Update: On November 17, Semafor reported that Martin Flumenbaum stopped representing Sam Bankman-Fried after FTX filed for bankruptcy due to “conflicts … that precluded us from representing him,” per a statement. He is now being represented by Greg Joseph, the former president of the American College of Trial Lawyers.
There are several barometers indicating just how much trouble FTX founder Sam Bankman-Fried is facing after incinerating billions of dollars of client money — his company’s balance sheet from hell, the deeply sketchy-sounding back channel for moving his customers’ funds around, the reported SEC and Bahamian probes. But the best measurement might just be his choice of counsel: The ersatz crypto king has chosen attorney Martin Flumenbaum to represent him as his scam uncoils.
Don’t know Flumenbaum? You must not be a billionaire concerned that criminal investigators are around the corner. For several generations now, Flumenbaum, of the white-shoe firm Paul, Weiss, has been representing the most prominent names of the white-collar financial world when things go south.
He’s the guy to call if your father confesses to you in his penthouse study that his successful security brokerage was actually the largest Ponzi scheme in history, as the sons of Bernie Madoff did in December 2008. He’s there to represent your ratings agency when it’s sued by a state retirement fund for its alleged role in the financial crisis — as he did in 2011 when Fitch Ratings settled a class-action suit for underwriting non-prime mortgage-backed securities. Moving back a little further, he also represented Drexel Burnham Lambert managing director Dennis Levine, who was charged in 1986 in the largest-ever insider trading case at the time. Levine’s cooperation eventually led to the fall of the bank and the securities-fraud plea of its junk-bond pioneer, Michael Milken. He, too, was represented by Flumenbaum.
And now, Sam Bankman-Fried. His biggest problem is the report that FTX had a backdoor in its code allowing him to move billions in customers’ money to his failing hedge fund, Alameda. The leaders of that private equity firm — a.k.a. his roommates in the Bahamas — then blew that stolen money on margin trading. He has not been charged with a crime and claimed on Twitter that the whole collapse stemmed from a personal error. (FTX and Paul, Weiss did not respond to requests for comment.) And while that big mistake, if confirmed, would be a new one for Flumenbaum to wrestle with, there are some striking parallels between the downfall of FTX and notorious clients represented by Flumenbaum.
First, there’s the P-word. Like Madoff, FTX was reportedly violating contract terms by moving customer cash around at a whim. Where SBF was trying to recover losses, the Ponzi scheme busted in 2008 was simpler, handing new investors’ money off to those who bought in earlier. Like the infamous pyramid scheme, FTX was rolling along in a bear market until a macroeconomic correction shook the exchange to its core. And like Madoff himself, Bankman-Fried made some actual contributions — Madoff pioneered electronic trading, while Bankman-Fried concocted a much smaller, but still clever, arbitrage scheme — before diving into something uglier.
Months ago, there was a hint that something was up: Bankman-Fried described his own operation as a pyramid scheme in a high-profile interview in April. All it takes is a bunch of people putting money in a “magic” box to build “psych” until “it goes to infinity.” That more or less describes what went on at Bernard L. Madoff Investment Securities, where the reputation of abnormally high returns attracted green investors to keep things afloat.
The Drexel guys share a few resemblances as well. Working in high-risk, high-yield bonds, Levine was part of a network at the investment bank buying up companies’ stock before deals were being announced publicly — a practice better known as insider trading. According to The Wall Street Journal, Bankman-Fried’s hedge fund could have been doing something similar with cryptocurrencies, picking up millions of dollars worth of tokens before they were listed on FTX; when they made it on the exchange, their value would soar.
Bankman-Fried should at least be confident that he’s got the right attorney. The son of a union painter, Flumenbaum learned about securities fraud trying cases as an assistant U.S. attorney in the Southern District of New York, where he was the lead prosecutor in the tax-fraud case against Sun Myung Moon, the founder of the Unification Church. When Mark and Andrew Madoff told him of their father’s criminal enterprise, Flumenbaum advised them to turn their father in immediately to avoid being implicated in his crime. Not only did Flumenbaum call the SEC to report the crime for them, he later proved to the government that the tragic pair were not a party to the fraud. Dennis Levine was facing up to 20 years in prison and $1 million in fines; after the cooperation deal brokered by Flumenbaum, he served a little over a year behind bars and a $360,000 fine. Despite prosecutors’ claims that they had evidence of Milken insider trading, he never actually pleaded to the charge. Of the 98 counts he was initially charged with, the billionaire only copped to six violations.
While the details of Bankman-Fried’s misconduct are still coming to light, it’s clear that criminal prosecution could be in his immediate future and that he will need reputable counsel. “You want to let the people who have the experience of digging out of these holes and getting out of these situations guide you,” said a former attorney for the SEC. “The most important thing for him is to listen to them.” (And maybe to stop tweeting things that could be used against him in a court of law.) Right now, the ex-regulator speculates that SBF’s legal team is most likely doing its own forensic accounting of FTX and its associated hedge fund Alameda to determine the best possible explanation for the collapse: “If there’s any wrongdoing, you don’t want there to be intent or recklessness. If anything, it would be negligence.”
As crypto skeptics relish his fall, FTX and Bankman-Fried are not without allies. After he stepped down as CEO, the exchange hired another veteran of infamous financial implosions — the attorney John J. Ray III, who took over at Enron to help dissolve the company and return billions to its fraud victims. And some crypto executives have come to his defense. The CTO of the firm Ripple, David Schwartz, says the comparisons to Madoff aren’t as clear-cut as they may seem. Of course, Schwartz’s colleague is also represented by Flumenbaum: Ripple’s co-founder faces an SEC charge of raising over $1.3 billion in an unregistered securities offering.
This post has been updated to clarify Martin Flumenbaum’s representation of Ripple’s co-founder.