Gregory Coleman, the retired FBI special agent who helped seize the assets of Bernie Madoff and also brought down the so-called “Wolf of Wall Street,” thinks the case against Sam Bankman-Fried, the disgraced former CEO of crypto exchange FTX, is actually quite simple.
The best strategy for prosecuting Bankman-Fried is to view it as a trading situation that went bad, Coleman said. Alameda Research, the quantitative crypto trading firm, was likely not making money for a long time, and they probably moved assets from FTX to cover the bets, Coleman said. Bankman-Fried probably “got into a deep hole trading in Alameda. Whoever was doing the trading wasn’t a very good trader,” said Coleman, who emphasized that Bankman-Fried is innocent until proven guilty.
The Department of Justice on Dec. 13 charged Bankman-Fried, the 30-year-old executive who co-founded Alameda and sister company FTX, with eight criminal violations, ranging from wire fraud, money laundering, conspiracy to commit fraud, and illegal campaign contributions, Fortune reported (he also faces civil charges). The CFTC complaint alleges that the defendants—Bankman-Fried, FTX and Alameda Research—caused the loss of more than $8 billion in FTX customer deposits. The SEC and CFTC will likely fine Bankman-Fried while the executive, if convicted of the criminal counts, could spend more than 100 years in jail. The FTX ex-CEO currently sits in a jail in the Bahamas and has agreed to be extradited to the U.S., the New York Times reported.
Bankman-Fried has apologized several times on Twitter for the FTX implosion. He has maintained that while he was negligent and committed errors, he didn't intend to commit fraud and didn't knowingly commingle funds.
Once he returns to the U.S., Bankman-Fried will likely be housed in the Metropolitan Correctional Center, or MCC, in downtown Manhattan that's right across the street from the U.S. attorney's office, Coleman said. MCC is the same jail where financier Jeffrey Epstein hung himself. Coleman thinks Bankman-Fried should be placed on suicide watch if he's incarcerated. The young executive "is just starting to understand the gravity of what he is facing and the potential ramifications. Everyone is considered innocent until proven guilty, but the facts don't look good for him," Coleman said.
Coleman is well-known in the fraud world. He helped seize assets from Bernie Madoff, including $7 billion from Jeff Picower, the Wall Street investor who drowned in 2009 after the Madoff scandal came to light. But Coleman, who is not an accountant but has a background in finance, is best known as the FBI special agent responsible for the criminal investigation that convicted Jordan Belfort, the former chairman and co-founder of Stratton Oakmont, a Long Island, New York brokerage firm. Belfort and Daniel Porush, president of Stratton, pled guilty in 1999 to manipulating the stocks of at least 34 companies, which cost investors to lose hundreds of millions of dollars, the NYT said. Leonardo DiCaprio earned an Oscar nomination for his portrayal of Belfort and his lavish ways in “The Wolf of Wall Street,” but didn’t win.
Kyle Chandler, who is known for the TV shows "Friday Night Lights" and “Bloodline,” portrayed Coleman in the film. Coleman said he didn’t receive any money from the film, since he was still working as an FBI agent at the time (he retired in 2015). He did review the script during the pre-production phase, offering suggestions and recommendations to make the film as accurate as possible, he said. In real life, the boat scene, where Belfort tried to bribe Coleman, didn’t happen, which means the DiCaprio character didn’t actually chuck lobster legs at the straight-faced FBI agent. “It’s my favorite scene in the whole movie,” said Coleman, who now runs his own consulting company where he helps, among other things, clients recover money paid out to scammers.
Colman’s advice to the FBI agents building a case against Bankman-Fried? Follow the money. “In a financial crime case, the money will always lead you to the bad guys,” he said.
For his criminal investigation of Belfort, Coleman tracked the stocks that were traded at Stratton Oakmont. If a stock was being manipulated, Coleman looked for who was making money. The brokerage, led by Belfort, participated in “pump and dump” schemes that would artificially inflate the price of a stock. Stratton traders would allegedly cold-call potential investors and, following a script, attempt to entice investors with high-pressure sales tactics to spur them to buy shares of whatever company they were pushing. This would cause the stock price to jump. Once the stock reached a predetermined level, the insiders—Belfort, Porush and other people conducting the manipulation—would sell their shares, pulling away their support of the stock. This caused the share price to drop. Stratton Oakmont had a room filled with people who would continuously “dial-for-dollars,” Coleman said.
Coleman followed the stock certificates to offshore corporations in Switzerland and the accountant who managed them. The offshore companies led Coleman to bank accounts, where the money flowed in and out. “By following the money, it can lead you to the stock and by following stock it can lead you to the money. That’s why you pursue both,” he said.
The FBI will likely use a similar strategy to build a case against Bankman-Fried, who allegedly used customer funds to buy real estate. FTX bought and held properties for the company and its employees, acquiring 35 properties on the island of the Bahamas, including 15 multi-million-dollar condos in the Albany Resort. FTX spent $256.3 million for the properties, according to bankruptcy filings.
If Bankman-Fried and FTX used crypto to buy these assets then they can be traced, said Coleman. He admitted that the digital currency does make the search more complex.
But it’s likely that the properties or assets weren’t purchased with crypto but rather were acquired using fiat currency, he said. “There isn’t anybody or any place out there that is accepting large amounts of crypto for assets,” Coleman said. Bankman-Fried or FTX likely dealt with a middleman, possibly a bank or an exchange, that converted the crypto. “This means that all of the assets can be seized as proceeds of the alleged crime,” Coleman said.
Investigators will also search for where the crypto came from; some victims will have sent fiat money and others digital currencies. Crypto is built on blockchain technology that is transparent and can be traced. FTX may also have paper records at the firm that John Ray, FTX’s CEO for the past six weeks, will have access to, Coleman said. The biggest problem is that blockchain technology is mostly anonymous, with the data comprised of alphanumeric characters. This adds a confusing element for anyone not familiar with the technology. “With those transactions, you have to work to figure out who actually owns it. It’s not a problem but it’s a lot of work because of the size of it,” Coleman said.
But investigators have one thing on their side: Bankman-Fried and FTX executives apparently made no attempts to hide the money, or the crypto, and the assets they acquired, he said. “From the U.S. standpoint, it is not a problem building a case and seizing assets,” Coleman said.
Bankman-Fried vs. Bernie Madoff
When compared to the Madoff and Belfort cases, the Bankman-Fried investigation is much different, Coleman said. Belfort’s fraud was estimated at $200 million while Bankman-Fried and Madoff involved billions of dollars. Second, Madoff was a Ponzi scheme, while Bankman-Fried looks to Coleman more like an embezzlement, and Belfort was securities fraud and manipulation. All three executives laundered the proceeds of their crimes, although Belfort appears to have gone to greater lengths to hide his activities, Coleman said. Third, Madoff was turned in by his sons and confessed to his crimes, while Belfort's employees were incredibly loyal to him and cooperated with the government, in the hopes of receiving lighter sentences, only after they were charged in the investigation, Coleman said.
It appears that one or more FTX executives have already “flipped” on the FTX co-founder. Ryan Salame, the former co-CEO of FTX Digital Markets, had a call with a Bahamian regulator on Nov. 9, according to a court document. (FTX Digital is the Bahamas arm of FTX that filed for Chapter 15 bankruptcy on Nov. 15.) Salame told regulators that FTX client assets were transferred to Alameda Research to cover financial losses of Alameda. Only three people had the codes to transfer the assets: Bankman-Fried; Nishad Singh, former director of engineering at FTX; and FTX co-founder Zixiao (Gary) Wang, Salame said, according to the document.
What does Caroline Ellison know?
Will other executives turn on Bankman-Fried? There has been speculation swirling around Caroline Ellison, the ex-CEO of Alameda and one-time girlfriend of Bankman-Fried. Ellison was photographed in a New York coffee shop on Dec. 4, according to a tweet from Wall Street Silver, an investment forum for precious metals. “If she’s not cooperating already and cutting a deal, she’s certainly under a microscope,” Coleman said. Stephanie Avakian, a partner at law firm WilmerHale and chair of its securities and financial services department, is said to be advising Ellison. Avakian is the former director of the SEC’s division of enforcement, which during her tenure handled cases against Elizabeth Holmes, the former CEO of Theranos (when that company fraudulently claimed their company’s tests could detect cancer or diabetes without using needles), and Elon Musk, the CEO of Tesla and Twitter, when the executive was accused of making misleading statement about Tesla on Twitter. Avakian and WilmerHale did not return messages for comment.
Lastly, Fried is facing significantly more jail time than Belfort, who was sentenced in 2004 to four years in prison but only served 22 months. Sentencing guidelines, and their enhancements, have changed since Belfort committed his crimes, Coleman said. After large frauds like Enron and WorldCom, punishment of federal securities fraud was increased to 25 years from five years, Coleman said.
Will FTX account holders get their money back?
For the victims, the most important aspect of the case is whether they can recover any of their money. FTX creditors are expected to number more than one million but it’s unclear who they are. Coleman doesn’t think the government will be as successful recovering the missing funds from FTX as they were with Bernie Madoff, the mastermind behind a $20 billion Ponzi scheme. Most of the money will likely come from liquidating the real estate rather than the crypto, which has lost value, he said.
The Justice Department has recouped nearly 90% of funds for Madoff victims. Much of that came from Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, who clawed back $14.5 billion through bankruptcy proceedings. “It's too early to say for sure how much can be recovered, but the Madoff investigation certainly set a very high bar for recoveries,” Coleman said.
