Professors Eugene Soltes and Aiyesha Dey; image by John Ritter

When Sam Bankman-Fried was convicted in 2023 of all seven charges against him related to the cryptocurrency exchange FTX, the jury needed less than five hours to deliberate after a months-long trial. The egregiousness of the fraud he committed—his victims lost almost $10 billion in the failed exchange—makes even the crimes of Bernie Madoff pale in comparison, says Professor Eugene Soltes. His work focuses on corporate integrity and risk management; he’s also the author of the 2016 book Why They Do It: Inside the Mind of the White-Collar Criminal and the 2022 text Corporate Criminal Investigations and Prosecutions. Professor Aiyesha Dey’s research explores governance, regulation, and corporate behavior, as well as ethical lapses by executives. In the following conversation with the Bulletin, Dey and Soltes reflect on this latest chapter of corporate fraud and the lessons for entrepreneurs operating in the murky spaces between innovation and regulation.

As you look at how things fell apart at FTX, do you see anything new or is this the same, age-old story of fraud?

Aiyesha Dey: Crypto is a new space, which means there’s less regulation and more opportunities for something like this to happen. Sam Bankman-Fried’s idea in the beginning was actually fine; he was taking a risk, and it was all legal. But when he couldn’t make as many profits as he wanted, my belief is that he was willing to bend the rules to get them. To me, it’s really the human-psychology factor playing out in a new setting.

Eugene Soltes: When I look at the failures at FTX, I see a company that grew dramatically, and at some point between day one and the day it ultimately fell, they failed to put regulatory systems and controls into place. I think an interesting question here is: At what point is an entrepreneur—particularly someone who doesn’t have experience in business, per se—supposed to grow up and design those systems? When you start a business in your garage, we don’t expect regulation to be the first thing you’re thinking about, and regulators don’t often come down hard on those people. But when an entrepreneur is managing tens of billions of dollars, as was the case with Sam Bankman-Fried or Elizabeth Holmes—both brilliant and wayward entrepreneurs—we expect more from them.

Dey: I agree with you, Eugene, about growing up, and of course people like this have brilliance. They think outside the box. The difference between those who commit fraud and those who don’t is when someone crosses the line of being willing to do anything, including illegal and unethical things, to succeed. Some will very willingly cross that line, and others may not realize they’re crossing it. But in this case, if you look at some of the facts revealed in the trial, SBF said that the laws and rules didn’t apply to him. There were six opportunities for him to give back the customer’s funds, but he didn’t. These things tell you it was a choice to ignore controls and to knowingly lie.

Soltes: Well, what’s the distinction between puffery and fraud? There’s obviously an important legal distinction, but imagine you’re a CEO of a bank that could be facing a liquidity crisis. Funds are starting to go out your door. If you truthfully tell your big depositors that you’re seeing a worrisome trend of outflows, you’ll literally cause a bank run. Is there ever a responsibility of the CEO to actually exert confidence and say it’s going to be fine? Even if, in doing so, you’re potentially lying?

With the benefit of hindsight, it looks like FTX made some incredibly fraudulent decisions; but when I look at some of the things that Sam Bankman-Fried was trying to do, in terms of promoting crypto, he was trying to promote something larger than life, which requires a bit of puffery. And it’s not just his firm he was talking about: How FTX performed was correlated to his balance sheet and the perception of the entire industry. Is there ever a circumstance in which a leader of a company needs to use puffery to advance a firm or industry?

Dey: There is a fine line here as well. Conveying optimistic expectations for the future is different from conveying false information. FTX’s balance sheet revealed several false and misleading facts. One of the reasons regulators mandate regular disclosures of financial facts is to force firms to be transparent to investors during good performance and poor performance.

What are the lessons here for entrepreneurs who may have to navigate the murky areas and inherent risks of building new industries?

Dey: If you’re a high-flying entrepreneur, risk is not a bad thing. We teach students in our governance-controls classes that, if you’re an entrepreneur and you know that you’re going to make risky decisions, you need to think about putting a set of controls around yourself, essentially to protect you from yourself. You need advice and counsel; you need someone to tell you, No, this is actually crossing the line. Sam Bankman-Fried didn’t do that. They didn’t even have a board. Was it a mistake, or was it by choice?

Soltes: When I think of some of the most innovative businesses today, Uber and Airbnb are prime examples of businesses that were fundamentally based on engaging in alleged violations of law in some jurisdictions. Uber didn’t characterize itself as a transportation business because it would’ve been violating all kinds of transportation laws. Ultimately, they said Uber was a technology platform that simply connected people. Airbnb ignored zoning laws in some instances. They have largely described this as regulatory entrepreneurship; the leadership would describe the regulation as either outdated or not well-aligned with what would drive consumer surplus in the future.

I think there was some of that at FTX. They decided they were going to become so large and have such deep connections that they could write that regulation in a way that they thought was suitable to grow this industry. But transferring $10 billion from one legal entity to another does not fit within that broader regulatory entrepreneurship framework. That’s arguably one of the most egregious acts in the history of white-collar crime and makes even Bernie Madoff’s actions look comparatively less egregious.

And I’m drawing a distinction here between legality and ethical and moral concerns. Elon Musk often mocks regulators, and many of our students admire him. One of the things that we struggle with as educators is how to thread the needle between saying the law obviously ought to be respected—that’s a foundational principle at a business school—but simultaneously recognizing that some of the most innovative businesses are actually founded on concepts that, frankly, if you took that first principle as being the overriding first-order criterion, would not exist today. That’s the healthy and uncomfortable tension that we have to reconcile.

Dey: If you don’t innovate, someone else will come along with a better product and win, and one business can cause harm to another that way. But those competitive forces are fair. One of the things we need to teach our students is that, as you get higher up in your organization, you’re going to face more slippery slopes, so being aware of the controls and your advisors becomes increasingly important. Because defrauding others is never okay.

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