The Madoff Playbook: How FTX Creditors Could Get Their Money Back

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As there is much to be unrav­eled about the crash of FTX, a press­ing ques­tion for the cryp­to exchange’s cred­i­tors remains how and when they could get back lost funds.

Some have com­pared FTX founder Sam Bankman-Fried to Bernie Mad­off — who ran one of the largest Ponzi schemes in his­to­ry. Mad­off plead­ed guilty in 2009 to secu­ri­ties fraud, wire fraud and mon­ey laun­der­ing, among oth­er charges.

Bahami­an author­i­ties arrest­ed Bankman-Fried Mon­day. Pros­e­cu­tors allege he took FTX cus­tomer funds to pay the expens­es and debts of affil­i­at­ed trad­ing firm Alame­da Research. The 30-year-old for­mer FTX CEO faces eight fraud charges, among others.

New FTX CEO John Ray tes­ti­fied to the US House Finan­cial Ser­vices Com­mit­tee Tues­day that the exchange lost $8 bil­lion of cus­tomer money. 

Marc Pow­ers, a for­mer secu­ri­ties law prac­tice leader at Bak­er & Hostetler — a firm that worked to recov­er funds for vic­tims of Madoff’s Ponzi scheme — said he believes about half of that could be recov­ered over time. 

“I do think [the Mad­off case] is a sim­i­lar sit­u­a­tion to here,” he told Block­works. “And I do think they will use the same sort of play­book uti­liz­ing US Bank­rupt­cy Code clawbacks.”

Pow­ers was pre­vi­ous­ly a branch chief in the SEC’s divi­sion of enforce­ment in the 1980s. He is now an adjunct pro­fes­sor at Flori­da Inter­na­tion­al Uni­ver­si­ty, where he teach­es blockchain law.

Ulti­mate­ly, Bak­er & Hostetler helped recov­er about $14.5 bil­lion of the total loss­es of Mad­off vic­tims, which totaled between $18 bil­lion and $20 bil­lion, accord­ing to Pow­ers. About $14 bil­lion of that $14.5 bil­lion has been paid out to vic­tims to date. 

Some of that mon­ey was recov­ered using a statute under the US Bank­rupt­cy Code deal­ing with what is known as pref­er­en­tial pay­ments. It states that when a debtor pays a cred­i­tor with­in 90 days of fil­ing for bank­rupt­cy, the court can force the cred­i­tor to pay that mon­ey back so it can be dis­persed among oth­er creditors.

A por­tion of the bil­lions of dol­lars tak­en out of the exchange by cus­tomers in the days before FTX filed for bank­rupt­cy, for exam­ple, will like­ly come back to the estate after lit­i­ga­tion, Pow­ers said.

Targeting large institutions

Large finan­cial insti­tu­tions that received large amounts of funds from FTX this year in repay­ments of loans — and may have known some­thing was amiss at the exchange — could also be tar­gets in an effort to recov­er loss­es, Pow­ers said. 

Oth­ers sus­cep­ti­ble to pos­si­ble claw­backs, he added, are account­ing firms and bank­ing insti­tu­tions FTX and Alame­da Research used, as well as ven­ture com­pa­nies that FTX invest­ed in.

Secu­ri­ties Investor Pro­tec­tion Act (SIPA) Trustee Irv­ing Picard, with whom Pow­ers worked, reached a $1 bil­lion set­tle­ment with Tremont Group Hold­ings in 2011. Picard accused the New York-based com­pa­ny of miss­ing “red flags” and “blind­ly rely­ing on Mad­off to dri­ve their funds’ returns” for near­ly 15 years. 

JPMor­gan agreed to pay $1.7 bil­lion to vic­tims of the Mad­off fraud in 2014. The com­pa­ny, “because of its unique van­tage point as the firm’s banker, had rea­son to be sus­pi­cious about Mad­off,” accord­ing to doc­u­ments filed in Man­hat­tan fed­er­al court at the time.

“[Insti­tu­tions] must exer­cise due care not only with their own mon­ey but with oth­er people’s mon­ey also,” then-Man­hat­tan US Attor­ney Preet Bharara said in the 2014 state­ment. “In this case, JPMor­gan con­nect­ed the dots when it mat­tered to its own prof­it, but was not so dili­gent otherwise.”

Sep­a­rate from funds Bak­er & Hostetler helped recov­er, The Mad­off Vic­tim Fund — fund­ed through recov­er­ies by the US Attorney’s Office in var­i­ous crim­i­nal and civ­il for­fei­ture actions — has so far paid out near­ly $4.1 bil­lion to more than 40,000 victims. 

This includes the $1.7 bil­lion from JPMor­gan, as well as about $2.2 bil­lion from the estate of deceased Mad­off investor Jef­fry Picow­er. Addi­tion­al funds were col­lect­ed through oth­er Mad­off investors, as well as crim­i­nal and civ­il for­fei­ture actions against Mad­off and his co-conspirators.

The Mad­off Vic­tim Fund did not return a request for comment. 

Oth­er poten­tial sources of fund recovery

Dami­an Williams, the US Attor­ney of the South­ern Dis­trict of New York, called Bankman-Fried’s alleged crimes “one of the biggest finan­cial frauds in Amer­i­can his­to­ry” dur­ing a press con­fer­ence Tuesday.

In its indict­ment, the US gov­ern­ment has a for­fei­ture charge against Bankman-Fried, mean­ing all his assets — and those he recent­ly gave away effec­tive­ly as gifts — are like­ly to be recov­ered by the Depart­ment of Jus­tice to even­tu­al­ly be paid out in a victim’s fund, Pow­ers said.

“There are also siz­able loans to oth­er senior man­age­ment at FTX and affil­i­ates, if and when they are charged civil­ly or crim­i­nal­ly,” he added. “These amounts will be significant.”

Oth­ers still could be asked to return mon­ey received by FTX and its affiliates.

Vox was award­ed a $200,000 grant from Build­ing a Stronger Future — a fam­i­ly foun­da­tion run by Bankman-Fried and his broth­er, Gabe — to sup­port a project on tech­no­log­i­cal and inno­va­tion bot­tle­necks that ham­per human progress. This project has been put on pause.

The com­pa­ny is hav­ing inter­nal dis­cus­sions about what to do with the grant mon­ey, Vox senior cor­re­spon­dent Dylan Matthews wrote in a Dec. 12 col­umn

“It’s more com­pli­cat­ed than just giv­ing it back, not least because it’s hard to be sure where the mon­ey will go — will it go toward mak­ing vic­tims whole, for instance?” Matthews wrote.

A spokesper­son for the com­pa­ny declined to com­ment further.

Pow­ers said Bak­er & Hostetler had sought the return of dona­tions from non-prof­its of Mad­off under bank­rupt­cy claw­back rules.

“There are all dif­fer­ent kinds of peo­ple, pro­fes­sion­als and insti­tu­tions — ulti­mate­ly if they use the same play­book — from which they’ll be able to get back the mon­ey,” Pow­ers said.

A process to play out over years

Seth Taube, a for­mer fed­er­al pros­e­cu­tor and ex-SEC offi­cial, said get­ting judge­ments, col­lect­ing mon­ey and dis­trib­ut­ing mon­ey is set to take years, not weeks or months. Mad­off-relat­ed cas­es are still pend­ing more than a decade lat­er, he added.

Pow­ers said he expects the FTX-relat­ed law­suit and fund recov­ery process could be a bit quick­er than the Mad­off sit­u­a­tion — point­ing to FTX’s alleged mis­use of funds being done over a short­er amount of time. Still, the recov­ery process, and any pay­ments to vic­tims, could take at least three to five years, he added.

As for Bankman-Fried’s fate here, Taube said it is not yet clear whether this was a Ponzi scheme like the one Mad­off ran. Mad­off was sen­tenced to 150 years in fed­er­al prison, where he died in April 2021 at the age of 82. 

In a tran­script of tes­ti­mo­ny Bankman-Fried planned to give, obtained by Forbes, the for­mer FTX CEO said he “f*cked up,” acknowl­edg­ing that he “end­ed up fail­ing to focus on risk man­age­ment.” But he has denied com­min­gling funds in var­i­ous inter­views with media out­lets in recent weeks. 

“Bankman-Fried claims he was mere­ly neg­li­gent, not a know­ing thief,” Taube told Block­works. “In truth, the dif­fer­ence between venal­i­ty and stu­pid­i­ty is sub­tle in a case like this.”

Charges the for­mer FTX CEO faces car­ry max­i­mum penal­ties of 115 years in prison. Mark S. Cohen, who is rep­re­sent­ing Bankman-Fried, did not imme­di­ate­ly return a request for comment.

“If con­vict­ed, this is a Mad­off-like poten­tial sen­tence that is decades, not years,” Taube said. “If he coop­er­ates, he may get out before he needs a cane.”


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