The head of the Chicago Mercantile Exchange Group noticed problems at the crypto exchange FTX, which is operated by Sam Bankman-Fried

Sam Bankman-Fried, who posed as a t-shirt-wearing video game genius disrupting all things financial, was arrested in the collapse of his FTX cryptocurrency exchange.

It develops into the biggest scandal to rage through the markets since Bernie Madoff’s Ponzi scheme, and regardless of Bankman-Fried’s guilt or innocence, makes many supposed Sharpies look very bad.

These include financiers such as Chicago-based private equity firm Thoma Bravo, Ontario Teachers Pension Fund and Sequoia Capital. Sequoia posted a glowing profile of Bankman-Fried weeks before writing off the value of its investment with him. It described him playing League of Legends while on the phone with the company, which he took to be a good thing. According to some reports, the federal authorities were quite late on the case.

Many FTX supporters made statements about the rigor of their vetting procedures following the Nov. 11 bankruptcy. It’s baffling how so many people with advanced degrees and powerful computer programs have overlooked what John Ray III, the CEO who cleaned up the mess, called “simply old-fashioned embezzlement.” That’s just taking money from customers and using it for your own ends.” Ray told Congress that customers may have lost $8 billion.

John Ray III, a bankruptcy specialist and now CEO of FTX, testifies before the House Financial Services Committee on Dec. 13.

Apparently none of the supporters listened to early warnings from a Chicago business executive who knows about risk management.

Terrence Duffy is the chairman of the CME Group, the largest futures exchange in the United States. It is an amalgamation of the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange and other assets. He sounded the early warning about possible problems with FTX and said in March he had called Bankman-Fried a scam.

A week after the FTX implosion, Duffy took to the On the Tape podcast to elaborate on the conversation. It started with talk of a deal but quickly turned sour when Duffy said it was clear FTX had no plan to isolate risk in crypto trading. “I said, ‘Your model sucks. Why would I employ a model that introduces risk to the system?'” Duffy said on the podcast.

Bankman-Fried was said to be worth $26 billion at the time. As Duffy put it, “I said, ‘My fortune doesn’t start with any Bs. I’ll give you 3 to 1 that I have more money than you.’ I said, ‘Tell you what, I’ll give you 4 to 1. I’ve got more money in my right pocket than your fortune.’ I said, ‘You’re a scammer and I’m going to make sure we get that out there.’ And that was it. So we went to the convention.”

Sounds like someone’s speaking from the South Side. Duffy is among the longest-serving leaders in Chicago business, having made it without a wealthy background or an MBA. He grew up in Mount Greenwood, where his parents owned a flower shop. He worked in a bar, including She-nannigan’s on Division Street, and thought of becoming a police officer or a fireman.

His parents mortgaged their home so he could lease his first membership from the old Merc in 1981. He once said he paid them back in two years. He made connections on the trading floor and gained people’s trust. After serving on the Exchange’s Board of Directors, he was appointed Chairman of Merc in 2002 and has led it through its Board of Trade acquisition and transformative growth.

He testified before the US House Agriculture Committee in May about the dangers of FTX with Bankman-Fried sitting next to him. Both were clearly uncomfortable.

Duffy’s written testimony was technical jargon but carefully set out what he saw as deficiencies in the operation of FTX compared to futures markets, which have multiple layers of protection against trading failures. The CME Group calls the safeguards their “default waterfall” on their website.

Duffy said futures trading firms hold $173 billion to cover trading risks. FTX proposed an algorithm that liquidates accounts in stages based on how prices fluctuate. “The proposed proposal is fraught with danger,” Duffy said. He called it “Risk Management Light” that would destabilize financial markets beyond crypto.

Since that hearing, the FTX story has deteriorated. Federal prosecutors have accused Bankman-Fried of operating a brazen scheme to use client funds for property purchases, political donations and to cover losses at Alameda Research, a crypto hedge fund he founded. Bankman-Fried has admitted its operations lacked basic financial controls but denied any intent to fraud.

Ray, who worked on the Enron case, described the alleged fraud as years of preparation.

Why do people fall for this stuff? Blame it on ego, lazy duty of care and the wealth managers’ bane, fear of missing out.

Investors and regulators should have taken Duffy’s clear view of Chicago to heart. Taking care of bars and leaving tracks on the old trading floors can empower you to spot problems.