Former FTX users say the failed cryptocurrency is a “Ponzi scheme”. Here’s what we know about how they work and how Sam Bankman-Fried works

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

But the disheveled, left-leaning 30-year-old was living a lie. Claiming to be a minimalist philanthropist, SBF used client funds to prop up a failed crypto empire and finance a lavish lifestyle.

Amid the revelations and the broader crypto industry downturn, FTX and its investment network – SBF’s trading business, Alameda Research, as well as more than 200 other crypto companies – have been exposed sharply.

Meanwhile, SBF, the cryptocurrency’s former “white knight,” once reported to be worth $26.5 billion, says it has hit its last $100,000.

Former FTX clients, academicsand even crypto loyal They claimed that Bankman-Fried’s now-defunct cryptocurrency exchange was a straight-up “Ponzi scheme” and led to multiple civil lawsuits against him and his company. There is no decision on the cases yet.

Despite allegations and admission of wrongdoing by SBF, contacted lawyers Luck He said it was too early to declare FTX a true “Ponzi scheme” — though prosecutors may eventually do so.

“I don’t know if this is a Ponzi scheme, and it’s probably going to be a while before we know,” said Thomas P. Vartanian, executive director of the nonprofit Center for Financial Technology and Cybersecurity.

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

“They will follow the money and follow it down to the penny. “They’re going to figure out whether we’re dealing with negligence, civil fraud, criminal fraud and whether it’s a Ponzi scheme, a pyramid scheme or whatever,” he said. “But these are facts that I don’t think anyone will have for a while – until all the money is chased.”

However, Vartanyan noted that the documents released so far from the FTX bankruptcy are “quite devastating.”

“So it looks to me like corporate misconduct so far,” he said. “And whether that turns into fraud and irregularities or a Ponzi scheme is another question.”

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

“I think the lawyer’s answer will be “wait for the investigation”.” “But I think it’s pretty cut and dry. The writing was on the wall that it was – or at least, if not a Ponzi scheme, it definitely worked like a Ponzi scheme.

How 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 generate those returns using money from new investors, not profitable investments.

The name comes from Charles Ponzi, an Italian swindler who tricked US investors in the 1920s with a clever story and the promise of high returns.

The SEC has warned about the dangers of Ponzi schemes and their prevalence in crypto circles. Some crypto critics, such as Nouriel Roubini, professor emeritus at New York University’s Stern School of Business and CEO of Roubini Macro Associates, even claim that the entire cryptocurrency ecosystem is the “mother of all Ponzi schemes.”

FTX shared many similarities with past 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 attract regulators and investors was “very Bernie Madoff-like in a way.”

For more than 20 years, before his arrest in 2008, Madoff ran the largest Ponzi scheme in history, stealing $65 billion from 37,000 people. Although the final accounting has yet to be completed, FTX has $50 billion in liabilities to more than 100,000 creditors, bringing SBF’s case close to Madoff’s numbers.

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

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

“I would compare it to Enron,” Summers told Bloomberg earlier this month. “Not only financial malpractice, but also – certainly from the reports – horizons of fraud. Stadium names very early in the company’s history. A huge explosion of wealth that no one can understand where it came from.”

What we know about how FTX works

Whether FTX is a Ponzi scheme is debatable, Martinez said, but SBF can deal with what prosecutors can determine is “embezzlement,” “fraud” or even “an outright Ponzi scheme.” Luck.

For example, according to CoinDesk, SBF used at least $4 billion in FTX client funds to support trading firm Alameda Research as cryptocurrency prices fell earlier this year. SBF denies using a “backdoor” in FTX systems to do this, saying it’s “not necessarily true” and that it can’t even code it.

The SBF media representative did not respond to a request for comment Luck.

But also New York Times At the Dealbook Summit on Wednesday, SBF expressed surprise at the collapse of FTX: “I never tried to commit fraud. A month ago, I was excited about the prospects of FTX. I saw it as a developing, growing business. I was shocked by what happened this month. And while rebuilding it, there are things I wish I had done differently.”

But the former crypto-billionaire admitted that “very bad bookkeeping” allowed Alameda to be “substantially more effective” than he expected.

FTX is facing a wave of lawsuits over its advertising, similar to what happened to its marketing department in 2009 after the arrest of Bernie Madoff.

FTX hired celebrities including NFL star Tom Brady for expensive Super Bowl commercials. In its 2018 presentation to investors (pictured below), it offered customers “risk-free high returns” and “no downside” loans.

The team at SBF and FTX did not hesitate to spend. The firm plunked down $300 million on a property in the Bahamas for top executives, collected a $55,000 tab on Jimmy Buffet’s MargaritaVille Bar, and chartered private jets to deliver Amazon packages to executives.

Madoff and his associates lived a life of luxury, buying multimillion-dollar mansions and lavish jewelry, clothes and watches — some of which were auctioned off to pay back their investors after their arrests.

Before finally collapsing, FTX’s main international exchange held $9 billion in unsecured liabilities with only $900 million in assets. Financial Times. Usually, total liabilities and total assets should match on the balance sheet, and the difference indicates that the FTX is in a deep hole before it collapses.

While the SBF insisted it had simply misjudged the amount of liabilities on the books, FTX’s new CEO, John Ray III, who also managed the Enron bankruptcy, called FTX’s operations a “total failure of corporate control” with a “complete lack of sound financing.” information.”

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

Whether SBF operated a Ponzi scheme through FTX will not be determined until prosecutors complete their investigation and a jury decides any criminal charges they bring. But Vartanian argued that Congress should pass stricter regulations on the cryptocurrency industry as soon as possible.

“I think Congress should write new rules to make it clear that a cryptocurrency business is taking and using other people’s money, and that means it’s a fiduciary,” he said. under the law.”

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