Ben Strack

Bernie Madoff’s former lawyer is downplaying the significance of Sam Bankman-Fried’s not guilty plea on Tuesday.&nbsp;



Ira Lee Sorkin, who represented Madoff, told Blockworks that the FTX founder’s initial plea could soon change, adding that the move likely would not have a material impact on his sentence even if he were to be convicted. It’s not unusual for defendants in criminal cases to switch up their initial pleas.&nbsp;



“One of the factors in sentencing is what they call acceptance of responsibility,” Sorkin said. “If you plead guilty, under the guidelines, you get two points…But his guidelines are so off the charts that a couple of points are not going to matter one way or the other.”



Bankman-Fried was <a href="https://blockworks.co/news/sam-bankman-fried-arrested-in-bahamas">arrested</a> in the Bahamas last month after FTX <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing">filed for bankruptcy</a> in November. He faces charges including wire fraud, money laundering and violating campaign finance laws, which altogether carry a maximum penalty of 115 years in prison.



Madoff pleaded guilty to fraud, money laundering and other charges as part of a $50 billion Ponzi scheme. He was ultimately sentenced to 150 years in federal prison, where he died in April 2021 at 82.



Despite some similarities in the financial crimes of which Bankman-Fried and Madoff were accused, the latter faced a different set of circumstances. Several of those differentiators — including the move by Madoff’s sons, Mark and Andrew, to act as whistleblowers on their father — influenced Madoff’s decision to plead guilty from the outset, Sorkin said.&nbsp;



“The government had access to all of his trading records, all of the phony documents, the computers…So, there was a whole bunch of evidence against him, particularly from what his boys told the government,” Sorkin said.



The pressure a drawn-out case would have put on Madoff’s wife and children also came into play, according to Sorkin.



The bulk of the evidence prosecutors may have on Bankman-Fried isn’t yet fully clear. But Sorkin said the trial’s upcoming discovery period — where opposing counsels exchange information and related documents that they may later enter into evidence — could be one trigger for a change of plea, Sorkin said.&nbsp;



Manhattan US Attorney Damian Williams launched a task force Tuesday to continue investigating FTX’s collapse.&nbsp;



“They may [later] sit down with the government…to see if they can work out a plea,” Sorkin said of Bankman-Fried and his lawyers. “They’ll see what assets he has because the government’s going to look for forfeiture and disgorgement.



Added Sorkin: “If [Bankman-Fried] decides he’s going to fight it, then his lawyers are going to make a judgment as to whether he has a triable case.”



<h3 class="wp-block-heading">Financial fraudsters who pleaded not guilty</h3>



Bankman-Fried is far from the only high-profile purported financial fraudster to claim innocence.&nbsp;



Michael Milken — a former executive at the then-Wall Street bank Drexel Burnham Lambert charged with racketeering and securities fraud — pleaded not guilty in 1989. He pleaded guilty on six felony counts the following year in a packed Manhattan courtroom, The New York Times <a href="https://www.nytimes.com/1990/04/25/business/milken-defends-junk-bonds-as-he-enters-his-guilty-plea.html" target="_blank" rel="noreferrer noopener">reported</a>, as he tearfully thanked the court for allowing him to apologize.



Martin Flumenbaum, who represented Milken, did not immediately return a request for comment.&nbsp;&nbsp;



Dennis Zozlowski, the former chief executive of then-holding company Tyco International, pleaded not guilty to stealing millions of dollars from the company.&nbsp;



Zozlowski was convicted in 2005 of securities fraud, grand larceny and falsifying business records. He was sentenced to between eight years and 25 years in prison.



Zozlowski told the New York state Parole Board during a 2012 hearing that he <a href="https://www.bloomberg.com/news/articles/2012-04-11/ex-tyco-chief-kozlowski-says-he-had-sense-of-entitlement-" target="_blank" rel="noreferrer noopener">declined a plea deal</a> from the Manhattan district attorney’s office that would have resulted in between two to six years in prison. The board denied his request for parole at the time, but he was later released after serving roughly eight years in prison.



Like Zozlowski, Raj Rajaratnam also claimed to turn down a plea deal of what he expected would have been as little as five years if he cooperated with authorities, <a href="https://www.newsweek.com/exclusive-raj-rajaratnam-reveals-why-he-didnt-take-plea-68203" target="_blank" rel="noreferrer noopener">Newsweek reported</a>.



Rajaratnam, the founder of former hedge fund firm Galleon Group — formerly one of the largest and most influential such operations in the world — was convicted on charges of securities fraud and sentenced to 11 years in prison. He served nearly eight years behind bars.&nbsp;



<a href="https://www.linkedin.com/in/seth-taube-58844427/" target="_blank" rel="noreferrer noopener">Seth Taube</a>, a former federal prosecutor and SEC official, previously told Blockworks that if convicted, Bankman-Fried could receive a decades-long sentence.



“If he cooperates, he may get out before he needs a cane,” Taube said at the time.



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SBF Could Still Change His Not Guilty Plea: Madoff Lawyer

<a href="https://blockworks.co/news/sbf-released-on-bond" target="_blank" rel="noreferrer noopener">The bail terms</a> for Sam Bankman-Fried were not exactly unprecedented, but were much higher than the one received by the man who perhaps ran the most well-known financial scheme in history.&nbsp;



The FTX founder faces charges including wire fraud, money laundering and violating campaign finance laws. He was set to be released on $250 million bond after appearing in Manhattan federal court Thursday, the New York Post <a href="https://nypost.com/2022/12/22/sam-bankman-fried-released-on-record-250m-bond/" target="_blank" rel="noreferrer noopener">reported</a>. He was to stay under house arrest at his parents’ home in California.&nbsp;&nbsp;&nbsp;



The bond was secured by equity in Bankman-Fried’s family home, as well as by the signatures of his parents and two other individuals with “considerable” assets, according to <a href="https://www.cnbc.com/2022/12/22/ftx-founder-sam-bankman-fried-to-be-released-on-250-million-bail.html" target="_blank" rel="noreferrer noopener">CNBC</a>.



Some have compared Bankman-Fried to Bernie Madoff, who was released on <a href="https://www.nytimes.com/2008/12/18/business/18madoff.html" target="_blank" rel="noreferrer noopener">a $10 million bail</a> in 2008 after authorities said he had confessed to a $50 billion Ponzi scheme. The bail amount was secured by various family homes held in his wife’s name, according to The New York Times.&nbsp;



“Like Madoff, FTX’s Bankman-Fried proved adept at using his pedigree and connections to seduce investors, unbeknownst to them, into participating in one of the more high-profile schemes in modern times,” Bill Herrmann, co-founder of fund manager Wilshire Phoenix, told Blockworks in an email.



Madoff was ultimately sentenced to 150 years in federal prison, where he died in April 2021 at the age of 82.&nbsp;



<a href="https://www.linkedin.com/in/seth-taube-58844427/" target="_blank" rel="noreferrer noopener">Seth Taube</a>, a former federal prosecutor and ex-SEC official, <a href="https://blockworks.co/news/the-madoff-playbook-how-ftx-creditors-could-get-their-money-back" target="_blank" rel="noreferrer noopener">previously told Blockworks</a> that if convicted, Bankman-Fried could receive a Madoff-like sentence.



“If he cooperates, he may get out before he needs a cane,” Taube added.



Though Bankman-Fried’s bail amount far exceeds Madoff’s, it is not the highest bail of all time.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" class="wp-embedded-content" sandbox="allow-scripts" security="restricted" src="https://flo.uri.sh/visualisation/12250932/embed#?secret=noQbz4fpPE" data-secret="noQbz4fpPE" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Chart by David Canellis</figcaption></figure>



The bail of Michael Milken — an executive at Drexel Burnham Lambert charged with racketeering and securities fraud in 1989 — was also set at $250 million, which is worth about $570 million today when adjusted for inflation. He pleaded guilty the following year to six felony counts and was sentenced to $600 million in fines and 10 years in prison.



That of Robert Durst, who was convicted of murder last year, was initially set at $3 billion in 2003 after he was acquitted of a murder charge.&nbsp;



Durst remained in custody on one charge of bond jumping and two of tampering with evidence after State District Judge Susan Criss, set his bail at $1 billion and added a $2 billion bond. A Texas appeals court later <a href="https://www.cnn.com/2004/LAW/08/26/durst.ctv/" target="_blank" rel="noreferrer noopener">lowered</a> the bail to $450,000.



Like Madoff, the bail of Jordan Belfort, the stockbroker portrayed by Leonardo DiCaprio in the 2013 firm The Wolf of Wall Street, was set at $10 million. Belfort pleaded guilty to fraud and served 22 months in prison after receiving a four-year sentence.



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How Bankman-Fried’s $250M Bail Compares to Historical Financial Fraudsters

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 <a href="https://blockworks.co/news/sam-bankman-fried-arrested-in-bahamas" target="_blank" rel="noreferrer noopener">arrested</a> 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 <a href="https://www.youtube.com/watch?v=1dUS6tLZfUY" target="_blank" rel="noreferrer noopener">lost $8 billion</a> of customer money.&nbsp;



<a href="https://www.linkedin.com/in/marcpowers22/details/experience/" target="_blank" rel="noreferrer noopener">Marc Powers</a>, a former securities law practice leader at Baker &amp; 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.&nbsp;&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
“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.”
</blockquote>



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 &amp; 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.&nbsp;



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.



<h3 class="wp-block-heading">Targeting large institutions</h3>



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.&nbsp;



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, <a href="https://www.reuters.com/article/us-madoff-tremont/madoff-trustee-in-1-billion-settlement-with-tremont-idUSTRE76R5XT20110728" target="_blank" rel="noreferrer noopener">reached a $1 billion settlement</a> 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.&nbsp;&nbsp;



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,” <a href="https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-and-fbi-assistant-director-charge-announce-filing-criminal" target="_blank" rel="noreferrer noopener">according to documents</a> 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 &amp; 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.&nbsp;



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.&nbsp;



Other potential sources of fund recovery



Damian Williams, the US Attorney of the Southern District of New York, called Bankman-Fried’s alleged crimes “<a href="https://blockworks.co/news/us-attorney-sbf-perpetrated-largest-financial-fraud-in-american-history" target="_blank" rel="noreferrer noopener">one of the biggest financial frauds</a> 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&#8217;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 href="https://www.vox.com/future-perfect/23500014/effective-altruism-sam-bankman-fried-ftx-crypto" target="_blank" rel="noreferrer noopener">a Dec. 12 column</a>.&nbsp;



“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 &amp; 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.



<h3 class="wp-block-heading">A process to play out over years</h3>



<a href="https://www.linkedin.com/in/seth-taube-58844427/" target="_blank" rel="noreferrer noopener">Seth Taube</a>, 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.&nbsp;



In <a href="https://blockworks.co/news/sam-bankman-fried-planned-testimony'" target="_blank" rel="noreferrer noopener">a transcript of testimony</a> Bankman-Fried planned to give, <a href="https://blockworks.co/news/sam-bankman-fried-planned-testimony" target="_blank" rel="noreferrer noopener">obtained by Forbes</a>, 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.&nbsp;



“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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