Fall of Sam Bankman-Fried, Jewish cryptocurrency CEO, brings echoes of Bernie Madoff – The Times of Israel

Cryptocurrency maverick Sam Bankman-Fried, who famously became a billionaire under 30, is immersed in a reversal of fortune so vast and abrupt it has hit record proportions.

Once considered a financial wunderkind, Bankman-Fried now faces legal battles, possible extradition and bankruptcy in a sudden shift from his previous high-profile status as a mythic entrepreneur, political funder and philanthropist heralded for saving other struggling crypto firms. In short, the saga may have cost some investors their life savings.

The crash of Bankman-Fried’s disgraced empire comes as FTX, the company he founded and led as CEO until his recent resignation, grapples with a solvency crisis. Established in 2018, FTX was one of the world’s largest cryptocurrency exchanges until it filed for Chapter 11 bankruptcy earlier this month. Within a single day, November 8, 2022, his net worth plummeted an estimated 94 percent to $991.5 million on the Bloomberg Billionaires Index. This devastating fall represents the largest one-day drop in the index’s 10-year history. Commentators say his personal assets may now stand below zero.

This unfolding drama reads like a Hollywood blockbuster in the making. It comes complete with a meteoric rise from obscurity and subsequent fall from world renown, not to mention tremendous financial donations, a mea culpa issued on social media and a class action lawsuit naming headline legends — all within a rapid span of four years.

The suit, filed by Florida lawyer Adam Moskowitz, alleges billions of dollars in damages and names NFL quarterback Tom Brady and billionaire entrepreneur Mark Cuban, as well as Larry David, Gisele Bündchen, Stephen Curry, and Shaquille O’Neal among celebrities who could be liable for crypto endorsement.

Never in my career, have I seen such a complete failure of corporate controls and a complete absence of trustworthy financial information

Once crowned the “crypto emperor” by The New York Times, the 30-year-old former billionaire stepped down earlier this month as CEO of FTX Cryptocurrency Derivatives Exchange.

Investors rushed to rapidly withdraw their investments while advisers have reportedly struggled to locate both cash and crypto amidst the ruins. Noting poor internal oversight and record keeping, critics are drawing unsavory parallels between FTX’s implosion and that of Lehmann Brothers, Enron Corp. and Bernie Madoff’s Ponzi scheme.

Sheila Bair, a former financial regulator, told CNN earlier this week that Bankman-Fried, like Madoff, used his reputation and connections to win over investors and regulators who should have spotted troubling “red flags.”

“Charming regulators and investors can distract [them] from digging in and seeing what’s really going on,” said Bair, a former assistant secretary of the Treasury for financial institutions, of the rise and fall of Bankman-Fried and FTZ. “It felt very Bernie Madoff-like in that way.”

John J. Ray III, FTX’s new CEO, who previously oversaw the liquidation of Enron, described an unprecedented wreck. According to Bloomberg, Ray III said in a sworn statement, “Never in my career, have I seen such a complete failure of corporate controls and a complete absence of trustworthy financial information.”

FTX now faces potential scrutiny from the Securities and Exchange Commission and Justice Department.

The company’s top rival, Binance’s billionaire Changpeng Zhao, announced on November 9 its withdrawal from a prior agreement to acquire FTX, citing “mishandled customer funds and alleged US agency investigations.”

Son of law profs

SBF, as he is also known, is the son of academics, two law professors at Stanford University. His mother, Barbara Fried, has written extensively on matters of distributive justice, tax policy, property theory and political theory. His father, Joseph Bankman, is a scholarly expert on tax law who played an advisory role at FTX in regulation and its charitable efforts, as recently discussed on the company’s eponymous podcast. His brother, Gabe Bankman-Fried, led a nonprofit called Guarding Against Pandemics, partially funded by SBF and working toward pandemic prevention.

SBF’s background includes high school summers at Canada/USA Mathcamp and undergraduate studies at MIT. His financial collapse raises broader questions about the crypto industry, which the entrepreneur entered following a stint at Jane Street Capital. Soon after, he established Alameda Research as a quantitative bitcoin trading firm.

From Nassau, Bahamas, SBF and his company, FTX, claimed a major stake in the industry, with estimates of his personal wealth ranging from $10 to $16 billion last month. Six months prior, in March, 2022, Forbes estimated it climbed as high as $24.5 billion.

The FTX crisis unfolded rapidly over the course of one week earlier this month when CoinDesk, a crypto news site, obtained a leaked document suggesting improper financial ties between FTX and SBF’s hedge fund, Alameda Research. A digital token called FTT, which FTX created, comprised a substantial amount of Alameda’s assets.

Ian Allison, a senior reporter at CoinDesk, noted, “While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented… not an independent asset like a fiat currency or another crypto.”

Binance, the world’s largest crypto exchange, held assets, including the FTX token, in the company. Binance CEO Changpeng Zhao’s announcement that the exchange would “liquidate any remaining” tokens it had received after its “exit from FTX equity last year” triggered a massive bank run among FTX clientele. The company has been unable to pay billions of dollars in requested withdrawals. As The Wall Street Journal reported, “FTX lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm,” ultimately “setting the stage for the exchange’s implosion.”

‘I f-d up’

What makes this plot twist even more complicated is that SBF drew attention for his commitment to “effective altruism,” his membership in an organization called Giving What We Can, in which wage earners dedicate 10% to effective charities, and his public pledge to give away his fortune over his career.

According to Open Secrets, which tracks campaign finances, SBF donated about $40 million to the US midterm election campaigns for many candidates supported by pro-Israel groups, including the Democratic Majority for Israel (DMFI) and United Democracy Project, an AIPAC-affiliated super PAC. SBF also donated $250,000 directly to DMFI PAC last May. And in the 2020 election campaign, he was among the top donors to Joe Biden’s campaign, with a personal contribution of $5.2 million.

SBF reportedly did not indulge in sports cars and other luxuries common to the ultrawealthy. In an FTX-issued photo obtained by Reuters in July, he embodies a casual lifestyle — unshaven, a head of untamed dark curly hair, a simple olive-colored crewneck t-shirt. SBF is vegan and reportedly shared a penthouse with 10 roommates.

For now, Reuters has reported that SBF told the wire service he is residing in his home in the Bahamas. Other outlets suggest it is up for sale.

SBF has publicly pledged to do whatever he can to correct this situation. A thread of his tweets is drawing public speculation. On Twitter, which he previously offered to buy with Elon Musk, SBF issued a public apology. Stating he was sorry, he admitted simply, “I f-d up and should have done better.”

Questions remain whether politicians who received donations will be forced to return funds — and if the US will extradite SBF for legal proceedings, or whether he faces criminal prosecution.