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by bern
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CommunityFTX collapseSam Bankman-Fried
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SBF has been accused of so many things and there's more information coming to light all the time.[1] I'm interested in what people here think the core concrete (legal/ethical) accusations are. I myself still don't feel like I have enough clarity to know what lessons should be drawn from everything; I welcome other's insights.

My own view at this point of the main thing SBF did wrong is: HE MARKETED FTX AS A RELATIVELY SAFE EXCHANGE WHEN HE KNEW IT WAS CHAOS BEHIND THE SCENES.

All the other accusations appear much less important than this one and/or don't stand up to scrutiny. For instance:

  1. I don't believe anyone knew about Alameda's additional $8b liability to FTX via the fiat@ account until summer-fall 2022, SBF included.
    1. This seems to be the story told by Caroline, Gary, Nishad and of course, SBF.
    2. It seems really bad to run a company in such a way that mistakes of this magnitude can occur. But an honest mistake is different from fraud.
    3. Running an offshore crypto company this chaotically is not illegal per se.
  2. I haven't come up with a much better course of action than they took when they discovered this mistake.
    1. Alameda didn't need to borrow more to repay the recalled loans.[2]
    2. Alameda's net asset value was still ~$10 billion, although much was tied up in illiquid investments; things didn't feel "bulletproof" now, but still basically fine. (SBF obviously not anticipating CZ's fatal blow in November.)
    3. Over the next few months, SBF spent time trying to raise liquidity, sorting out their accounting and exploring replacing Alameda with a better managed backstop liquidity provider like Modulo. Alameda also began repaying FTX.[2]
  3. The funds Alameda otherwise borrowed from FTX came entirely from the margin lending program, which was permissible under the Terms Of Service.
    1. For efficiency, Alameda didn't post collateral because SBF (unaware of the $8b fiat@ issue) felt confident they had enough and, since he owned 90% of Alameda, felt confident he could take it if needed.[3]
    2. The code granting special privileges to market makers, Alameda included, was accessible to any senior developer at FTX. Their general policy was to not publicly disclose info about customer accounts and they saw no need to here.
    3. When SBF talked about Alameda's account being like everyone else's, he was only addressing the concern that Alameda might be front running other customers, which Gary testified was not happening.

Please tell me where you disagree and why!

 

  1. ^

    Examples from this month: FTX expects to return all customer money; clawbacks may go away; Justice Department Charges Three People in $400 Million FTX Mystery Hack; FTX CEO SBF Ordered to Appear in Court Amidst Celsius Connection Probe; FTX creditors file class action against bankruptcy lawyers over ties to FTX prior to its collapse; Bahamas Bank Deltec Accused of Giving Bankman-Fried ‘Secret’ Credit to Buy Tether; Ex Blood Gang Member Opens Up About SBF’s Life in Prison: “Free Sam Bankman-Fried”

  2. ^

    "Q. What do you see with the in-use line of credit for Alameda happening, according to the graph there? A. Well, it starts close to 3 billion in June [2022], but then it drops very precipitously about mid June."

  3. ^

    Crypto Lotus was not required to post collateral either.

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Nathan Young

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My base rate is that people who are found guilty of crimes are probably guilt of them. 

I don't believe anyone knew about Alameda's additional $8b liability to FTX via the fiat@ account until summer-fall 2022, SBF included.

I do believe they knew about it. Most people do know about such things. 

I haven't come up with a much better course of action than they took when they discovered this mistake.

Well Alameda could have not had a balance sheet mostly composed of FTT. And FTX could have not lent alameda the money in the first place. FTX could have admitted as soon as they found the mistake.

The funds Alameda otherwise borrowed from FTX came entirely from the margin lending program, which was permissible under the Terms Of Service.

This feels like exactly the kind of technicality that a trial would spot.

I don't feel like getting into all this again, but a) it feels like you take a very different prior to me and b) I don't find your reasoning finds some huge amount of new information. Clients did not expect their money to be lent to a hedge fund. That breaks norms. It doesn't seem surprising to me that it was illegal too. 

bern5
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Thank you for replying despite understandably not wanting to get into it all again. I really appreciate it. And I do regret not finding the courage earlier to make myself the only (?) person on here to suggest that perhaps not all of the accusations are obviously true.

I do believe they knew about it. Most people do know about such things. 

Do you think Caroline, Gary and Nishad lied[1] about this in their testimony then, but told the truth about everything they accused SBF of? (It's possible. But it does seem a little cherry-picked.)

On priors, it ... (read more)

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MichaelStJules

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At least, it seems SBF lied or misled about Alameda having privileged access, because Alameda could borrow and go badly into the negative without posting adequate collateral and without liquidation, and this was something only Alameda was allowed to do, and was intentional by design. This seems like fraud, but doing this wouldn't imply Alameda would borrow customers' funds without consent and violate FTX's terms of service, which seems like the bigger problem at the centre of the case.

Also, it seems their insurance fund numbers were fake and overinflated.

https://www.citationneeded.news/the-fraud-was-in-the-code/

I haven't followed the case that closely and there's a good chance I'm missing something, but it's not obvious to me that they intended to allow Alameda to borrow customer funds that weren't explicitly and consensually offered for borrowing on FTX (according to FTX's own terms of service). However, I'm not sure what happened to allow Alameda to borrow such funds.

By design, only assets explicitly and consensually in a pool for lending (or identical assets with at most the same total per asset, e.g. separately USD, Bitcoin, etc.) should be up for being borrowed. You shouldn't let customers borrow more than is being consensually offered by customers.[1] That would violate FTX's terms of service. It also seems like an obvious thing to code.

But they didn't ensure this, so what could have happened? Some possibilities:

  1. They just assumed the amounts consensually available for lending would always match or exceed the amounts being borrowed without actually checking or ensuring this by design, separately by asset type (USD, Bitcoin, etc..). As long as more was never borrowed, they would not violate their terms of service. That's a bad design, but plausibly not fraud. But then they allowed Alameda to borrow more, and Alameda borrowed so much it dipped into customer funds without consent. They could have done this without knowing it, so again plausibly not fraud. Or, maybe they did do it knowingly, so it would be fraud. But I'm not sure the evidence presented supports intent beyond a reasonable doubt.
  2. They assumed they had enough net assets to cover customer assets, even if they had to sell different assets from what customers thought they held. Or, they might have assumed they'd be able to cover whatever users would want to withdraw at a time, even if it meant not actually holding at least the same assets in the same or greater amounts, e.g. the same amount of USD or more, the same amount of Bitcoin or more, and so on. In either case, if they didn't care that they would not actually hold the same assets separately in the same or greater respective amounts (e.g. separately enough USD, enough Bitcoin, etc.) than what the customers retained rights to, this would be against FTX's terms of service, and it would seem they never really intended to honor their own terms of service, which looks like fraud.
  1. ^

    Which assets are actually borrowed and lent don't need to match exactly. If A wants to lend Bitcoin and B wants to borrow USD, FTX could take A's Bitcoin, sell it for USD and then lend the USD to B. That would be risky in case the Bitcoin price increased, but A and B could assume this risk or FTX could use an insurance fund or otherwise disperse the risk across funds opted into lending/borrowing, depending on the terms of service. This needn't dip into other customer funds without consent. I don't know if FTX did this.

bern9
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At least, it seems SBF lied or misled about Alameda having privileged access, because Alameda could borrow and go badly into the negative without posting adequate collateral and without liquidation, and this was something only Alameda was allowed to do, and was intentional by design.

I touched on this in my post and added a little more detail in the final paragraph of my reply to Nathan, but to expand further:

  • As far as I can tell, when SBF denied that Alameda had privileged access, the context was addressing concerns about potential front running. In the fa
... (read more)
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MichaelStJules

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The funds Alameda otherwise borrowed from FTX came entirely from the margin lending program, which was permissible under the Terms Of Service.

Source? My impression is that FTX and Alameda used the same bank account(s) and they (intentionally or unintentionally) let Alameda use FTX customer funds without consent, beyond just margin lending and against the Terms of Service.

bern9
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There were two different ways through which Alameda used funds from FTX. One was the ~$8b via the same bank accounts which I talk about in 1. The other was ~$2-3b via the margin lending program which I talk about in 3.

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MichaelStJules
Ah, I misunderstood. Still, I think they did violate their own terms of service and effectively misappropriated/misused customers' funds, whether or not it was intentional/fraud/criminal. If I tell you I'll hold your assets and won't loan them out or trade with them, and don't take reasonable steps to ensure that and instead actually accidentally loan them out and trade with them, then I've probably done something wrong. It may not be criminal without intent, though, and I just owe you your assets (or equivalent value) back. Accidentally walking out of a store with an item you didn't pay for isn't a crime, although you're still liable for returning it/repayment. I just read the Wikipedia page on the case and didn't see compelling evidence of intent, at least not beyond a reasonable doubt https://en.m.wikipedia.org/wiki/United_States_v._Bankman-Fried Also Googling "sbf prove intent" (without quotes) didn't turn up anything very compelling, at least for the first handful of results, in my view.
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bern
I agree. And thank you for engaging. I'm genuinely impressed with your open-mindedness in reconsidering some aspects of a heated topic that your wider community has treated as an open and shut case and that everyone is very tired thinking about.
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Pat Myron
Skeptical. Sentencing considers intent, but even those ignorant of laws themselves are found guilty: https://en.wikipedia.org/wiki/Ignorantia_juris_non_excusat
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MichaelStJules
(EDITED) I didn't refer to ignorance of the law. The point is that if you don't know you took something without paying, it's not theft. Theft requires intent. https://www.law.cornell.edu/wex/theft A jury can find someone guilty of theft (or fraud) without adequate evidence of intent, but that would be a misapplication of the law and arguably wrongful conviction. If you find out later you took something without paying and make no attempt to return or repay or don't intend to do so, it might be theft, because then you intend to keep what you've taken. I don't know. If you're unable to pay it back for whatever reason already at the time of finding out (because of losses or spending), I don't know how that would be treated, but probably less harshly, and maybe just under civil law, with a debt repayment plan or forfeiture of future assets, not criminal conviction. Either way, fraud definitely requires intent.
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