Fraud, Scam and Ponzi Schemes: Did Sam Bankman-Fried Use the Madoff Tactics? | Sam Bankman Fried

At first glance, Sam Bankman-Fried bears little resemblance to Bernie Madoff. One is a gray-haired financial titan with a 40-year career on Wall Street, and the other is a 30-year-old crypto millennial kingpin in shorts and a t-shirt.

But nearly 14 years to the day since Madoff was arrested and charged with fraud in New York for orchestrating a long-running pyramid scheme, the FTX crypto scandal is being compared to Madoff’s criminal enterprise.

Diana Henriques, financial historian and author of The Wizard of Lies, a book exploring Madoff’s $64billion (£53billion) scheme, says the similarities between Bankman-Fried – or SBF as it is known – and the Wall Street investment manager are “striking.”

“The similarities between what we know about Madoff and what we know about Bankman-Fried are striking,” she said. “They’re very different characters, but what’s similar is this deliberate, dazzling complexity that would cause the average investor to just roll over their heads and say, ‘Well, I trust Bernie.

“I see that same dynamic in how the clientele viewed FTX. They really didn’t have a lot of solid evidence to back up their trust, so it was – like with Bernie – a leap of faith. You trust the character central and it bypasses a lot of the steps that, in hindsight, are the obvious due diligence you would do, and that’s amazing[ly] similar.”

“The most essential gift of a scammer is that they can inspire confidence that never wavers, even in the face of red flags and disturbing details. from many people who should have known better,” Henriques said.

Madoff died in prison last year while serving a 150-year sentence. This week, US federal prosecutors in New York released a complaint against SBF alleging eight counts of fraud. If found guilty, he faces a maximum 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, a financial meltdown – the 2008 crisis for Madoff and a crypto market downturn, Covid-19 and soaring inflation for SBF – exposed the flaws in their businesses and scorched the confidence that their customers once had in them.

“In the blink of an eye the handsome prince became an ugly toad,” Henriques wrote of Madoff — an observation now just as readily applicable to Bankman-Fried.

The personal situations of the two men were very different – Madoff had a long and excellent reputation on Wall Street and had been regularly inspected by regulators, while SBF was an untested young math whiz who had established instant credibility in a new industry. financial. But both have worked hard to present themselves as trusted role models.

Both men were financial innovators who ran companies of dizzying complexity. But as US prosecutors alleged this week, at the heart of FTX’s collapse was a simple idea – rob Peter to pay Paul, the same charge in the Madoff case. “This is a simple, classic fraud complaint about fraudulent deception, backed by anti-fraud laws that have been tested in court for over a century,” Henriques points out.

Like Madoff, FTX’s business was shrouded in a cloud of pseudo-complexity. Madoff, Henriques points out, was explaining his investment strategy to clients in a way that would make the average investor indifferent. “That meant investors had to fall back on ‘Well, I trust Bernie,'” she said.

“It was extremely complicated and investors didn’t have a lot of solid evidence to back up their confidence,” she added.

But Madoff was actually just taking clients’ money to meet other clients’ withdrawals, while taking a cut for himself and his family. The scam – known as a Ponzi scheme – worked until the incoming money dried up.

Madoff’s scam came crashing down when the 2008 global financial crisis triggered an attempted withdrawal of some $7bn (£6bn) by customers. It finally became clear that he had been running a Ponzi scheme for over 20 years.

Although it’s early days and the FTX scandal needs more unpacking, the alleged Bankman-Fried fraud was based on a similar dynamic, according to US authorities.

The cryptocurrency exchange he ran boasted of being a good performer in an industry notorious for bad ones. SBF lobbied for clearer guidelines on crypto trading, spent millions wooing politicians, and continues to pretend its only reason for making money was to do good.

But according to the Securities and Exchange Commission: “Bankman-Fried orchestrated a massive, years-long fraud, embezzling billions of dollars of trading platform client funds for his own benefit and to help grow his crypto empire.”

Authorities say the wrongdoing started at the very beginning. A parallel lawsuit filed by the Commodity Futures Trading Commission, said the method by which Bankman-Fried siphoned FTX client funds from the vaults of its trading firm, Alameda Research, was installed in the structure of the operation from the day it opened in 2019.

John Ray III, a seasoned bankruptcy expert who took over FTX after its collapse, told Congress this week that it was a case of “old-fashioned embezzlement.” Ray and his team sift through company records to find out how much money is missing, who is owed what, and how much he can recover. But he said he was bothered by the alarming state of FTX’s record keeping and its “unprecedented and complete failure of corporate controls”.

To argue that FTX was, at bottom, just a Ponzi scheme is a strong move, Henriques said. “The criminal case avoids all the difficult regulatory questions and focuses primarily on lying and deception. This is a simple fraud complaint with no bells and whistles that cuts through all the complexities,” she said. “It’s an elegantly simple approach to pursuit.”

Madoff was once chairman of the Nasdaq stock exchange and promoted the advent of electronic trading platforms. Among his famous clients were film producer Steven Spielberg, actor Kevin Bacon and a foundation run by Holocaust survivor Elie Wiesel, who lost all his money.

We’ve yet to see the full list of who lost money on FTX, but the fallout has hit some big names. American footballer Tom Brady and his ex-wife, model Gisele Bündchen, were listed as equity investors and starred in advertisements for the company, according to documents seen by the Guardian.

The company has received support 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 received 15 million (£12m) to approve the swap.

Eric Schiffer, a crypto investor at the Patriarch Organization, a private equity firm, said Bankman-Fried “built authority in political circles, with celebrities, and exhibited a value system of idealism. utility which [was] not money oriented, causing investors to drop their due diligence guard.

Financial regulators’ allegations against Bankman-Fried could draw further parallels to Madoff’s allegations as they seek to track the flow of money through FTX and into Alameda and other investments, including lavish spending on property Bahman and the roles played by others in the business. his fall.

Many people compare Bankman-Fried to Bernie Madoff following the FTX scandal.
Many people compare Bankman-Fried to Bernie Madoff following the FTX scandal. Photograph: Louis Lanzano/AP

SBF is the first to face charges for the collapse of the cryptocurrency exchange, but prosecutors have made it clear that he won’t be the last. On Tuesday, prosecutors advised anyone involved in the alleged fraud to “come talk to us before we come to see you.” Separately, in Washington, Ray revealed he was “investigating” the role of Bankman-Fried’s parents, Joseph Bankman and Barbara Fried, both professors at Stanford University.

Peter Madoff, Bernard’s brother, and others were also convicted after Madoff’s conviction.

But as news of the FTX collapse begins to unfold in various venues and authorities gain a better understanding of how the money was transferred and how the alleged fraud was carried out, Henriques warns that the parallels could still collapse.

“We don’t know yet, and I’m not sure John Ray still knows, if this was actually some kind of high-tech Ponzi scheme. Understanding how close this is to Bernie Madoff means understanding what has been done with the money.

SBF has tweeted his defence, done countless interviews and admitted he “screwed up” but while he said he made some big mistakes, he also seems to be suggesting – in a sometimes confusing way – that it was all a big mistake. “The carelessness or flippancy of his responses was striking,” Henriques pointed out.

In the coming months, prosecutors will build a case that argues that, for all the differences in style, SBF is just a millennial Madoff. Outlining the criminal charges against SBF on Tuesday, Damian Williams, the U.S. Attorney for the Southern District of New York, was asked if Bankman-Fried fit the profile of a fraudster. “You can cheat in shorts and a t-shirt in the sun,” Williams shot back.

SBF is already fighting 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.

“Yeah, I mean, I don’t think that’s who I am at all, but I get why they say that,” Bankman-Fried replied. “People have lost money and people have lost a lot of money. At the end of the day, listen, there is a question of what happened and why and who did what, what caused the collapse. I think it reads very differently.

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