At first glance, Sam Bankman-Fried bears little resemblance to Bernie Madoff. One is a smartly-suited, grey-haired financial titan with a 40-year career on Wall Street, and the other a 30-year-old millennial king of crypto in shorts and T-shirt.
But almost 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, a financial historian and the author of The Wizard of Lies, a book delving into Madoff’s $64bn (£53bn) scheme, says the similarities between Bankman-Fried – or SBF as he is known – and the Wall Street investment manager are “striking”.
“The similarities between what we know of Madoff and what we know of Bankman-Fried is striking,” she said. “They are vastly different characters, but what is similar is this deliberate, eye-crossing complexity that would cause the average investor to just glaze over and say, ‘Well, I trust Bernie.’
“I see that same dynamic in how the client base viewed FTX. They really didn’t have a lot of solid evidence to support their trust, so it was - as with Bernie - a leap of faith. You trust the central character and that short-circuits a lot of the steps that, in hindsight, are the obvious due diligence you would do, and that is amazing[ly] similar.”
“The most essential gift of a con man is that they can inspire trust that never wavers, even in the face of red flags and worrisome details. You can’t look at FTX as anything but a massive leap of faith by a lot of people who should have known better,” Henriques said.
Madoff died in prison last year while serving a 150-year sentence. This week, US federal attorneys in New York unsealed a complaint against SBF alleging eight counts of fraud. If convicted, he faces a maximum of 115 years. Bankman-Fried has not been formally charged and has yet to enter a plea; he may yet be proven innocent of all charges.
In both cases, a financial collapse - the 2008 crisis for Madoff and a crypto market downturn, Covid-19 and soaring inflation for SBF - exposed the holes in their businesses and burned the trust 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 easily applied to Bankman-Fried.
The two men’s personal circumstances were very different – Madoff had a long and sterling reputation on Wall Street and had been regularly inspected by regulators, while SBF was a young, untested math whizz who had established instant credibility in a new financial industry. But both worked hard to represent themselves as paragons of trust.
Both men were financial innovators who ran dizzyingly complicated businesses. But as US prosecutors alleged this week, at the heart of FTX’s collapse was a simple idea – robbing Peter to pay Paul, the same charge made in the Madoff case. “It’s a simple, classic fraud complaint, about fraudulent deception, relying on anti-fraud statutes that have been tested in the courts for more than a century,” Henriques points out.
Like Madoff, FTX’s activities were shrouded in a cloud of pseudo-complexity. Madoff, Henriques points out, would explain his investment strategy to clients in ways that would cause the average investor to glaze over. “That meant investors had to fall back on, ‘Well, I trust Bernie,’” she said.
“It was eye-crossingly complicated and investors didn’t have a lot of solid evidence to support their trust,” she added.
But Madoff was in fact simply taking customers’ money to meet other customers’ withdrawals, all while taking a slice for himself and his family. The scam – known as a Ponzi scheme – worked until money coming in dried up.
Madoff’s con unraveled when the 2008 global financial crisis triggered an attempted withdrawal of some $7bn (£6bn) by customers. It eventually became clear that he had been running a Ponzi scheme for more than 20 years.
While these are early days and the FTX scandal needs more unpacking, Bankman-Fried’s alleged fraud relied on a similar dynamic, according to US authorities.
The cryptocurrency exchange he ran prided itself on being a good actor in a sector notorious for bad ones. SBF lobbied for clearer guidelines on crypto trading, spent millions wooing politicians and continues to claim his only reason for making money was to do good.
But according to the Securities and Exchange Commission: “Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire.”
Authorities claim 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 customer funds into the coffers of his trading firm, Alameda Research, was installed into the structure of the operation from the day it opened in 2019.
John Ray III, a veteran bankruptcy expert who took over FTX after its collapse, told Congress this week that this 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 missing, who is owed what and how much he can clawback. But he has said he has been hampered by the parlous state of FTX’s recordkeeping and its “unprecedented and complete failure of corporate controls”.
Making the case that FTX was, at heart, a simple Ponzi scheme is a strong move, said Henriques. “The criminal case sidesteps all the tough regulatory questions and focuses primarily 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 prosecution.”
Madoff was once chairman of the Nasdaq stock exchange and promoted the advent of electronic trading platforms. His celebrity clients included film producer Steven Spielberg, actor Kevin Bacon and a foundation run by Holocaust survivor Elie Wiesel, which lost all its money.
We have yet to see a full list of who lost money on FTX but the fallout has taken in big names. American footballer Tom Brady and former wife, model Gisele Bündchen, were listed as equity investors and starred in ads for the business, according to documents seen by the Guardian.
The company 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 was paid $15m (£12m) to endorse the exchange.
Eric Schiffer, a crypto investor at the Patriarch Organization, a private equity firm, said Bankman-Fried “built authority in political circles, with the celeberati, and showed a value system of utilitarian idealism that [was] not orientated toward money, all of which caused investors to let down their due diligence guard.”
The financial regulators’ allegations against Bankman-Fried may draw more parallels with the Madoff allegations as they seek to track the flow of money through FTX and into Alameda and other investments, including lavish spending on Bahmanian property and the roles others at the company played in its downfall.
SBF is the first to face charges on the cryptocurrency exchange’s collapse but prosecutors have made clear 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 you”. Separately, in Washington, Ray revealed that 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 sentencing.
But as information about FTX’s collapse begins to unspool across a variety of venues and the authorities build a clearer understanding of how the money moved and how the alleged fraud was carried out, Henriques cautions that the parallels may yet collapse.
“We don’t know yet, and I’m not sure John Ray knows yet, whether this was some kind of high-tech Ponzi scheme in reality. Understanding how close this gets to Bernie Madoff means understanding what was done with the money.”
SBF has tweeted his defense, done countless interviews and admitted he “fucked up” but while he has said he made big errors, he also appears to be suggesting – in a sometimes confusing way – that it was all a big mistake. “The insouciance, or casualness, of his responses, has been striking,” Henriques pointed out.
In the coming months, prosecutors will be building a case that argues, for all the style differences, SBF is merely a millennial Madoff. Outlining the criminal charges against SBF on Tuesday, Damian Williams, the United States attorney for the southern district of New York, was asked if Bankman-Fried fit the profile of a fraudster. “You can commit fraud in shorts and T-shirts in the sun,” Williams countered.
SBF is already fighting off the Madoff analogies. “A lot of people look at you and see Bernie Madoff,” ABC’s George Stephanopoulos said to Bankman-Fried in an interview before his arrest.
“Yeah, I mean, I don’t think that’s who I am at all, but I understand why they’re saying that,” Bankman-Fried replied. “People lost money and people lost a lot of money. At the end of the day, look, there’s a question of what happened and why and who did what, what caused the meltdown. I think that reads very differently.”