What Sam Bankman-Fried and Bernie Madoff have in common

The noose around Sam Bankman-Fried’s neck tightens. The founder and ex-head of the bankrupt crypto exchange FTX was arrested in the Bahamas on Monday and has been in custody there ever since. The judges on the Caribbean island did not respond to a $250,000 bail application, saying the risk of absconding was too great.

Bankman-Fried is incarcerated in the island nation’s only prison, Fox Hill. The contrast to the villa life at the luxury resort of Albany, from where he ran the FTX empire and where he lived until his arrest, couldn’t be greater.

Prison conditions at Fox Hill are miserable. The high-security cells are two by three meters in size. According to a human rights report commissioned by the island nation’s government, Fox Hill is hopelessly overcrowded, with a shortage of mattresses and toilets. The cells are infested with rats, maggots and insects. So Bankman-Fried is already experiencing what it feels like to be a delinquent, well over a month after FTX’s demise.

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Based on the indictments published on Tuesday, it is astounding that he was able to remain at large for so long. New York State Attorney Damian Williams has called it the “largest financial fraud case in the history of the United States”.

This puts the FTX scandal even one step higher than the scandal surrounding Bernie Madoff, who has so far been able to claim the title of the cheater of the century. At the time of his arrest in 2008, Madoff had defrauded thousands of investors out of tens of billions. At the time, the US Attorney and the Securities and Exchange Commission had pursued and sued Madoff under criminal and civil law.

Bankman-Fried is being put through the cracks by three American authorities: also by the US Attorney’s Office and the SEC, and also by the CFTC, which is responsible for regulating the futures and options markets. The charges include eight counts of fraud and conspiracy, including embezzlement of funds. Customer deposits have been misused to fund investments and debt from Bankman-Fried’s crypto hedge fund, Alameda Research.

He is also accused of violating rules when financing political campaigns. Gary Gensler, head of the powerful SEC, said: “Sam Bankman-Fried built a house of cards on a foundation of deception.”

Deception was also at the heart of Bernie Madoff’s investment fraud. However, it is too early to say whether Bankman-Fried’s suspected crimes are in the same league as Madoff’s. The financier deliberately ran a systematic Ponzi scheme for years. He promised investors in his fund extraordinary returns. However, payments could only be made if they were covered by the contributions of new participants. Madoff did not invest the funds originally entrusted to him, but instead transferred them to a bank account for his own use.

intent or ignorance

Whether Bankman-Fried intended to deliberately mislead customers is for the judges to decide. There is a possibility that it is “just” a grandiose risk control failure brought about by the ignorance and carelessness of the FTX team.

The professional and academic backgrounds of the FTX leadership render this version of events implausible. The testimonies of John Ray, FTX’s experienced bankruptcy trustee, suggest that criminal energy was involved: “It wasn’t sophisticated at all, it’s pure and simple embezzlement,” he told members of the US Congress.

Ray is well qualified to make such a judgement. In the noughties he was responsible for the complex liquidation of the American energy giant Enron. At that time, manipulated accounting was at the center of the scandal. However, according to Ray, Enron was run down by clever people who kept their transactions secret. That was obviously not the case with FTX.

Madoff remained silent until his arrest by the FBI in 2008, though he was reportedly about to turn himself in on the brink of his system collapsing. Unlike Bankman-Fried, Madoff was initially released on $10 million bail, but was eventually placed under house arrest and eventually taken into custody full-time.

In March 2009, after a relatively short trial, he pleaded guilty to theft, money laundering and forgery of documents and was sentenced to 150 years in prison. In April 2021 he died of kidney disease at the age of 82.

Swiss victims

Bankman-Fried’s case, like Madoff’s, is being conducted by the District Attorney for the Southern District of New York. In the present case, it is not yet clear whether the lead will lie with the state of New York, the state of Delaware, where the bankruptcy was filed, or the authorities of the Bahamas, where FTX is headquartered.

Also like Madoff, Bankman-Fried has a long list of injured parties. Madoff’s list was 162 pages long and stretched as far as Switzerland. The direct damage sum is said to have amounted to at least 30 billion dollars.

Then as now, even professional asset managers allowed themselves to be duped. The Swiss private banks Union Bancaire Privé, Reichmuth and Hentsch suffered millions in losses as a result of their involvement with Madoff.

In the case of FTX, both private individuals and professional investors are affected in Switzerland. According to a Zurich law firm involved, lawsuits by injured parties from Switzerland are in preparation. We are working on collecting these in order to be able to process them as efficiently as possible. It is already clear that the respective procedures will take several years, especially if they have to go through different instances.

“Injured parties in Switzerland would have to contact a lawyer to check whether a lawsuit would make sense in the specific case,” says Claudia V. Brunner, head of white collar crime at the Lucerne University of Applied Sciences and Arts. However, the victims should not get their hopes up too high.

“In the case of white-collar crime, the money is usually lost,” says the expert. The chance that injured Swiss investors will get their money back is therefore small, even if a lawsuit is filed in the USA.