What the Bernie Madoff and Sam Bankman-Fried Fiascos Have In Common: Red Flags Ignored
It Pays to Be a Healthy Sceptic
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He was well-respected in the industry, as head of a major exchange. He was able to attract billions of dollars in investments. He was known for his major philanthropic initiatives. And then his world suddenly collapsed, wiping out billions for his investors.
This portrayal aptly describes Sam Bankman-Fried (also known as SBF), founder of cryptocurrency exchange FTX, with its recent spectacular collapse. But it equally describes Ponzi-scheme fraudster, Bernie Madoff, who passed away while serving 150 years in prison. What else did they have in common? Red flags that were missed or ignored.
Bernie Madoff
Madoff and his wife and high-school sweetheart Ruth founded Bernard L. Madoff Investment Securities LLC in 1960. He initially traded in penny stocks and eventually persuaded family and friends to invest with him, but a severe market drop in 1962 required a bail-out from his father-in-law.
In the early 1970s, Madoff made an important mark on the investment industry through pioneering achievements in electronic trading of stocks. As one of the original broker-dealers, he helped the Nasdaq stock exchange to emerge as a serious competitor to the well-established New Your Stock Exchange (NYSE). Madoff served as Nasdaq’s chairman in 1990, 1991, and 1993. By 2001 he was one of the top market makers in Nasdaq stocks, as well as matching buyers and sellers of NYSE-listed stocks. But by this time the technology he employed was no longer cutting-edge.
By the late 1980s, Madoff was also building a secretive “advisory” business that was acting like a hedge fund (although it wasn’t initially registered as such). It was probably around this time that his fraudulent Ponzi scheme started. He took in money under the guise of investing in a so-called “split-strike” strategy that he claimed invested in top-raked U.S. stocks while entering into options contracts to mitigate risk, allowing steady double-digit annual returns. His major source of cash inflows was through feeder funds, the largest of which was run by Fairfield Greenwich Group, which brought in billions of dollars.
