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

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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 $64 billion ($53 billion) scheme, says the similarities between Bankman-Fried or SBF as he is known and the manager of Wall Street investment 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, mind-boggling complexity that would cause the average investor to just roll over their heads and say, Well, I trust Bernie.

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

A scammer’s most essential gift is that they can inspire confidence that never wavers, even in the face of red flags and disturbing details. You can’t consider FTX anything more than a huge leap of faith by 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 an observation about Madoff now just as easily applicable to Bankman-Fried.

The personal circumstances of the two men were very different. Madoff had a long and stellar reputation on Wall Street and had been regularly scrutinized by regulators, while SBF was a young math genius who had established instant credibility in a new financial industry. 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 to 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 more than a century, Henriques points out.

Like Madoff, FTX activities were 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 much solid evidence to back up their confidence, she added.

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

Madoffs con collapsed when the 2008 global financial crisis triggered an attempted withdrawal of some $7 billion (6 billion) by customers. It finally became clear that he had been running a Ponzi scheme for over 20 years.

Although it’s still early days and the FTX scandal needs more unpacking, the alleged Bankman-Frieds fraud relied 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 client funds from trading platforms 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 embarrassed 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 difficult regulatory questions and focuses mainly on lying and deception. It’s 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 Bndchen, were listed as equity investors and starred in advertisements for the company, according to documents seen by the Guardian.

The company has received backing from comedian Larry David, tennis star Naomi Osaka, former basketball player Shaquille ONeal, and Canadian Shark Tank star and businessman Kevin OLeary, who received $15 million ( 12 million) to approve the exchange.

Eric Schiffer, a crypto investor at the Patriarch Organization, a private equity firm, said Bankman-Fried had built authority in political circles, with celebrities, and exhibited a value system of utilitarian idealism. who [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 others in the company played in its downfall.

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 cryptocurrency exchanges, 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 speak to us before we come to see you. Separately, in Washington, Ray revealed he was investigating the role of Bankman-Frieds’ 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 does, if this was actually some kind of high-tech Ponzi scheme. Understanding how close it is to Bernie Madoff means understanding what was done with the money.

SBF tweeted his defense, did countless interviews and admitted he screwed up, but while he said he made some big mistakes he also seemed to suggest 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 countered.

SBF is already fighting Madoff’s analogies. A lot of people look at you and see Bernie Madoff, ABC George Stephanopoulos told Bankman-Fried in an interview before his arrest.

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

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