While their crimes are more than a decade apart, both businessmen charmed investors, stealing billions of dollars using a similar tact. Here’s how they did it.
The recent FTX scandal has all the trappings of a Netflix drama series where the business tycoon—once lauded for his power moves—is brought down by greed, selfishness and the judiciary system (The Wolf of Wall Street, much?).
The CEO of crypto exchange FTX, Sam Bankman-Fried, has come into the spotlight for bringing about the downfall of FTX and his other company Alameda Research. In November 2022, he filed for bankruptcy for both companies after a devastating collapse in the public eye. To investors, the crypto mogul’s rise and fall have been similar to that of fraudster investor Bernie Madoff, who was caught in 2008. Let’s take a closer look at how it all unfolded:
The FTX collapse
It all began when the 30-year-old CEO of crypto exchange FTX, Sam Bankman-Fried, launched Alameda Research, a quantitative trading firm, in 2017. The company accumulated millions of dollars by unveiling the inefficiencies in Bitcoin. Later, in 2019, he launched FTX, which traded the FTT crypto coin. As per FTX’s terms and conditions, Bankman-Fried could not transfer money to fund Alameda’s operations. However, he did so anyway. As per reports, he transferred up to a whopping US$10 billion of customer funds to Alameda and later tried to cover it up by blaming “confusing internal labelling”. Big red flag.
Even as the FTX ship sank, another crypto exchange Binance threw FTX a life jacket, with its CEO Changpeng Zhao offering to buy out the company. However, upon discovering lots of problems with FTX’s finances, Binance withdrew the merger deal, leaving FTX to its own devices.
And just like that, in less than a week, Bankman-Fried—who the New York Post dubbed a “world-class schemer”—lost all his fortune. His US$32 billion company filed for bankruptcy and is now facing investigations by the Securities and Exchange Commission (SEC) and the Justice Department regarding FTX’s links with Alameda. He misused customer funds, lied and hurt the crypto community at large. He also brought about a sense of déja vu, reminding people of a similar scam in the past: Bernie Madoff.
Bernie Madoff vs. FTX: The similarities
Once likened to Warren Buffett, Bankman-Fried is now being compared to the likes of fraudster Bernie Madoff, another business tycoon who spearheaded the largest financial fraud in history, resulting in losses of over US$20 billion. Madoff, who died in 2021 in Federal Prison, was a trusted investor, managing the money of the rich and famous while serving on the SEC advisory board and was even once the Chairman of NASDAQ in the 1990s.
Both Bankman-Fried and Madoff thrived off of charming people in power and using their networks and connections to get ahead. Madoff launched a Ponzi scheme, duping his investors by taking money from one client and giving it to another. Like Bankman-Fried, he stole from his customers and breached their trust.
Additionally, in a bid to polish his image, Bankman-Fried donated his money to charities and philanthropic ventures, never revealing where the money to do so was coming from. These personalities reveal plenty about human nature and how easily manipulated we are by charming people. It really makes you wonder whether all the fuss surrounding Prince Charming is just a brainwashing strategy.
The revelation aside, whether Bankman-Fried meets a similar fate as Madoff—a prison sentence—is yet to be ascertained.
Though disgraced, the FTX CEO has been accepting the errors in his ways (or perhaps he is keeping the act up). He claimed, “Had I been a bit more concentrated on what I was doing, I would have been able to be more thorough,” Perhaps, he said, it would have allowed him to reduce the risks.
What’s more? He even acknowledged and called out his goody-two-shoes act as a “dumb game” that, though fooled many—including the likes of actor Tom Brady and venture capitalists at Sequoia Capital—didn’t work in the long run.
What the FTX debacle means for crypto
The FTX crash seems to be the latest nail in the coffin of cryptocurrency. Digital currency has had a less-than-satisfactory year owing to the crypto crash, increasing crimes, bankruptcies, frauds, rug pulls and much more. Crypto is infamous for its volatility; it’s a risky asset that can turn your fortunes into failures in the blink of an eye. One wrong Tweet or move can clean sweep your account. Plus, due to a lack of regulation, there is very little that you can do when things go south.
The FTX debacle has further diminished customer trust in not just FTX but in crypto as a whole. That’s one of the biggest problems with crypto; when one crypto falls, it causes a domino effect. We saw that in the case of Terra Luna’s collapse and now with FTX, too, as Bitcoin and Ether suffer ripple effects. While he plans on rebuilding his billion-dollar crypto empire, it is unlikely that many people would come crawling back.
If anything, Bankman-Fried’s fall from grace is a reminder to be wary of where you put your money. Charming CEOs with fancy degrees (Bankman-Fried went to M.I.T.) don’t always guarantee profitability (Read: Elizabeth Holmes’s trial). You must do your research and remain skeptical…and if something seems to be good to be true, it probably is.
Will the industry be able to regain customer trust after the year it has had?
Only time will tell.
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