Until recently, Sam Bankman-Fried, or SBF, was the golden boy of crypto, known for building his cryptocurrency exchange, FTX, into a $32 billion giant in just two years.
But the 30-year-old’s erratic, left-leaning player turns out to be a lie. SBF, which claims to be a bit philanthropic, used customer money to prop up its failing crypto empire and pay for its prosperous lifestyle.
Amidst the revelations and dismissals of crypto companies, FTX and its financial network – which included the business of SBF, Alameda Research, as well as more than 200 other crypto companies – have been exposed in a shocking way.
Meanwhile, SBF, the former “white knight” of crypto that once had a net worth of $26.5 billion, is said to have dropped to its last $100,000.
Former FTX customers, studentsand even trusted crypto He claimed that Bankman-Fried’s now-defunct crypto exchange was a “Ponzi scheme,” which led to a flood of criminal charges against him and his company. There have not yet been any verdicts in the cases.
Despite these charges, and the admission of SBF’s crimes, lawyers were contacted by Chance he said it was too early to declare FTX a bona fide “Ponzi scheme” – although he said prosecutors could.
“I don’t know if it’s a Ponzi scheme, and it may be a while before we know,” said Thomas P. Vartanian, director of the nonprofit Financial Technology and Cybersecurity Center.
Vartanian, who has represented parties in 30 of the 50 largest collapses of financial institutions in US history, said it will take years for prosecutors to investigate the complex, interconnected, and poorly managed FTX and its subsidiaries.
“They will follow the money, and they will follow it down to the last cent.” And they’re going to see if we’re being negligent, civil fraud, criminal fraud, and if it’s a Ponzi scheme, a pyramid scheme, or whatever it is,” he said. But these are facts that I don’t think will be in anyone’s hands for a while—until all the money is tracked. .”
However, Vartanian noted that the documents released from the FTX bankruptcy so far are “very damaging.”
“So to me, to this point, this looks like corporate malpractice,” he said. “And whether it turns out to be fraud and illegal or a Ponzi scheme is another question.”
But Carlos Martinez, a bankruptcy expert at the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, went one step further.
“I think the lawyer would say ‘let’s wait for the investigation'” he said. But I think it’s cut and dry. The writing is on the wall that this was—or, if it wasn’t designed to be a Ponzi scheme, it worked like a Ponzi scheme. “
How Ponzi schemes work
A Ponzi scheme is a scam that lures investors with promises of high returns without any risk. The problem is that Ponzis generate those claimed returns using money from new investors, not capital gains.
The name comes from Charles Ponzi, an Italian schemer who defrauded the US economy in the 1920s with a clever story and the promise of huge profits.
The SEC has warned about the dangers of Ponzi schemes and their spread in the crypto sector. And some critics of crypto, such as Nouriel Roubini, professor emeritus at the Stern School of Business at New York University, and CEO of Roubini Macro Associates, argue that the entire crypto universe is “the mother of all Ponzi schemes.”
FTX shared many similarities with old Ponzi schemes. Sheila Bair, who chaired the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, told CNN earlier this month that SBF’s ability to influence regulators and investors was “similar to Bernie Madoff.”
For more than 20 years, Madoff ran the largest Ponzi scheme in history before his arrest in 2008, stealing $65 billion from 37,000 people. Although the final calculation has not been completed, FTX has debts of $ 50 billion to more than 100,000 borrowers, putting the SBF business close to Madoff’s numbers.
But did SBF run a Ponzi scheme? Or was it corporate fraud like the one that led to the collapse of Enron, the Houston-based energy company whose bankruptcy and poor accounting records rattled the markets?
If you ask former Treasury Secretary Larry Summers, Enron is more like FTX than a Ponzi scheme.
“I would compare it to Enron,” Summers told Bloomberg earlier this month. “Not just financial crime but—certainly from the reports—fraud. Names of stadiums very early in the history of the company. There is so much wealth that no one understands where it is coming from. “
What we know about how FTX works
Whether FTX was a Ponzi scheme is open to debate, but SBF may have engaged in what prosecutors would consider “misappropriation of funds,” “fraud,” or “an actual Ponzi scheme,” Martinez said. Chance.
For example, SBF used at least $4 billion in FTX client funds to support its investment firm, Alameda Research, as crypto prices plummeted earlier this year, according to CoinDesk. SBF denies that it installed a “back door” in the FTX system to do this, saying that it is “not true” and that they cannot even write.
A spokesperson for SBF did not respond to a request for comment Chance.
But to New York Times Dealbook Summit Wednesday, SBF was surprised by the collapse of FTX, saying: “I have never tried to do fraud.” I got excited about the prospect of FTX a month ago. I saw it as a progressive business. I was very surprised by what happened this month. And to recap, there are some things I wish I had done differently. “
But the former crypto-billionaire admitted that “the worst known thing” made Alameda a “greater supporter” than he expected.
FTX is also facing a number of fraud charges, similar to what happened to Bernie Madoff in 2009 after he was arrested.
FTX hired celebrities including NFL star Tom Brady for expensive Super Bowl ads. And in 2018 for investors (pictured below), it offered customers what it said were “high returns with no risk” and no “bad” loans.
SBF and his team at FTX were not shy about using it. The company dropped $300 million on property in the Bahamas for executives, made a $55,000 investment on Jimmy Buffet’s MargaritaVille Bar, and hired private jets to fly Amazon packages to executives.
During his tenure, Madoff and his associates also lived a lavish lifestyle, buying multimillion-dollar mansions and luxury jewelry, clothing, and watches—some of which he sold to recoup his money after his arrest.
Finally, before the collapse, the world’s largest exchange FTX had $9 billion in debt and only $900 million in assets, according to Financial Times. In general, all debts and all assets should be equal on the balance sheet, and the difference shows that FTX was in a deep hole before it collapsed.
Although the SBF has insisted that it only wrongly estimated the amount of debt on the books, the new CEO of FTX, John Ray III, who also worked on the collapse of Enron, called the operations of FTX “a complete failure of corporate governance” and “a complete lack of reliable financial knowledge.”
“From the corrupt practices and the mismanagement of the administration, the administration is in the hands of a small group of people.” ignorant, uneducated and potentially confused, this has never happened before,” he said.
Whether SBF was operating a Ponzi scheme through FTX will not be known until prosecutors complete their investigation, and the court will set the rules for any charges they bring. But Vartanian said that Congress should pass stricter regulations on the crypto industry soon.
“I think Congress should write new laws to make it clear that the crypto business is taking and using other people’s money, and that means it’s being honest,” he said. “He is a supervisor, and he should be treated as such under the law.”