At first glance, Sam Bankman-Fried bears little resemblance to Bernie Madoff. One is a well-dressed, gray-haired financial giant with a 40-year Wall Street career, and the other is a 30-year-old millennial crypto king in shorts and T-shirt.
Related: FTX ally alerted authorities days before Bankman-Fried’s arrest
But almost 14 years since Madoff arrest and accused of fraud in New York for orchestrating a protracted pyramid scheme, the FTX crypto scandal is being compared to Madoff’s criminal enterprise.
Diana Henriques, a financial historian and author of The Wizard of Lies, a book that delves into Madoff’s $64 billion (£53 billion) plan, says the similarities between Bankman -Fried – or SBF as he is known – and the Wall Street investment manager is “outstanding”.
“The similarities between what we know about Madoff and what we know about Bankman-Fried are striking,” she said. “They are very different characters, but what is similar is this intentional, eye-catching complication that would make the average investor just look over and say, ‘Well, I believe Bernie.’
“I see a similar dynamic in the way the customer base views FTX. They really don’t have a lot of solid evidence to back up their beliefs, so that – as with Bernie – is a leap of faith. You believe in the central character and miss so many steps that, in hindsight, you’re obviously going to work carefully and that’s awesome.[ly] the same, similar.”
“The most essential gift of a fraudster is that they can ignite faith that never wavers, even in the face of red flags and disturbing details. “You can’t see FTX as a leap of faith for so many people who should have known better,” says Henriques.
Madoff die in prison last year while serving a 150-year prison sentence. This week, US federal attorneys in New York unsealed a complaint against the allegations of SBF eight counts of fraud. If convicted, he faces a maximum sentence of 115 years. Bankman-Fried has not been formally charged and has yet to plead guilty; he can still be proven innocent of all charges.
In both cases, the financial fallout – the 2008 crisis for Madoff and the crypto market downturn, Covid-19 and soaring inflation for the SBF – exposed operational gaps. their business and ignite the trust that customers once had in them.
“In the blink of an eye, the handsome prince becomes an ugly toad,” Henriques wrote of Madoff – a remark that now applies easily to Bankman-Fried as well.
The two’s personal circumstances are vastly different – Madoff has a longstanding reputation on Wall Street and is regularly scrutinized by regulators, while SBF is a young, untested math major who established an immediate reputation in the new financial industry. But both work hard to present themselves as reliable role models.
Both men are financial innovators who run dizzyingly complex businesses. But as US prosecutors allege this week, the core of FTX’s collapse was a simple idea – rob Peter to pay Paul, the same allegation made in the Madoff case. “It was a simple, classic fraud complaint about fraud,” Henriques points out, “based on anti-fraud statutes that have been tested in courts for more than a century.
Like Madoff, FTX’s operations are shrouded in a cloud of artificial complexity. Henriques points out that Madoff would explain his investment strategy to clients in a way that would shock the average investor. “That means investors have to go back to, ‘Well, I trust Bernie’,” she said.
“It’s very complicated and investors don’t have a lot of solid evidence to back up their beliefs,” she added.
But in reality, Madoff is simply taking customer funds to satisfy other customers’ withdrawals, while also taking a portion for himself and his family. The scam – known as a Ponzi scheme – works until the incoming funds are exhausted.
Madoff’s hoax was unraveled when the 2008 global financial crisis prompted customers to attempt to withdraw around $7 billion (£6 billion). In the end, it became clear that he had been running a Ponzi scheme for over 20 years.
Although these are early days and the FTX scandal needs more to be addressed, the Bankman-Fried’s alleged fraud is based on a similar dynamic, according to the US authorities. blame the United States.
The crypto exchange he runs prides himself on being a good actor in a field notorious for its badass. The SBF has been lobbying for clearer guidelines on crypto trading, spending millions to woo politicians and continuing to claim its sole monetization is to do so. good.
But based on Securities and Exchange Commission: “Bankman-Fried orchestrated a massive multi-year scam, transferring billions of dollars of client funds on the trading platform for his personal benefit and to help grow his crypto empire.”
Related: FTX founder Sam Bankman-Fried accused of defrauding investors
Authorities argue that the misconduct began in the first place. A parallel lawsuit, filed by the Commodity Futures Trading Commission, says the method by which Bankman-Fried withdraws FTX clients’ funds into the coffers of his trading firm Alameda Research, has been incorporated into its structure. structure of the operation since its opening in 2019.
John Ray III, a veteran bankruptcy expert who took over FTX after it collapsed, told Congress this week it was a case of “old-fashioned embezzlement.” Ray and his team are sifting through the company’s records to find out how much money is owed, who owes what, and how much he can recover. But he said he was plagued by the poor state of FTX’s record keeping and “complete and unprecedented failure corporate control”.
In essence, FTX is a Ponzi scheme simply a powerful move, Henriques said. “The criminal case ignores all the legal conundrums and focuses primarily on lying and deception. It’s a simple fraud claim with no bells and whistles beyond all the complications,” she said. “It’s an elegantly simple approach to prosecution.”
Related: Sam Bankman-Fried has been arrested. What happens next for the founder of FTX?
Madoff served as chairman of the Nasdaq stock exchange and promoted the creation of electronic exchanges. His famous clients include film producer Steven Spielberg, actor Kevin Bacon and a fund run by Holocaust survivor Elie Wiesel, which has lost all its money.
We have yet to see the full list of people who have lost money on FTX but the big names as a result. American football player Tom Brady and his ex-wife, model Gisele Bündchen, are listed as equity investors and have starred in advertisements for the business, according to documents seen by the Guardian.
The company has received endorsements from comedian Larry David, tennis star Naomi Osaka, former basketball player Shaquille O’Neal and Canadian Shark Tank star and businessman Kevin O’Leary, who have been paid $15 million (£12 million) to endorse the exchange.
Eric Schiffer, a crypto investor at Institutional Foundation, a private equity firm, said Bankman-Fried “has built authority in the political world, with celebrities, and shows a system value system of utilitarian idealism [was] not money-oriented, all of which caught investors off guard.”
The financial regulator’s allegations against Bankman-Fried may have many similarities with those made by Madoff when it sought to track cash flow through FTX and into Alameda and other investments, including lavish spending on Bahmanian assets and the roles of others in the company. its downfall.
SBF is the first to face charges of the crypto exchange’s collapse but prosecutors have made it clear he won’t be the last. On Tuesday, prosecutors advised anyone involved in the alleged scam to “come talk to us before we come see you.” Separately in Washington, Ray revealed that he was “investigating” the roles of Bankman-Fried’s parents Joseph Bankman and Barbara Fried, both professors at Stanford University.
Peter MadoffBernard’s brother, and others also sentenced later Madoff’s judgment.
But as news of FTX’s demise began to spread across various locations and authorities gained a better understanding of how the money moved and how the alleged fraud was carried out, Henriques warned. that the similarity may not have collapsed yet.
“We don’t know yet, and I’m not sure John Ray knows, if this is some kind of high-tech Ponzi scheme in reality. Understanding how close this is to Bernie Madoff means understanding what was done with that money.”
The SBF has tweeted in his defense, doing countless interviews and admitting he’s “spoiled things” but while he says he made a big mistake, he also seems to be suggesting – in a sometimes confusing way – that it was all a big mistake. Henriques points out: “The impartiality, or arbitrariness, of his answers is astonishing.
In the coming months, prosecutors will build a case arguing that, for all the stylistic differences, SBF is just a Madoff of the millennial generation. Outlining the criminal charges against SBF on Tuesday, Damian Williams, the US attorney for the southern district of New York, was asked if Bankman-Fried would fit a fraudster’s profile. Williams countered: “You can do cheating in shorts and a t-shirt in the sun.
The SBF resisted Madoff’s analogies. “A lot of people look at you and see Bernie Madoff,” ABC’s George Stephanopoulos told Bankman-Fried in an interview before his arrest.
“Yes, I mean, I don’t think that’s who I am at all, but I understand why they say that,” Bankman-Fried replied. “People lose money and people lose a lot of money. At the end of the day, look, there is a question of what happened and why and who did what, what caused the crisis. I think reading is very different.
