“Madoff: The Monster of Wall Street” is a four-part documentary airing on Netflix. This could hardly be more relevant given the spectacular implosion of Sam Bankman-Fried and his cryptocurrency empire FTX.
While much is unknown about “SBF” and FTX, the similarities to the Madoff operation are striking.
Ponzi characteristics: Madoff ran a pure Ponzi scheme. He took money from new investors and used it to pay off old investors. Unlike Charles Ponzi, Madoff did not promise investors a 100% return every 90 days. Madoff promised steady month-to-month increases of roughly 10% per year. Because Madoff didn’t actually do anything with the money, investors were able to withdraw their fictitious profits every year for years and be paid in full with their own stakes.
If panicked investors hadn’t started cashing out en masse during the 2008 financial crisis, Madoff might have continued indefinitely.
SBF and FTX operated in the cryptocurrency “industry”. This industry is a Ponzi scheme without the Ponzi. Cryptocurrency is a computer creation with no tangible value beyond what a gullible buyer will pay. Without money from new investors, old investors have no way out. Unless you can fool some of the people all the time, Crypto is tulip bulb mania without the tulips.
Gullible Institutions: Much of Madoff’s money came from “side funds.” These are middlemen who take money from investors and give real investment to people like Madoff. Every broker should have known that Madoff’s returns were too good to be true. The split strike option strategy allegedly used by Madoff was neither new nor unknown. Although it was able to prevent large losses, the strategy could not produce the positive returns that Madoff reported in every severely down market.
Institutional “victims” of FTX include Blackrock, Softbank, Tiger Global and Sequoia Capital. It’s not surprising to see Sequoia, which was defrauded by Valeant back in 2017, or Softbank, which was a major investor in WeWork among other disasters. But Blackrock, which manages $8.6 trillion, couldn’t figure out that a crypto company buying other crypto companies is a house of cards?
Regulatory Failure: The Securities and Exchange Commission received multiple warnings about Madoff’s operations, including a demonstration that Madoff’s fictitious trades amounted to more than 100% of the options actually traded. The SEC didn’t even bother to pick up the phone and call the Depository Trust Company to confirm that Madoff was trading something.
FTX operated in a regulatory vacuum. Although SEC Chairman Gary Gensler claims that the Commission has the authority to regulate crypto exchanges, this is not the case.
Weak internal controls: Madoff was audited by a two-person accounting firm and held no assets with a third-party custodian.
No one at FTX seems to know exactly what happened to all the money.
In the end, Madoff’s $64 billion scheme consisted of $19 billion in deposits and $45 billion in bogus “profits.” About $15 billion of the $19 billion was returned by bailing out investors who took out more than they put in. FTX victims can count themselves lucky if they recover that much.
Jeffrey Scharf welcomes your comments. To contact him, please email [email protected]