FTX’s Sam Bankman-Fried slump vs. Enron, Madoff

The collapse of cryptocurrency exchange FTX amid reports that at least $1 billion in customer funds have disappeared, potentially impacting an estimated one million customers, has prompted comparisons to some of the most notorious financial scandals of decades , but the scale of affected customers is much larger.

FTX, which at its peak was the third-largest cryptocurrency exchange, filed for Chapter 11 bankruptcy protection on Friday, and the company confirmed over the weekend that millions of dollars of assets were not accounted for.

INSIDE THE CRYPTO EXCHANGE FTX COLLAPSE: EVERYTHING YOU NEED TO KNOW

The company’s founder, Sam Bankman-Fried, faces allegations that he secretly transferred $10 billion from FTX to Alameda Research, his hedge fund which has also filed for bankruptcy. The company is facing a criminal investigation in the Bahamas, and Senate Banking Committee Chairman Sherrod Brown, D-Ohio, on Tuesday called on Bankman-Fried to appear before his panel.

Sam Bankman-Fried, founder and chief executive officer of FTX, speaks during the annual meeting of members of the Institute of International Finance in Washington, DC on October 13, 2022. (Ting Shen/Bloomberg via Getty Images/Getty Images)

Former Treasury Secretary Larry Summers said FTX’s collapse bears similarities to some of the most significant bankruptcies in decades.

“A lot of people have compared this to Lehman. I would compare this 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 blunders but, certainly from the reports, hints of fraud. Stadium names very early in a company’s history. Vast explosion of wealth that no one quite understands where it comes from.”

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Here’s a look at some of the most infamous corporate meltdowns and scandals of the last few decades.

Lehman Brothers goes bankrupt

Lehman Brothers’ bankruptcy at the height of the 2008 financial crisis remains the largest bankruptcy in US history to date, as the investment bank had more than $600 billion in assets on its books at the time of its implosion. He had invested heavily in mortgage-backed securities which included subprime and lower rated mortgage assets.

A worker carries a box outside the Lehman Brothers offices in London, September 15, 2008. (Photo Reuters)

Lehman’s bankruptcy resulted in financial contagion affecting several other major financial institutions, which in turn led to a global recession. His the liquidation took 14 years. Trustee James W. Giddens was eventually able to repay more than $115 billion to customers and creditors.

Enron accounting scandal

Enron pursued bankruptcy protection in 2001 after it was discovered that the massive energy company had engaged in shady clandestine accounting practices. The company eventually collapsed, costing $74 billion in shareholder funds and sending thousands of employees to the unemployment line.

Jeff Skilling, former CEO of Enron (Reuters/Tim Johnson/Files)

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Enron’s bankruptcy filing was the largest in US history at the time. Several of the company’s leaders, including CEO Jeffrey Skilling, eventually served prison sentences. The Enron scandal, coupled with the bankruptcy of Worldcom the following year, led to passage of the Sarbanes-Oxley Act in 2002, which aimed to strengthen corporate accounting practices and increase penalties for financial wrongdoing.

Madoff’s Ponzi scheme

Bernie Madoff, who once chaired the NASDAQ stock exchange, defrauded thousands of customers worth an estimated $64.8 billion in what is the largest Ponzi scheme in history. Madoff lured investors into his company with promises of high returns, deposited their funds into a bank account he controlled, then used the funds in that account to pay withdrawal requests using forged business documents to create the illusion that the company was engaging in legitimate business. activities.

Disgraced financier Bernard Madoff leaves the U.S. District Court in Manhattan, New York, January 5, 2009. AP Photo/Kathy Willens, File

FTX BANKRUPTCY MAY AFFECT A MILLION CREDITORS

Madoff’s plan came to light in 2008 when investors, unnerved by deteriorating financial conditions, scrambled to withdraw funds they had invested with his company, leaving it unable to meet their demands. 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.

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Scandal Tyco

Tyco International was a fire protection and safety systems company that went through a period of rapid growth and diversification through acquisitions until it began experiencing financial difficulties in 2002. It was later embroiled in a scandal involving the CEO Dennis Kozlowski and other senior management members, who were found to have overestimated Tyco’s financial results.

Tyco, scandal

Former Tyco CEO Dennis Kozlowski (File)

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 damages to the company under New York state’s “unfaithful servant” doctrine. While Tyco avoided bankruptcy, many of its subsidiary units were sold before Tyco was eventually absorbed in a merger with Johnson Controls in 2016.

Aislinn Murphy and Julia Musto of Fox Business contributed to this report.

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