What a coincidence!
On December 11, 2008, almost fourteen years to the day, conman Bernie Madoff was arrested at his apartment in New York and was charged with having been the mastermind of a Ponzi scheme that had swallowed up at least $65 billion.
This fraud is considered one of the biggest financial fiascos in history.
Photos of the former chairman of the Nasdaq stock exchange, with his silver hair, were strewn across the headlines. He was the face of financial greed.
Fourteen years later, history seems to be repeating itself. But this time, in the leading role is a young man of 30 years old, who is accused of having orchestrated one of the biggest scams in the junior industry of financial services powered by the Blockchain technology.
Sam Bankman-Fried, a graduate of the prestigious Massachusetts Institute of Technology (MIT) and former trader of Jane Capital, has been dubbed, for several weeks, the Bernie Madoff of the crypto sphere.
Arrested
On December 12, 2022, Bankman-Fried, the former king of crypto, was arrested in the Bahamas after the US authorities filed a criminal indictment, following weeks of speculation that he defrauded the clients and investors of his crypto’s empire.
Bankman-Fried is being held in custody pending an extradition process, Ryan Pinder, the Bahamas’ attorney general, said on December 12. He was arrested without incident at his apartment complex shortly after 6 pm ET Monday in Nassau, the Royal Bahamas Police Force said in a statement.
His arraignment is scheduled for Tuesday.
Federal prosecutors in Manhattan plan to unseal the case against him on December 13.
“Earlier this evening, Bahamian authorities arrested Samuel Bankman-Fried at the request of the U.S. Government, based on a sealed indictment filed by the SDNY,” Damian Williams, U.S. attorney for the Southern District of New York, said in a statement on Twitter on December 12. “We expect to move to unseal the indictment in the morning and will have more to say at that time.”
The charges against Bankman-Fried could include wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering, according to The New York Times.
The United States’ extradition treaty with the Bahamas allows US prosecutors to return defendants to American soil, if the charges would be considered punishable by imprisonment of at least one year in both jurisdictions.
The U.S. Securities and Exchange Commission (SEC) also authorized civil charges relating to the former king’s violation of securities laws.
“We commend our law enforcement partners for securing the arrest of Sam Bankman-Fried on federal criminal charges,” Enforcement Director Gurbir Grewal said in a statement on Twitter. “The SEC has authorized separate charges relating to his violations of securities laws, to be filed publicly tomorrow in SDNY.”
The Rise of Bankman-Fried
This chain of events in the 14 days leading to the arrest of Bernie Madoff at his New York apartment, illustrates the many similarities between Bankman-Fried and the former conman. It also underlines the sad disgrace of a young man whose rise had been meteoric.
Bankman-Fried founded FTX in 2019 with two associates – Nishad Singh and Gary Wang. Very quickly, his empire became one of the biggest crypto exchange firms. In February 2022, the firm was valued at $32 billion, during a final round of financing in which the crème de la crème of investors participated.
Bankman-Fried’s investors include the famous venture capital firm Sequoia and BlackRock, the world’s largest asset manager..
What attracted such top names of finance is the fact that, in parallel, Bankman-Fried had created Alameda Research, a hedge fund which was also a trading platform. Alameda was a market maker, which made it the go-to place for institutional investors wanting to trade in cryptocurrencies.
But it was also through Alameda Research that the troubles and downfall of the Bankman-Fried empire originated.
The hedge fund had the “ability” to “borrow funds held at FTX.com to be utilized for its own trading or investments without any effective limits,” John Ray, the new CEO of FTX wrote in his prepared remarks to Congress on December 11.
“Customer assets from FTX.com were commingled with assets from the Alameda trading platform. Alameda used client funds to engage in margin trading which exposed customer funds to massive losses,” said Ray who was the liquidator of the Enron bankruptcy.
“Never in my career have I seen such an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever,” the veteran in corporate restructuring added.
In recent days, Bankman-Fried had embarked on a media tour to try and sway public opinion and control the narrative. In all the interviews, he explained how the overnight implosion of his empire was due to bad luck.
“I made a lot of mistakes,” he said during his first interview on November 30 with The New York Times/DealBook. “There are things I would give anything to be able to do over again. I didn’t ever try to commit fraud on anyone.”
Young Billionaire
Until November 8, Bankman-Fried was a billionaire. His net wealth was valued at almost $16 billion, before his empire filed for Chapter 11 bankruptcy on November 11. He was considered the tutelary figure of the crypto sphere, a sort of godfather to turn to when things went wrong.
He owed this image to his tour de force during last summer to bail out crypto firms struggling due to a credit crunch caused by the sudden collapse of the cryptocurrencies Luna and UST, or TerraUSD, two tokens issued by the Terraform Labs platform.
The fall of these two tokens hit hedge fund Three Arrows Capital, also known as 3AC, which found itself unable to honor its payments to crypto lenders, including Voyager Digital and Celsius.
Voyager and Celsius filed for Chapter 11 bankruptcy, while 3AC was forced into liquidation.
SBF, as he is nicknamed in the crypto industry, had, through his firm FTX Ventures, embarked on an acquisition spree and bailouts of struggling crypto firms to avoid a collapse of the sector.
He gave credit facilities to lenders Voyager Digital and BlockFi, and acquired a significant 7.6% stake in Robinhood, the brokerage house for Gen Z and millennials. He has an option to buy BlockFi.
More recently, Bankman-Fried concluded a deal with Anthony Scaramucci, who was ever-so-briefly the White House director of communications under former president Donald Trump. FTX Ventures acquired 30% of Skybridge Capital, the alternative investment company founded by Scaramucci, aka “The Mooch.
“The FTX group went on a spending binge in late 2021 through 2022, during which approximately $5 billion was spent buying a myriad of businesses and investments, many of which may be worth only a fraction of what was paid for them,” Ray told Congress.
Within a month, Bankman-Fried’s empire crumbled. He himself became a pariah. It now appears that he will spend a lot of time in court to avoid ending up in prison like Bernie Madoff.