Sam Bankman-Fried, FTX, and the lessons of Bernie Madoff and the Crisis.

What do two of the biggest fraud cases in U.S. history have in common?

COLLEEN P. EREN

Left: Bernie Madoff's mug shot by U.S. Department of Justice, Public Domain, Via Wikimedia Commons

Right: February 2022— Sam Bankman-Fried delivering testimony at the U.S.  Senate. By US Senate, CSPAN, Public Domain, Via Wikimedia Commons

 

The precipitous fall of Samuel Bankman-Fried (SBF) from his status as a crypto wunderkind and the world’s youngest billionaire, splashed across the covers of Fortune and the Forbes’ “400” edition, to having his in-jail nutrition and pastimes in a sordid Bahamas jail reported by Bloomberg, is a story that rapidly claimed widespread public attention and commentary. Indicted on eight counts of conspiracy and criminal activity related to wire fraud, commodities fraud, securities fraud, money laundering, violation of campaign finance laws, as well as facing civil charges filed by the Securities and Exchange Commission, SBF is alleged to have, from the very beginning of his establishment of the cryptocurrency trading platform, FTX, in 2019, deceived equity investors, and channeled and commingled billions in customers’ funds illegally to his other business, the quantitative crypto-hedge fund Alameda Research, founded in 2017. With those funds, SBF purchased swanky real estate in the Bahamas, made risky speculative investments and large political donations, loaned himself and other executives large amounts of money, repaid Alameda’s debts, and even bailed out other distressed crypto firms. In total, about 8 billion dollars of FTX customers’ funds are thought to have been lost in the swindle by SBF and his accomplices.

Almost immediately, along with the details of SBF’s fraud and titillating accounts of his life in the Bahamas, came comparisons with and allusions to perhaps the most notorious white-collar criminal of the 21^st century, Bernard Madoff. CNN juxtaposed footage of Madoff’s arrest alongside that of SBF, asking if SBF was the “new Madoff” in an interview with the federal prosecutor. In his first network interview, George Stephanopolous levelled at him “A lot of people look at you and see Bernie Madoff.” #BernieMadoff trended in tweets about SBF in November 2022, and Google Trends in January 2023 showed that the top two related rising “breakout” queries to the search term “Bernie Madoff” were “FTX” and “Sam Bankman-Fried" respectively. Yet, the comparison to Madoff, in terms of the nature, length of, modus operandi, and motive, is largely inapposite. Important differences (and similarities) abound.

Perhaps most significant among these differences, in spite of the loose throwing around of the term to describe SBF’s fraud: it is not a Ponzi scheme. To call it such—as has been the case in non-broadstreet outlets—stretches the term so that it loses its definitional clarity. Madoff’s 17.5 billion Ponzi, the largest in history, like all such classic schemes regardless of size, involved paying ‘returns’ to investors in a fake investment advisory business using funds from other investors in the same scheme that were merely deposited in a personal Chase bank account. It was a legerdemain that was possible as long as new institutional investors and individual ‘marks’ could be obtained. SBF is accused of misappropriating deposits from FTX customers to plug holes for Alameda among other purposes, commingling funds between the two businesses, but this is more readily described as embezzlement. His selling equity investors on a responsible business that was anything but responsible, was also fraudulent, but not a Ponzi. On none of the legal documents from government agencies like the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) does the term appear, unlike in Madoff’s case. Among the other important differences is the modus operandi: Madoff's scheme, as with many Ponzis, was an affinity fraud targeting members of communities to whom he had personal connections, a characteristic not seen in SBF’s crime, which was much shorter-lived, surviving only a few years, compared to Madoff’s fraud, which by some accounts stretched back to the 1970s, an almost 40-year scheme. And last, while Madoff in his interviews for my book Bernie Madoff and the Crisis: The Public Trial of Capitalism », expressed being motivated to begin the Ponzi to not disappoint his wealthiest clients, some have suggested that SBF’s allegiance to the philanthropic philosophy of effective altruism might have been his motivator.

In spite of these differences, the SBF case does bear important similarities among which are the scope, impact, and societal importance of the crime, qualities that enabled it to capture public attention. In my book, I made the argument that the “Madoff” high-profile crime had five key elements that allowed it to exit the business pages and enter mainstream public discourse, some of which are shared by “SBF.” The first is that the case involved, for the most part, a single individual around whom a story of mythological proportions could be told. Check. Second, surrounding the crime was a family drama of epic proportions. While the family drama is not as pronounced with SBF, certainly his parents being law professors at Stanford University, to say nothing of the scandalous rumors of a polyamorous, drug-fueled lifestyle, can be seen to serve a similar function. Check. Third, the size of the swindle was itself mythological in an era of gargantuan losses. 8 billion in customer money directly swindled, with billions more in investors’ capital up in smoke with the fall of FTX? Check. Fourth, there was an entanglement of easily recognizable celebrities. Celebrities from sports, Hollywood, and reality TV from Tom Brady to Larry David are currently the subject of class-action lawsuits for their promotion of FTX. Check. And finally, during the Madoff scandal, there was an atmosphere with already rising anti-Semitism, which saw the involvement of a Jewish businessperson fuel pejorative stereotypes. A similar rising atmosphere has been documented in during the exposure of SBF’s fraud. Check.

Bernie Madoff and the Crisis» goes beyond purely investigative accounts to examine how and why Madoff became the epicenter of public fury and titillation.

Bernie Madoff and the Crisis further contended that because the case had entered mainstream discussion through the elements above, and the crime had become conflated with the causes of the financial crisis of 2008, it became a vehicle-- through one man’s transgressions--for discussion of more difficult and abstract crisis-related issues, from regulatory failures and what their role should be in a free market, globalized economic system, to the political and societal consequences of enormous wealth concentrated in the hands of a few, to class-based disparities in law and administration of justice. We can see how SBF’s case is serving a similar function in 2023 to that of Madoff’s in 2008. What the role of the SEC and other regulatory agencies should be in an unprecedented new era of cryptocurrencies is being debated vigorously through the case of SBF. Almost exactly as we saw in the Madoff case, besides searing aspersions being cast at the leadership and approach, allegations of regulatory capture are being levelled at the SEC in coverage of SBF. Noteworthy too is how the delay in arresting SBF, his being invited to give an interview with the New York Times, and his later being released on a $250M bond to live at home with his Stanford Professor parents, is being used to discuss criminal justice system inequalities. We see the clear parallel with Madoff, who was also released on bail monitoring to his Upper East Side apartment, and which stirred similar class-based conversations about inequality and justice at the time. And with Madoff’s 150-year maximum sentence, in the end denied clemency and dying in prison, the ‘statement’ was made about fraud in a time of crisis. I predict a similar ‘statement’ will be made through SBF as he is symbolic of the nascent crypto industry. 

While the full details of SBF and his associates’ crimes have yet to be revealed, and the remarkable collapse of FTX is only months old, doubtless the likening between two of the largest white collar crimes in history will continue. My book hinted at not only looking at factual differences and similarities, but investigating role the case is serving societally and politically.  The last chapter of Bernie Madoff and the Crisis, which was published almost a decade after the Madoff case was discovered, was pessimistically titled, “The more things change, the more they stay the same.” I hope the same chapter will not be written for SBF.

Start Reading Bernie Madoff and the Crisis »

Colleen P. Eren is Associate Professor of Criminology and Criminal Justice at William Paterson University.

Comments

[Merdiven Asansörü]

I agree with you. good work. thanks for article.

[شركات تصدير الفحم في مصر]

Nice topic. very good work. I read with pleasure. thanks.

[Engelli Asansörü Fiyatları]

nice article nice work. thanks.

[Engelli Asansörü]

We have to think about where the world is going. Thanks for the article.

[Liftart Kaliteli]

nice. i think the SBF is definitely a rogue, but it could still be more of a tool for the bigger rogues in the background than being the main rogue. Need to research thoroughly. You have to make the right comment.