Former FTX users say the failed crypto exchange was a ‘Ponzi scheme’. Here’s how these things work, and what we know about how Sam Bankman-Fried works

Until recently, Sam Bankman-Fried, or SBF, was the golden boy of cryptocurrency, known for building the cryptocurrency exchange, FTX, into a $32 billion behemoth in just two years.

But the disheveled, left-leaning 30-year-old was living a lie. SBF, who claimed to be a minimal philanthropist, used client money to support his failing crypto empire and fund his lavish lifestyle.

Amid the revelations and broader downsizing of the cryptocurrency industry, FTX and its investment network — which included SBF’s business, Alameda Research, as well as more than 200 other crypto firms — dramatically disintegrated.

Meanwhile, the SBF, a former cryptocurrency “white knight” who was reportedly worth $26.5 billion, says it has reached its last $100,000.

Ex FTX Clients, Academicsand even Faithful encryption They alleged that Bankman-Fried’s now-defunct cryptocurrency exchange was an outright “Ponzi scheme,” leading to a flood of civil lawsuits against him and his company. There are still no provisions on these issues.

Despite allegations and acknowledgments by the SBF of wrongdoing, lawyers called luck They said it’s too early to declare FTX a true “Ponzi scheme” — though they say prosecutors may eventually do so.

“I don’t know if this is a Ponzi scheme, and it will likely be some time before we know,” said Thomas B. Vartanian, executive director of the nonprofit Center for Fintech and Cybersecurity.

Vartanian, who has represented parties to 30 of the 50 largest financial institution failures in US history, noted that it could take prosecutors years to delve into the complex, interconnected accounting and mismanagement of FTX and its subsidiaries.

“They’ll follow the money, they’ll follow it to the hundred. And they’ll find out if we’re dealing with negligence, civil fraud, criminal fraud, whether it’s a Ponzi scheme, or a pyramid scheme, or whatever,” he said. “But these are facts which I don’t think will be in anyone’s possession for some time — until all the money has been pursued.”

However, Vartanian noted that the filings released from FTX’s bankruptcy so far are “very devastating.”

“To me, so far, this looks like corporate misconduct,” he said. “Whether it turns out to be fraud, violations of the law or a Ponzi scheme is another question.”

But Carlos Martinez, a bankruptcy specialist at the law firm Scura, Wigfield, Heyer, Stevens & Cammarota, went further.

“I think the lawyer’s answer would be, ‘Let’s wait for the investigation,’” he said. “But I think it’s pretty cut and dry. The writing on the wall was – or at least, if it wasn’t supposed to be a Ponzi scheme, it certainly worked as a Ponzi scheme.”

How do Ponzi schemes work?

A Ponzi scheme is a scam that lures investors with promises of high returns with little or no risk. The problem is that Ponzis makes those so-called returns using money from new investors, not profitable investments.

The name comes from Charles Ponzi, an Italian con artist who deceived American investors in the 1920s with a clever story and the promise of high returns.

The Securities and Exchange Commission has warned of the dangers of Ponzi schemes and their prevalence in crypto circles. And some crypto critics, such as Nouriel Roubini, Professor Emeritus at New York University’s Stern School of Business, and CEO of Roubini Macro Associates, argue that the entire crypto ecosystem is the “mother of all Ponzi schemes.”

FTX shares many similarities with previous Ponzi schemes. Sheila Beer, who was president of the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, told CNN earlier this month that the SBF’s ability to attract regulators and investors was “a lot like Bernie Madoff.”

For more than 20 years, Madoff ran the largest Ponzi scheme in history before his arrest in 2008, in which he stole $65 billion from 37,000 individuals. Although the final accounting is not yet complete, FTX has $50 billion in liabilities to more than 100,000 creditors, which puts SBF’s business close to Madoff’s numbers.

But did the SBF run a Ponzi scheme? Or was corporate fraud what led to the collapse of the Houston-based energy company Enron, whose bankruptcy and subsequent accounting scandal rocked the markets?

If you ask former Treasury Secretary Larry Summers, Enron is a better analogy for FTX than an outright Ponzi scheme.

“I would compare it to Enron,” Summers told Bloomberg earlier this month. “Not just a financial misstep but – certainly from the reports – a whiff of fraud. Pitch labels so early in the company’s history. A massive explosion of wealth that no one quite understands where it’s coming from.”

What we know about how FTX works

Whether FTX was a Ponzi scheme may be up for debate, Martinez said, but the SBF may also have been involved in what prosecutors may determine was “misappropriation of funds,” “fraud,” or even an “outright Ponzi scheme.” luck.

For example, the SBF has used at least $4 billion in FTX clients’ funds to support its trading firm, Alameda Research, as crypto prices plummeted earlier this year, according to CoinDesk. The SBF denies that it has implemented a “backdoor” into FTX systems to do so, saying that it is “definitely not true” and that it couldn’t even program.

A media representative for SBF did not respond to requests for comment luck.

but in The New York Times Announcing its amazement at FTX’s collapse, Dealbook Summit said on Wednesday: “I’ve never tried to commit a scam. I was excited about the prospects for FTX a month ago. I’ve seen it as a thriving and growing business. I’m shocked at what happened this month. And rebuilding, there are things I wish I had done it differently.”

But the former crypto billionaire admitted that a “very weak accounting thing” enabled Alameda to be “more efficient” than he expected.

FTX is also facing a wave of lawsuits over its ads, much like what happened to Bernie Madoff’s marketing arm in 2009 after his arrest.

FTX has hired celebrities including NFL star Tom Brady for expensive Super Bowl ads. And in a planned 2018 presentation to investors (pictured below), she offered clients what she described as “high returns without the risk” and loans “with no downside.”

SBF and its team at FTX haven’t been shy about spending either. The company dropped $300 million on property in the Bahamas for its top executives, took out a $55,000 tab at Jimmy Buffet’s MargaritaVille Bar, and chartered private jets to fly Amazon packages to the executives.

During his presidency, Madoff and his cohorts lived a life of luxury, too, buying multimillion-dollar mansions, fancy jewelry, clothes, and watches—some of which were auctioned off to pay back his investors after his arrest.

Finally, before its crash, major international exchange FTX held $9 billion in outstanding liabilities with only $900 million in assets, according to financial times. Normally, total liabilities and total assets on the balance sheet should match, and the discrepancy shows that FTX was in a deep hole before it collapsed.

While the SBF insisted it simply miscalculated the amount of the liabilities on the books, FTX’s new CEO John Ray III, who also dealt with the collapse of Enron, called FTX’s operations a “complete failure of corporate controls” with a “total absence of trustworthy finances.” ” Information.”

“From the compromised integrity of systems and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and vulnerable individuals, this situation is unprecedented,” he said.

Whether the SBF ran a Ponzi scheme through FTX will only be determined after the plaintiffs have completed their investigations, and a jury has ruled any criminal cases they bring. But Vartanian argued that Congress should pass stricter regulations on the cryptocurrency industry as soon as possible.

He said, “I think Congress needs to write new rules to make it clear that cryptocurrencies take and use other people’s money, which means it’s fiduciary. It’s honest, and it should be treated as such according to the law.”

This story originally appeared on

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