To his credit, Securities and Exchange Commission chief Gary Gensler says the Sam Bankman-Fried crypto scandal doesn’t mean we need more regulations to curb digital coin overreach and fraud. Laws are on the books, giving the existing regulatory and legal system many tools to prosecute bad actors. Moreover, theft has been illegal since the dawn of civilization.
But if our regulators are properly armed, how did the shaggy-haired alleged fraud get away with something that could rival the wrongdoing of the infamous Bernie Madoff and his $65 billion Ponzi scheme?
To answer that question, you need to examine how both Madoff and the dude known as SBF operated within the regulatory apparatus—a “capture,” if you will, that inquiring minds in government aren’t worth the time to look at. to the duo’s too-good-to-be-true relationship.
Yes, “regulatory capture”—that is, industry’s dominance over regulators and not the other way around—is a real problem, and has been as the financial system has grown in size, wealth, and power.
On the one hand, the revolving door between financial business and government is inevitable. People who work for the SEC or DOJ have a knowledge base that can benefit Wall Street firms looking to avoid trouble. The flip side of all this is that regulators stand to make a lot of money when they decide to switch sides. This is when regulatory toxicity often emerges. It’s a very human thing to think that someone you want to work with and who your former colleagues have worked with could never commit fraud.
It became associated with Madoff and SBF and the people who were supposed to look after them.
For years, Madoff was considered a virtuous member of the Wall Street club, and he had extensive access to a system of checks and balances to detect fraud. He helped establish the Nasdaq stock market, becoming a senior member of its self-regulatory organization. He and the firm’s partners have held various positions in the financial industry’s main lobbying group. Madoff and his family gave money to politicians involved in the oversight of the financial system. His compliance officer was married to his niece, an SEC official.
Madoff had a prominent market-making business and an investment fund that reached great heights on paper — about $65 billion in alleged assets, making it one of the largest private equity funds — but never attracted much interest from the SEC because it had Madoff’s name on it.
On paper, his investments produced implausibly consistent returns in good markets and bad markets, prompting a handful of securities industry insiders to conclude that Bernie was a fraud. The punters went to the SEC, which kicked the tires a little, but not enough.
The 2008 financial crisis and Madoff’s cash-strapped investors exposed the SEC’s fraud and the watchdog’s alphabet soup: The returns were fictitious and investors’ money was stolen in a massive Ponzi scheme. Madoff died in prison after serving about 12 years of his 150-year sentence.
Shades of Madoff can be seen in the SBF story as it relates to how Bankman-Fried operated within the regulatory apparatus. SBF sent money to Poles with cryptocurrency control; FTX has hired people from crypto regulatory bodies like the Commodity Futures Trading Commission to work on the crypto exchange; he drank wine and dined others.
His money to DC opened doors – even in the Biden White House (SBF was a major contributor to the president’s 2020 campaign). He was also a favorite speaker before various congressional committees eager to hear from the millennial cryptocurrency. House Financial Services Committee Chair Maxine Waters (D-Calif.) was so impressed with SBF’s knowledge of crypto that she kissed him after hearing him speak.
Like Madoff, there were a few SBF skeptics – especially how it thrived while others were crushed in the 2022 crypto correction. He ran an exchange and a hedge fund, which is always a recipe for trouble when a hedge fund loses money and seizes client accounts.
Gary’s “brother” meetings
SEC chief Gensler isn’t the kissing type, but he met with SBF twice in less than six months — and not because he discovered anything shady.
SBF continued to meet with supporters in Congress, contacts at the CFTC, and major investors until it was discovered that billions of dollars of customer money had been siphoned from SBF’s FTX cryptocurrency exchange and lost in a hedge fund gamble. record all these whimsical media types.
Like Madoff, SBF is now likely going to jail. The SEC’s charge sheet contains an impressive array of alleged wrongdoings by SBF, including having a hedge fund that took risks with client money on an associated exchange, lack of oversight, stealing client money to trade, and more. and so on. is listed.
This is a big, serious fraud happening right under the SEC’s nose.