutors claim Shetty knowingly exposed Fabric to risk and attempted to profit personally from the investment, transforming what may have been poor judgment into a crime.
The Question of Disclosure and Intent
One of the primary ways in which Shetty drew the ire of prosecutors is that he failed to disclose the nature of the investment and his ownership interest in HighTower, thereby depriving Fabric of the ability to make an informed decision. Although the prosecution carefully doesn’t say the words explicitly, the government’s argument is rooted in the “right to control” theory, posturing that Shetty’s nondisclosure equates to depriving Fabric of its right to manage its assets freely. However, the Supreme Court recently rejected this theory unanimously (9-0) in Ciminelli v. United States (2023), ruling that fraud statutes apply to concrete deprivations of money or property, not the loss of decision-making authority. Prosecutors’ reliance on a discredited legal theory has drawn criticism from the legal community, with experts questioning whether Shetty’s actions meet the legal definition of fraud.
Shetty’s defense team also points to his intentions, arguing that he genuinely believed the investment aligned with Fabric’s financial goals. His attorneys contend that he viewed TerraUSD as a secure investment based on assurances from Terraform Labs and its founder, Do Kwon, who marketed it as a stable asset pegged to the U.S. dollar. According to the defense, Shetty’s investment decisions may appear risky in hindsight, but they were not intended to harm Fabric.
In their failed motion to dismiss, Shetty’s attorneys highlight the lack of evidence showing that he acted with criminal intent, a crucial element of wire fraud. They argue that Shetty’s failure to disclose his ownership interest may have been an ethical lapse, but not a criminal act. By prosecuting Shetty for what amounts to a failure in business judgment, they argue, the government risks conflating corporate policy violations with federal crimes, creating a dangerous precedent for business leaders.
Potential Prosecutorial Overreach Should Have Founders and Startup Execs on Edge
The prosecution’s broad interpretation of fraud statutes has led many to question whether the DOJ is overreaching by criminalizing poor investment decisions.
According to these critics, Shetty’s case underscores the risks of allowing the government to pursue criminal charges based on poor outcomes rather than criminal intent.
The National Association of Criminal Defense Lawyers (NACDL), which filed an amicus brief supporting Shetty, argues that the government’s theory stretches the bounds of federal fraud statutes. The NACDL asserts that self-dealing, without clear evidence of embezzlement or theft, should not constitute fraud, as it does not meet the statutory requirement of intent to deprive.
Legal experts warn that prosecuting Shetty could effectively render any unsuccessful investment as potentially criminal as it obviously wasn’t as safe as the investors expected and hoped it to be. Business leaders and investors are regularly tasked with evaluating opportunities that may involve calculated risks, and treating these decisions as potential crimes could stifle that process, ultimately harming the economy and limiting companies’ ability to adapt to market trends.
Demonizing Crypto
This case also highlights the risks of criminalizing investments in emerging asset classes like cryptocurrency. Despite cryptocurrency’s historic volatility, many companies have pursued it as a high-potential area for growth.
Cryptocurrency assets are indeed their own asset class and within that asset class there are a myriad of different investment options with different risk-reward profiles. By treating Shetty’s cryptocurrency investment as fraud, the government could deter other executives from considering similar assets, ultimately hindering the adoption of new technologies in the financial sector.
Cryptocurrency investments carry unique risks, as the collapse of TerraUSD illustrated. Nonetheless, Shetty’s attorneys argue that he reasonably relied on Terraform Labs’ marketing and public statements about TerraUSD’s stability. According to his defense, Shetty believed that TerraUSD offered a secure way to generate returns for Fabric without jeopardizing its principal. Prosecutors, however, argue that Shetty’s decision to invest in a cryptocurrency venture shows reckless disregard for Fabric’s investment policy. But as legal analysts note, investing in cryptocurrency does not inherently criminalize executives who invest in it. Criminalizing investments based on generalizations could limit opportunities for businesses to innovate and diversify their portfolios.
Conclusion: Be Careful Out There
As the Shetty case progresses, it offers the judiciary an opportunity to reaffirm the limits of federal fraud statutes and clarify the standards of criminal liability in corporate contexts.
By prosecuting Shetty based on his investment choices, the government risks setting a precedent that could lead to overcriminalization, blurring the line between poor business decisions and intentional fraud.
For executives, the outcome of this case will have broad implications: if the court upholds the prosecution’s interpretation of fraud, it could signal to business leaders that even the slightest misstep or policy breach could expose them to criminal charges. Such a precedent would discourage executives from pursuing high-risk, high-reward opportunities, ultimately stifling innovation.
