FTX– Some Safety Tips for Avoiding Ponzi schemes

The Barometer has said it before, but bears repeating:  How many times of we have to go through these genius scams before we recognize them for the frauds that they are? To no one’s surprise, except perhaps FTX  investors and its employees, that crypto currency darling turned out to be a scam run by a nerd that was propped up by the online braggadocio of Caroline Ellison who ran Alameda, another company founded by Mr. Bankman-Fried.  Ms. Ellison has a string resemblance to Pippi Longstocking,

The nerd and his gal-pal did very well, for a time. They were darlings of the field of philanthropy and Democrats in Congress.  John Jay Ray III, one of the biggest names in sorting through bankrupt companies, including Enron,  concluded that this one is the biggest mess he has ever seen. Alameda now owes FTX $10 billion for loans it received.  FTX owes $8 billion to creditors. We are into territory doubling and tripling previous scandals. David-Yaffe Bellamy, “Chief Tapped to Clean Up FTX Calls Mess the Worst He’s Ever Seen,” New York Times November 18, 2022, p. B1

So, some safety tips for proactive recognition of fraud in place of the post-mortem outrage coupled with, “Who knew?”

  1.  If you are investing in a company run by a guy who looks like Jerry Robinson from The Bob Newhart Show, but with worse clothes, you may be taking some risks.
  2. If the founder of the firm you are investing in says that he will be using his money to “prevent nuclear war” and “future pandemics,” you might have a trickster on your hands. If “altruism” is their buzzword, it means they are doing good with your money.
  3. Watch for posts by executives, such as Ms. Ellison.  Her are a few of her musings.  Following a phone call with CEOs of other companies, she posted, “Oh, thank god [sic], I think I fooled them into thinking I’m a real adult.”  (Tumblr) And revealing the habits of trades at Alameda and FTX, she wrote, “Nothing like regular amphetamine use to make you appreciate how dumb a lot of normal, nondedicated human experience is.” (Twitter).
  4. If the founder of the firm you are investing in is cozying up to lawmakers with donations and regulators with advice to keep both at bay, you may be investing in another Enron.
  5. If the founder of the firm that has your cash is running away (on camera) from Tom Brady, another investor, as Mr. Brady did an endorsement, you may be taking a leap into a bankrupt firm.
  6. If the firm you are investing in is loaded with Hollywood and entertainment world A-listers, well, study history.  In particular, see all the folks who were duped by Madoff, Elizabeth Holmes and Sunny at Theranos, and CDOs at banks pre-2008.
  7. If Maxine Waters heads the committee that would regulate the firm you are investing in, run away.  Her oversight is so well done that she has missed the collapse of Fannie Mae as well as the dramatic blow-up of mortgage and real estate markets in 2008. In the case of FTX, she was filmed blowing kisses to Sam Backman-Fried following his appearance at a hearing.
  8. If the firm you are investing in is an ESG darling, sprint away.  The criterion for being a “good” company in that endeavor does not calculate fraud into its definitions for environmental and social responsibility or corporate governance.  If they did, the girlfriend might not have been running FTX.
  9. If the firm you are investing in is hopping into a new field with only a little proven track record, stand back and let others get it all straightened around.
  10. If the board members are the same at the trading firm working with your firm, you have some conflicts issues that should have been raised and addressed.
  11. Hindsight is indeed 20/20, and it is readily available through the study of history?  How many Professor Harold Hills does it take to make innocent and gullible  fall for 76 trombones every time?  Repent, all ye sheep who find the next-great richer-than-ever dreams. Become wary of the too-good-to-be-true hucksters, especially those who look like Peter Bonerz.

David Yaffe-Bellany, Lora Kelley, and Cade Metz, “Collapse of FTX Puts Focus on Obscure Crypto Trader,” New York Times, November 24, 2022, p. B1.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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