Disgraced FTX founder and major Democratic donor Sam Bankman-Fried (SBF) has many comparing his actions to that of Bernie Madoff and Enron executives. Once the third largest cryptocurrency exchange in the world, FTX filed for chapter 11 bankruptcy protection last week. SBF faces allegations of secretly transferring $10 billion from FTX to his hedge fund, Alameda Research. A criminal probe was launched, and Senate Banking Committee Chairman Sherrod Brown summoned SBF to appear before the committee.
Eric Revell; November 16, 2022
The collapse of cryptocurrency exchange FTX amid reports that at least $1 billion in client funds disappeared, impacting potentially around a million customers, has prompted comparisons to some of the most notorious financial scandals in recent decades, yet the magnitude of customers impacted is much larger.
FTX, which at its peak was the third-largest cryptocurrency exchange, filed for Chapter 11 bankruptcy protections on Friday, and the company confirmed over the weekend that millions of dollars worth of assets are unaccounted for.
The company’s founder, Sam Bankman-Fried, faces allegations that he secretly transferred $10 billion from FTX to Alameda Research, his hedge fund that also filed for bankruptcy. The company is facing a criminal probe in the Bahamas, and on Tuesday, Senate Banking Committee Chairman Sherrod Brown, D-Ohio, called on Bankman-Fried to appear before his panel.
Former Treasury Secretary Larry Summers said FTX’s collapse has similarities to some of the most significant bankruptcies in recent decades.
“A lot of people have compared this to Lehman. I would compare it to Enron,” Summers told Bloomberg’s Wall Street Week. Summers described some aspects of FTX’s downfall that reminded him of Enron: “The smartest guys in the room. 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.”
Here’s a look at some of the most infamous corporate collapses and scandals in recent decades.
Lehman Brothers collapse
The failure of Lehman Brothers at the peak of the 2008 financial crisis remains the largest bankruptcy in U.S. history to date, as the investment bank had more than $600 billion in assets on its books at the time of its implosion. It had invested heavily in mortgage-backed securities that included subprime and lower-rated mortgage assets.
Lehman’s failure prompted a financial contagion that affected several other major financial institutions, which in turn led to a global recession. Its liquidation took 14 years. Trustee James W. Giddens was ultimately able to return more than $115 billion to customers and creditors.
Enron accounting scandal
Enron pursued bankruptcy protection in 2001 after it was discovered the massive energy firm had engaged in shady off-the-books accounting practices. The company ultimately collapsed, costing $74 billion in shareholder funds and sending thousands of employees to the unemployment line.
Enron’s bankruptcy filing was the largest in U.S. history at the time. Several of the company’s leaders, including CEO Jeffrey Skilling, ultimately served time in prison. The Enron scandal, along with the failure of Worldcom the following year, led to the passage of the Sarbanes-Oxley Act in 2002, which aimed to strengthen corporate accounting practices and enhance penalties for financial malfeasance.
Madoff’s Ponzi scheme
Bernie Madoff, who once chaired the NASDAQ stock exchange, defrauded thousands of clients to the tune of an estimated $64.8 billion in what is the largest Ponzi scheme in history. Madoff enticed investors to his firm with promises of high returns, deposited their funds into a bank account he controlled, then used funds from that account to pay out withdrawal requests while using falsified trading documents to create the illusion that the firm was carrying out legitimate trading activities.
Madoff’s scheme came to light in 2008 when investors who were unnerved by deteriorating financial conditions rushed to withdraw funds they had invested with his firm, leaving it unable to meet their requests. Madoff was ordered by a court to pay $170 billion in restitution and was sentenced to 150 years in federal prison, where he died at the age of 82 in 2021.
Tyco International was a company specializing in security systems and fire protection that went through a period of rapid growth and diversification through acquisitions until it began to experience financial distress in 2002. It then became embroiled in a scandal involving CEO Dennis Kozlowski and other members of senior management, who were found to have overstated Tyco’s financial performance.
Kozlowski was convicted of financial crimes and went on to serve six years in prison. He was ordered by a federal court to return $500 million in compensation to the company under the state of New York’s “faithless servant” doctrine. While Tyco avoided bankruptcy, several of its subsidiary units were sold off before Tyco was eventually absorbed in a merger with Johnson Controls in 2016.