Connect with us


Former FTX users say the failed crypto exchange was a ‘Ponzi scheme.’ Here’s how those work, and what we know about how Sam Bankman-Fried operated

News Agencies



Until recently, Sam Bankman-Fried, or SBF, was crypto’s golden boy, known for building his cryptocurrency exchange, FTX, into a $32 billion giant in just two years.

But the disheveled, left-leaning 30-year-old gamer was living a lie. SBF, who claimed to be a minimalist philanthropist, had used customer funds to prop up his failing crypto empire and fund his lavish lifestyle.

Amid the revelations and the broader retrenchment of the crypto industry, FTX and its web of investments—which included SBF’s trading business, Alameda Research, as well as over 200 other crypto companies—have dramatically unraveled.


Meanwhile, SBF, the former “white knight” of crypto who was once reportedly worth $26.5 billion, says he’s down to his last $100,000.

Former FTX customers, academics, and even the crypto faithful have alleged that Bankman-Fried’s now defunct crypto exchange was an outright “Ponzi scheme,” leading to a deluge of civil lawsuits against him and his company. There have yet to be any rulings on the cases.

Despite the allegations, and admissions by SBF of mistakes, lawyers contacted by Fortune said it’s too early to declare FTX a true “Ponzi scheme”—though they say prosecutors may eventually do so.


“I don’t know if it’s a Ponzi scheme, and it’s probably going to be a while before we do know,” said Thomas P. Vartanian, executive director at the nonprofit Financial Technology and Cybersecurity Center.

Vartanian, who has represented parties in 30 of the 50 largest collapses of financial institutions in U.S. history, noted that it could take years for prosecutors to dig through the complex, interconnected, and mismanaged accounting of FTX and its subsidiaries.

“They’ll follow the money, and they’ll follow it down to the cent. And they’ll figure out whether we’re dealing with negligence, civil fraud, criminal fraud, and whether it’s a Ponzi scheme, a pyramid scheme, or whatever it is,” he said. “But those are facts that I don’t think are going to be in anybody’s possession for some time—until all the money is followed.”


Still, Vartanian noted that the filings released from FTX’s bankruptcy so far are “pretty devastating.”

“So to me, so far, this looks like corporate misbehavior,” he said. “And whether it turns into fraud and violations of law or a Ponzi scheme is another question.”


But Carlos Martinez, a bankruptcy specialist at the law firm Scura, Wigfield, Heyer, Stevens & Cammarota, went a step further.

“I think the lawyerly answer would be ‘let’s wait for the investigation’” he said. “But I do think that it’s pretty cut and dry. The writing’s on the wall that this was—or at least, if it wasn’t meant to be a Ponzi scheme, it definitely operated as a Ponzi scheme.”

How Ponzi schemes work

A Ponzi scheme is a scam that draws in investors with promises of high returns with little to no risk. The problem is that Ponzis create those purported returns using money from new investors, not profitable investments.


The name comes from Charles Ponzi, an Italian con artist who swindled U.S. investors in the 1920s with a clever story and the promise of high returns.

The SEC has warned about the dangers of Ponzi schemes and their prevalence in crypto circles. And some crypto critics, like Nouriel Roubini, professor emeritus at New York University’s Stern School of Business, and the CEO of Roubini Macro Associates, even argue that the whole crypto ecosystem is the “mother of all Ponzi schemes.”

FTX shared many similarities with past Ponzi schemes. Sheila Bair, who was chair of the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, told CNN earlier this month that SBF’s ability to charm regulators and investors was “very Bernie Madoff-like in a way.”


For more than 20 years, Madoff ran the largest Ponzi scheme in history before his arrest in 2008, stealing $65 billion from as many as 37,000 individuals. Although the final accounting has yet to be completed, FTX has $50 billion in liabilities to more than 100,000 creditors, putting SBF’s business close to Madoff’s numbers.

But did SBF run a Ponzi scheme? Or was it corporate fraud like what led to the collapse of Enron, the Houston-based energy company whose bankruptcy and subsequent accounting scandal rocked markets?

If you ask former Treasury Secretary Larry Summers, Enron is a better analogy to FTX than an outright Ponzi scheme.


“I would compare it to Enron,” Summers told Bloomberg early this month. “Not just financial error but—certainly from the reports—whiffs of fraud. Stadium namings very early in a company’s history. Vast explosion of wealth that nobody quite understands where it comes from.”

What we know about how FTX was operating

Whether FTX was a Ponzi scheme may be up for debate, but SBF may also have engaged in what prosecutors may determine was “misappropriation of funds,” “fraud,” or even “an outright Ponzi scheme,” Martinez told Fortune.

For example, SBF used at least $4 billion in FTX customer funds to prop up his trading company, Alameda Research, as crypto prices fell earlier this year, according to CoinDesk. SBF denies that he implemented a “back door” in FTX systems to do this, saying it’s “definitely not true” and that he can’t even code.


A media representative for SBF didn’t respond to requests for comment from Fortune.

But at the New York Times Dealbook Summit on Wednesday, SBF voiced surprise at FTX’s collapse, saying: “I didn’t ever try to commit fraud. I was excited about the prospects of FTX a month ago. I saw it as a thriving, growing business. I was shocked by what happened this month. And reconstructing it, there are things that I wish I had done differently.”

But the former crypto billionaire admitted that a “very poor labeled accounting thing” enabled Alameda to be “substantially more leveraged” than he anticipated.


FTX faces a wave of lawsuits over its advertising as well, much like what happened to Bernie Madoff’s marketing arm in 2009 after his arrest.

FTX hired celebrities including NFL star Tom Brady for expensive Super Bowl commercials. And in a 2018 pitch deck to investors (pictured below), it offered customers what it described as “high returns with no risk” and loans with “no downside.”

SBF and his team at FTX weren’t shy about spending either. The firm dropped $300 million on property in the Bahamas for senior executives, racked up a $55,000 tab at a Jimmy Buffet’s MargaritaVille Bar, and hired private planes to fly Amazon packages to executives.

During his prime, Madoff and his colleagues lived a life of luxury as well, buying multi-million dollar mansions and luxury jewelry, clothes, and watches—some of which were auctioned off to pay back his investors after his arrest.


Finally, before its downfall, FTX’s main international exchange held $9 billion in unbacked liabilities with just $900 million in assets, according to the Financial Times. Usually, total liabilities and total assets should match on a balance sheet, and the disparity shows that FTX was in a deep hole before its collapse.

While SBF has insisted that he simply misjudged the amount of liabilities on the books, FTX’s new CEO, John Ray III, who also handled the Enron collapse, called FTX’s operations “a complete failure of corporate controls” with a “complete absence of trustworthy financial information.”

“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” he said.


Whether SBF was operating a Ponzi scheme through FTX won’t be determined until after prosecutors finish their investigations, and a jury rules on any criminal cases they bring. But Vartanian argued that Congress must pass tougher regulations on the crypto industry as soon as possible.

“I think the Congress needs to write new rules to make it clear that the crypto business is taking and using other people’s money, and that means it’s a fiduciary,” he said. “It’s a custodian, and it’s got to be treated as such under the law.”

This story was originally featured on


More from Fortune:  The American middle class is at the end of an era Sam Bankman-Fried’s crypto empire ‘was run by a gang of kids in the Bahamas’ who all dated each other The 5 most common mistakes lottery winners make Sick with a new Omicron variant? Be prepared for this symptom

Continue Reading


Breaking News

Editor Pick’s

Latest Entertainment

Entertainment3 hours ago

Stephen Dorff slams ‘garbage’ superhero movies, Marvel’s ‘Blade’ reboot: ‘We already did it and made it the best’

Stephen Dorff attends the premiere of his movie “Divinity” on Jan. 21 at the 2023 Sundance Film Festival in Park...

Entertainment4 hours ago

Yoshiki, glam-rocker responsible for ‘changing Japan’s culture,’ eyes U.S. stardom with supergroup the Last Rockstars: ‘It’s kind of cool to break some kind of boundary again’

When Japanese musician/composer/producer Yoshiki founded seminal glam-metal band X Japan back in 1982, pounding the drums in kabuki-esque facepaint, peroxide-blond...

Entertainment6 hours ago

Britney Spears asks fans to respect her privacy after police welfare check: ‘Things went a little too far’

Britney Spears says things went “too far” after fans called police to her home. (Photo: FilmMagic) Britney Spears broke her...

Entertainment7 hours ago

Camila Mendes details struggles with eating disorder: ‘I was really afraid of eating carbs’

Camila Mendes opens up about recovering from an eating disorder. (Photo: Frazer Harrison/Getty Images) Camila Mendes is opening up about...

Entertainment8 hours ago

Amy Robach and T.J. Holmes mediating with ABC amid suspension: ‘It’s all a huge mess,’ says source

T.J. Holmes and Amy Robach’s fate at GMA3 unclear as the two begin a mediation with ABC. (Photo: Getty Images)...

Entertainment11 hours ago

‘Shazam 2’ Trailer Highlights the Villainous Daughters of Atlas

A new Shazam! Fury of the Gods trailer has been released, giving fans a closer look at the upcoming DC...

Entertainment11 hours ago

Salma Hayek’s see-through dress leaves Channing Tatum speechless: ‘I have no comment’

Salma Hayek stuns in a see-through dress at the premiere for Magic Mike’s Last Dance. (Photo: Getty Images) Salma Hayek...

Entertainment12 hours ago

Succession season 4 teaser promises more warring, more Wambsgans, and a wedding

Succession will return for its fourth season March 24, HBO announced today. And we also got us our first, predictably...


Latest Sports

Sports49 mins ago

Greg Olsen braces to be bounced from top Fox booth by Tom Brady

Former NFL tight end Greg Olsen knew when he ascended to the No. 1 booth at Fox this year that...

Sports1 hour ago

Arizona Cardinals head coach search: Five candidates remain after two make decisions

The Arizona Cardinals are busy lining up interviews with head coach candidates.

Sports1 hour ago

3 fights break out 16 seconds apart in Flyers vs. Wild game

It was Fight Night in St. Paul on Thursday as the Wild took on the Flyers in a heated matchup.

Sports2 hours ago

NBA All-Star starters 2023: Joel Embiid not selected in Eastern Conference frontcourt

Joel Embiid, the Eastern Conference's leading scorer with 33.4 points per game, was not selected as an All-Star starter. By...

Sports2 hours ago

Gio Reyna scores second straight winner in second game since USMNT World Cup saga

Reyna did it again Wednesday, just three days after marking his return from the World Cup with a winner.

Sports3 hours ago

Rui Hachimura’s well-rounded skills on display in Lakers debut

Forward Rui Hachimura made a number of shots from the post, mid-range and long distance in the Lakers' victory over...

Sports3 hours ago

Refs miss key call on go-ahead Klay Thompson shot vs. Grizzlies, NBA confirms

The NBA's Last Two Minute Report confirmed the refs missed a call on Klay Thompson's go-ahead 3-pointer in the Warriors'...

Sports4 hours ago

Blame game fail: Dak, Bills coaches are just fine

Of course there will be overreactions to playoff losses, but cooler heads should prevail when it comes to Dak Prescott...

Technology Hot News

Technology1 week ago

Led by "Amazon" and "Microsoft" .. the technology giants are planning to lay off 64,000 employees

After 10 years of driving the stock market bull run, big tech companies are racing to downsize staff to adapt...

Technology1 week ago

Apple introduces MacBooks with new M2 processors

Yesterday, Tuesday, Apple unveiled MacBooks powered by the new, faster “M2 Pro” and “M2 Max” processor chips, in a surprise...

Technology1 week ago

All you need to know about the upcoming Galaxy S23 phones from Samsung

Samsung has officially announced that the (Galaxy Unpacked 2023) event will be held this year on Wednesday, February 1, which...

Technology1 week ago

FTX Exchange Announces Hacking and Stolen $415 Million in Cryptocurrency

Bankrupt American cryptocurrency firm FTX announced today, Wednesday, that $415 million in cryptocurrency has been hacked and stolen from the...

Technology1 week ago

Because of a "fraudulent tweet"… Elon Musk's trial begins

Elon Musk's trial began Tuesday in San Francisco with the selection of jury members who will have to decide whether...

Technology1 week ago

An electric spoon replaces salt and spices, but with conditions

Experts have developed an electric spoon that is able to replace spices and flavors and affect the taste buds in...

Technology2 weeks ago

The biggest dangers of using tracking devices.. so you can escape?

If you spot an unknown Bluetooth tagging device, there are ways to disable the device so it can't track your...

Technology2 weeks ago

New Twitter.. For You tab to web version

The Twitter platform announced that it will bring the new tab (For You), which launched last Tuesday for iPhones and...