To his credit, Securities and Exchange Commission chief Gary Gensler is arguing that the Sam Bankman-Fried crypto scandal doesn’t mean we need more regulations to rein in digital-coin excess and fraud. Laws are on the books that give the current regulatory and legal system plenty of tools to prosecute bad actors. Plus theft has been illegal since the beginning of civilization. 

But if our regulators are properly armed, how did the furry-haired alleged fraudster get away with something that could rival the wrongdoing of the notorious Bernie Madoff and his $65 billion Ponzi swindle? 

To answer that question, you need to dissect how both Madoff and the dude known as SBF worked the regulatory apparatus — “capturing” it, if you will, so that the inquiring minds in government didn’t think it was worth their time to look into the duo’s too-good-to-be-true dealings. 

Yes, “regulatory capture” — that is, the industry having sway over regulators and not vice versa — is a real problem, and has been as the financial system has grown in size, wealth and power. 

On one hand, the revolving door between financial business and government is inevitable. People who work for the SEC or DOJ have a knowledge base that could benefit Wall Street firms looking to avoid trouble. The flip side of all of this is when the regulators have an eye on making a lot of money when they decide to switch sides. That’s when the toxicity of the arrangement often sets in. It’s all too human to think the person you might want to work for, and your former colleagues work for, could never have committed fraud. 

That’s what went down with Madoff and SBF and the people who were supposed to be watching them. 

‘Virtuous’ Madoff 

For years, Madoff was considered a virtuous member of the Wall Street club — and his access to the system of checks and balances to detect fraud was vast. He helped create the Nasdaq stock market, became a senior member of its self-regulatory organization. He and his firm partners worked in various capacities in the financial industry’s main lobby group. Madoff and his family gave money to connected politicians with financial-system oversight responsibilities. His compliance officer, a niece, was married to an SEC official. 

Madoff had a prominent market-making business and an investment fund that grew to enormous heights on paper — around $65 billion in alleged assets, making it one of the biggest private investment funds — yet it never generated much interest from the SEC because it had the Madoff name on it. 

On paper, his investments produced implausibly stable returns in good markets and bad, eventually prompting a handful of securities-industry insiders to conclude that Bernie was a crook. Whistleblowers went to the SEC, which kicked the tires a bit but not enough. 

The 2008 financial crisis, and Madoff’s investors needing cash, exposed the fraud the SEC and the alphabet soup of watchdogs missed: Those returns were fictional and investor money was pilfered in a massive Ponzi scheme. Madoff died in prison after serving about 12 years of his 150-year sentence. 

Shades of Madoff can be seen throughout the SBF narrative as it relates to how Bankman-Fried worked the regulatory apparatus. SBF funneled money to pols with crypto oversight; hired people from crypto regulatory agencies such as the Commodity Futures Trading Commission to work at his FTX crypto exchange; wined and dined others. 

His money to DC opened doors — even at the Biden White House (SBF was a major contributor to the president’s 2020 campaign). He was also a favorite speaker before various committees in Congress looking to hear from the millennial crypto sage. Maxine Waters (D-Calif.), head of the House Financial Services Committee, appeared so impressed with SBF’s knowledge of crypto that after hearing him speak, she blew him a kiss. 

Like Madoff, there were a few SBF skeptics — particularly how he was seemingly thriving while others were getting crushed in the 2022 crypto correction. He ran an exchange and a hedge fund on the side, which is always a recipe for trouble when the hedge fund loses money and customer accounts can be fleeced. 

Gary’s ‘bro’ meetings 

Gensler, the SEC chief, isn’t the kissing type, but he met with SBF twice in less than six months — and not because he uncovered something shady. 

Nearly up to the moment it was revealed that billions of dollars in customer money was taken from SBF’s FTX crypto exchange and lost in his hedge fund’s gambling, SBF continued to meet with supporters in Congress, his contacts at the CFTC and big investors, not to mention all those fawning ­media-types. 

Like Madoff, SBF is now likely heading to prison. The SEC’s charging document lists SBF’s impressive array of alleged wrongdoing, having a risk-taking hedge fund associated with customer money in an affiliated exchange, lack of controls, the alleged theft of customer money to trade with, etc., etc. 

It’s a vast, serious fraud that occurred right under the SEC’s nose.