The fall of crypto exchange FTX is 'worse than Theranos, worse than Madoff' as federal probes mount, former SEC official says

• The fall of cryptocurrency exchange FTX has drawn numerous comparisons to the collapse of Lehman Brothers.
• But a former Securities and Exchange Commission official likened FTX to the Theranos and Bernie Madoff debacles.

The fall of cryptocurrency exchange FTX has drawn numerous comparisons to the collapse of Lehman Brothers, which sparked the 2008 financial crisis.

But a former Securities and Exchange Commission official likened FTX to the Theranos and Bernie Madoff debacles.

John Reed Stark, the founder and former chief of the SEC's Office of Internet Enforcement, pointed to reports that FTX transferred client funds to trading house Alameda earlier this year.

"This is worse than Theranos, this is worse than Madoff, if what I'm reading is true," he told Yahoo Finance on Thursday, a day before FTX and its affiliates filed for Chapter 11 bankruptcy.

FTX didn't respond to a request for comment.

In January, a jury found Theranos founder Elizabeth Holmes guilty of defrauding investors out of hundreds of millions of dollars. In 2009, Madoff pleaded guilty to a Ponzi scheme that defrauded tens of thousands of investors of as much as $65 billion.

Stark noted "sophisticated" FTX investors have had to write down their holdings, even after performing due diligence on its financials.

On Thursday, Venture capital firm Sequoia Capital informed its partners that it wrote off its entire $213.5 million investment in FTX as a complete loss.

He also pointed to reports that the Justice Department is investigating FTX, which the SEC and Commodity Futures Trading Commission are probing as well.

Stark said the SEC's enforcement division is likely standing down while the DoJ conducts its investigation, which could involve informants, search warrants and arrests. The DoJ prosecutes criminal cases, while the SEC enforces civil laws.

Meanwhile, FTX exemplifies issues in the broader crypto space, he added.

"Some of these companies, you don't even know where they're headquartered. You don't even know who works there. There's absolutely no transparency," Stark said. "The contagion is rapidly spreading amongst all of the various crypto ecosystem and that's a serious problem for anybody that's doing anything with crypto."