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Evan R. Murphy31
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I'm surprised you were putting such high odds on it being a mistake at this point (even before the arrest). From my understanding (all public info), FTX's terms of service agreed that they would not touch customer funds. But then FTX loaned those funds to Alameda, who made risky bets with them.

IANAL but this seems to me like pretty clear case of fraud from FTX. I didn't think any of those aspects of the story were really disputed, but I have not been following the story as closely in the past week or so.

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See in context
by Markus Amalthea Magnuson
1 min read 32

62

CommunityFTX collapseSam Bankman-Fried
Frontpage

Confirmed by Sarah Emerson, a tech reporter at Forbes: https://twitter.com/SarahNEmerson/status/1602448748109512704 (Edit: Now also confirmed by NYT, CNBC, Bloomberg, Yahoo Finance, and others.)

Includes statement from the Attorney General of The Bahamas, transcribed below:

Statement from the Attorney General of The Bahamas Sen. Ryan Pinder KC on the arrest of Sam Bankman-Fried

On 12 December 2022, the Office of the Attorney General of The Bahamas is announcing the arrest by The Royal Bahamas Police Force of Sam Bankman-Fried ("SBF"), former CEO of FTX. SBF's arrest followed receipt of formal notification from the United States that it has filed criminal charges against SBF and is likely to request his extradition.

As a result of the notification received and the material provided therewith, it was deemed appropriate for the Attorney General to seek SBF's arrest and hold him in custody pursuant to our nation's Extradition Act.

At such time as a formal request for extradition is made, The Bahamas intends to process it promptly, pursuant to Bahamian law and its treaty obligations with the United States.

Responding to SBF's arrest, Prime Minister Davis stated, "The Bahamas and the United States have a shared interest in holding accountable all individuals associated with FTX who may have betrayed the public trust and broken the law. While the United States is pursuing criminal charges against SBF individually, The Bahamas will continue its own regulatory and criminal investigations into the collapse of FTX, with the continued cooperation of its law enforcement and regulatory partners in the United States and elsewhere."

December 12, 2022
Office of The Attorney General &
Ministry of Legal Affairs
Commonwealth of The Bahamas

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Deborah W.A. Foulkes26
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Full text of statement SBF planned to give to US House hearing (which the representative who submitted it for the record found completely disrespectful in tone):

https://www.forbes.com/sites/stevenehrlich/2022/12/13/exclusive-transcript-the-full-testimony-sbf-planned-to-give-to-congress/

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Jason2
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Thanks for sharing. He does not know how to stop digging his hole even deeper. I do not recall off the top of my head ever reading such a whiny, self-indulgent statement by a criminal defendant or defendant-to-be.

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blonergan13
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I find it disappointing that he tries to use EA as a shield (p 17, "As a believer in the Effective Altruism movement, my primary goal has never been personal enrichment; I'm motivated by a commitment to help bring happiness and alleviate suffering for others.") This is in the context of denying that he has billions of dollars stashed away. If he really cared about bringing happiness and alleviating suffering, why would he further tarnish the EA community's reputation by associating himself with it in testimony before Congress?

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Jason7
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He probably cares about those things less than he cares about minimizing the number of decades he spends in a modern dungeon known as a United States Penitentiary. And he thinks that painting himself as having had good motives at heart will curry favor with the sentencing judge he is likely to face. 

(By the way, I think his strategy will backfire -- it might have been a reasonable mitigation strategy if he had chosen to come clean almost immediately after the collapse. But -- assuming he is convicted -- when combined with his denials of misconduct, it will come across as fake piety that will not play well in front of most judges.)

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Ben Stewart1
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Yep. The only bit I'm qualified to assess is that he uses the phrase 'chalk full' instead of 'chock fill'. He should have read more books.

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Jason3
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That updates the probability that no lawyer reviewed this before he sent it to whoever he sent it to (someone in/at Congress?). I would hope that most of us would have caught that typo in a document of this nature . . . 

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Jason24
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The US Attorney's office for the Southern District of NY expects to move to unseal the indictment tomorrow morning per CNBC.

That was relatively fast -- wonder if they were worried about flight risk or extradition delays and knew they could add charges later. So when the indictment comes out, remember that USAO/SDNY can add to it.

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wayne21
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I think it's very very fast. A few possibilities: 

  1. Concerned he's a flight risk. 
  2. Overwhelmingly clear evidence, most likely in the form of a cooperating witness who can provide documents proving fraud, e.g., records showing Sam saying, "We're going to have to lie to our customers to cover our losses." 
  3. Concerned about additional harm he could cause, e.g., the mysterious withdrawals from FTX accounts shortly after the collapse. 

Of these 3, the last 2 seem most likely to me. Sam probably isn't a flight risk, given that he has deep connections in the United States. 

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Jason5
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Anyone whose Guidelines sentence would be de facto life -- and could easily be looking at 30+ years -- is a potential flight risk in my book.

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trevor1-2
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I don't think this line of investigation is as worth pursuing as you guys seem to think. It most likely had something to do with his congressional hearing tomorrow, which he intended to give remotely from the Bahamas but now might end up doing it while in custody in the US. 

"Not knowing or noticing some random fact which turns out to be important" is a very common mistake and is frequently made by professional forecasters and analysts.

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Jason22
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Unless SBF wants to waive his right to process, he has the right to a hearing in the Bahamas prior to being extradited. Seems rather unlikely that would happen in time for him to be in the U.S. tomorrow.

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trevor1-2
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Seems reasonably likely that the congressional hearing triggered the extradition through different means then, such as negotiations falling through and/or petty revenge, especially if he had big plans for it e.g. accusing Binance of wrongdoing and leverage was worth getting (even if the detainment was offshore instead of inside the US). Cancelling the hearing has the risk of looking bad for Congress. 

One way or another, it's clearly worth noting that the extradition happened the day before the date of his congressional hearing.

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HStencil4
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Rep. Waters’s statement on the arrest strikes me as compelling evidence against explanations in this vicinity.

https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=410026

I’m also inclined to trust the judgment of the attorneys on this thread about matters like this.

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trevor10
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I read the statement and all it says is that the hearing seems to be cancelled, which is explained both by my hearing-driven model and Jason's fraud driven model? I was arguing that the timing of the arrest has a causal relationship with the hearing, and therefore it isn't a good indicator for flight risk. He was arrested literally the day before the hearing. 

Congressional hearings are costly to cancel if they are scheduled in advance with this much public attention. I stand by my hypothesis that the arrest happened when it did due to the date of the hearing and the fact that SBF would have had a large public platform, and that made him a liability to a wide variety of influential people.

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wayne23
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This updates me significantly in favor of thinking there is fraud. The conviction rate for the feds is 90+%, and the SDNY has a particularly good reputation – probably the best of any US Atty office in the nation. 

It's also possible that SDNY has jumped the gun due to public pressure. But I'm doubtful the US Attorney would bring this case unless there's pretty clear evidence of fraud. The US Attorney in SDNY, Damian Williams, is someone who has extensive experience litigating securities cases and presumably has personally vetted the evidence, given the prominence of this case. 

Very sad if it's truly the case that this is fraud. 

I think I've gone from 70-30 to 50-50, for the probability of mistake vs fraud. 

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Evan R. Murphy31
31
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I'm surprised you were putting such high odds on it being a mistake at this point (even before the arrest). From my understanding (all public info), FTX's terms of service agreed that they would not touch customer funds. But then FTX loaned those funds to Alameda, who made risky bets with them.

IANAL but this seems to me like pretty clear case of fraud from FTX. I didn't think any of those aspects of the story were really disputed, but I have not been following the story as closely in the past week or so.

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anoncrypto11
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Likewise. At some point I had looked into using FTX for crypto. I didn't because it raised several red flags for me, but let me share my recollections about the historical ToS, fwiw:

Wayne, I see in another post you aren't sure what about its terms of service was violated. I can't pull up the historical ToS, and I'm not sure if they changed, but back when I looked into using it, I specifically looked for language that they were keeping the funds safe and not lending them out and I found that language. If the language somehow wasn't completely airtight, it was at least sure as hell deceptive, because I was specifically looking for it, carefully reading it, and believed I found it. I was not interested in any tokens providing interest, so it's also not right to (as per your post on another thread) suggest that investors should have known better because where did they think the interest was coming from. The tokens bearing interest were a separate product, as it were, and I don't even remember seeing anything about interest. Probably the majority of users were only looking for a place to transfer money to and buy bitcoin, nothing fancier like staking. I do recall coming across instructions to wire to Alameda and saying hell no and stopping right there. I only regret not making the connection between "red flag for me" -> "red flag for EA". I did not know about the EA connection until much later (or I might have trusted Alameda).

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K A2
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 Allegedly made risky bets.  I think there is very real possibility the money was just stolen and siphoned into the underworld

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Jason6
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How does the SEC complaint (and the criminal complaint, if unsealed before you read this) update your assessment?

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wayne16
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I read it. (It's here.) 

Doesn't really change my views that much. Maybe I'm 45 - 55 for mistake-fraud now, from 50-50. There's no smoking gun documents or communications in the complaint. It's possible they are hiding the ball, at this point. Perhaps they have a fragile witness who they don't want to expose to public scrutiny. (Caroline Ellison or one of the other high level executives seem like the most likely candidates.) But I don't see proof  beyond a reasonable doubt that this is fraud. 

The key thing to note is that, legally, Sam's subjective intent (and not whether customers were harmed or felt deceived)  is what ultimately matters. I think it also matters morally, though of course extreme negligence is immoral too. There are a lot of troubling circumstantial allegations made -- e.g., the fact that customer deposits were in some cases going directly into Alameda-controlled accounts, while Sam was promising folks that the two entities were separate and that customer accounts were segregated -- but unless the prosecution can prove beyond a reasonable doubt that Sam intentionally committed fraud, they should lose their case. (Does not mean they actually WILL lose their case, as in cases such as this, with so much public pressure, juries are quick to condemn even if the evidence is insufficient.) I can see an early-stage startup putting funds into the wrong bank account simply because it was convenient, and then forgetting about it later when it was convenient to forget about it. That's not fraud. That's negligence and incompetence. 

I still think the very fact that the feds filed charges is significant evidence that fraud was committed. But without hearing Sam's side of the story, it's really hard to say, from these relatively-barebones complaints, that there is clear evidence of fraud. Sam will likely have explanations for all the decisions made, e.g., the special coding for Alameda's margin ("We felt Alameda was a safe counterparty, and important to the business, and would have given the same treatment to any similarly-situated customer."). Until I hear that evidence -- or see CLEAR evidence of fraud --  it's hard to assess the relatively general allegations made in this complaint. 

An example of clear evidence of fraud would be something like this in the coplaint: "In August 2022, Bankman-Fried, realizing that Alameda's creditors were demanding more collateral, wrote to his team members: 'I don't care what the terms of service say, and I don't care what we promised investors and customers. Send the money to Alameda immediately, so we can solve their balance sheet problem. And don't tell anyone about this.' "

Instead this complaint has reasonable circumstantial evidence of guilt but nothing that, to me, leaps out as clear and convincing evidence of fraud. Of course, the prosecution will have much more time to develop their case. But if the complaint is all they have, I think they are going to have trouble winning this case. (I should add; the complaint is rarely all a prosecutor has, and I still think that SDNY probably would not have brought this case without something strong, e.g., a cooperating witness who can testify about agreements to lie to investors. Remembering the base rate of conviction, 90+%, is pretty important here.) 

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wayne8
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PS I'm curious. What was your take? I have a defendant bias, as someone who has done criminal defense work. Do you think I'm missing some smoking gun in this complaint that, at this point, shows that the prosecution has a very strong case? Fraud cases are very hard to prove, in my experience, even pursuant to the civil burden of proof. 

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Jason14
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I wouldn't expect a smoking gun to show up in either a SEC civil complaint or a criminal indictment. Many fraud cases are built on a number of events, the cumulative weight of which makes an innocent explanation implausible. And I think I -- and in general, jurors -- are more willing to infer state of mind from the circumstances than you seem to be.

I think the most significant paragraph in the SEC complaint is probably paragraph 41 in which SBF explicitly directs special treatment for Alameda. "On multiple occasions, Bankman-Fried directed FTX to increase the amount by which Alameda could maintain a negative balance in its account." That isn't consistent with an early design failure that everyone forgot about, or SBF being asleep at the switch / ignorant / negligent while things happened. It supports a finding of actual knowledge (and intent) that Alameda was eating into customer funds. 

But maybe more importantly, it supports a conclusion that the various representations made to investors and customers (directly and through the media) about the "arms-length" relationship between the two were false and SBF knew it. Those representations were almost certainly made with the intent to encourage investment and depositing. Sure sounds like a scheme to "obtain[] money or property by means of false or fraudulent pretenses, representations, or promises . . . ." 18 USC 1343 (wire fraud statute).

 FTX had no plausible claim of legal right to knowingly appropriate customer funds to allow another customer (much less an insider) to run a massive negative balance unless the customer opted-in to that. "The concept of fraud includes the act of embezzlement, which is the fraudulent appropriation to one's own use of the money or goods entrusted to one's own care by another." Carpenter v. United States, 484 U.S. 19, 27 (1987) (cleaned up). Finally, the timing, size, and low/non-documented nature of the "loans" to SBF while the ship was starting to sink is itself significant evidence of a purpose to defraud -- again, that doesn't really match the idea that SBF honestly thought he was making legitimate business decisions.

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wayne7
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These are very sound, reasonable points. Agreed that the allegation that he repeatedly raised Alameda's line of credit, and its ability to carry negative balances, seems troubling and inconsistent with his claims that, "I had no idea." But complaints always sound bad. Hard to know what to make of the story until we've heard the other side. 

I also would feel more convinced if they stated in the complaint something like the following, "When other employees raised concerns that turning off risk controls for Alameda would be unfair and fraudulent, Bankman-Fried responded, 'I don't care if it's dishonest. We need to make money.' " 

Complaints don't have to go into that level of detail, but given the public nature of this prosecution, if I were the USAtty, I would have chosen to do so. The other side will get this evidence eventually, anyways, because it's legally required discovery. And it will build more public confidence in the prosecution -- that it is a legitimate prosecution rather than mob mentality -- if they show that they have clear evidence of fraud. 

If they have evidence of this sort and are hiding the ball, the best explanation to me is that they are trying to soft pedal their witnesses, to prevent them from backing out of their commitment to provide testimony. 

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Lukas_Gloor7
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I also would feel more convinced if they stated in the complaint something like the following, "When other employees raised concerns that turning off risk controls for Alameda would be unfair and fraudulent, Bankman-Fried responded, 'I don't care if it's dishonest. We need to make money.' " 

Sure, I agree that things would be even more apparent if SBF were on the record explicitly condoning fraud. But that's easily avoidable, so any bad actor who isn't stupid will find workarounds to communicating in such a self-incriminating way. (From what we're hearing, there may have been self-deleting chats and emoji reactions instead of diligent record-keeping.)  It's common for liars to leave themselves plausible deniability wherever possible. That's why a shred of plausible deniability should be worth near to nothing when contrasted with a large amount of circumstantial incriminating evidence. I take moral offense at your slowness to update here: it seems that bad actors have it easy when people on the sidelines predominantly reason the way you do. We should invest at least as much effort steelmanning the case that someone is guilty than that they're innocent. If they're guilty, their potential/alleged victims usually vastly outnumber them. 

I get the point that ideal justice includes steelmanning the case that someone is innocent or was acting with negligence rather than fraud/malice. So if you're playing the role of a defender in the legal system, that's okay! But it should be flagged as such. If we're approaching this from the perspective of "what's likely to be the case?" then my worry is that you're systemically underestimating the probability of fraud/malice if you wait for explicit confessions/smoking guns with the person's fingerprints. It's somewhat rare for bad actors to leave these things laying around. Also, and perhaps more importantly, it's very rare that innocent people maneuver themselves in situations where they face really severe criminal charges and potentially a lifetime in jail. This holds even more so if the person in question seems really smart and competent whenever it isn't in their advantage to play dumb.

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Jason2
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Prosecutors are not supposed to litigate their criminal cases in the media (although they often do). Although you could put explosive stuff in the complaint without violating Model Rules 3.6 and 3.8, it does run the risk of tainting the jury pool. The accountability will come when SBF pleads or when SDNY has to put up or shut up at trial. I don't think there is a widespread (or even semi-common) belief that SDNY is overplaying its hand. So I would be more worried about handing SBF a potential appellate issue than about public confidence right now.

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Jason22
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SEC civil complaint here. "But from the start, Bankman-Fried improperly diverted customer
assets to [Alameda], and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations. " And then there are detailed factual allegations to support that.

Anyone who believed that FTX was fundamentally OK until mid-2022 should update their views in light of SEC's complaint. If their views about clawback risk were based on such an assumption, they should update their risk assessment as well.

Although I haven't thought much about it, my sense is that the news that much of the money was paid to Alameda's creditors more than ninety days before the bankruptcy filing is bad news for the FTX depositors.

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Substantive11
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The lawsuits/complaints by the SEC and the CFTC are very substantive and worth reading.

(Also like many legal complaints the quality and tightness of writing is excellent).

It is very likely Caroline Ellison and other insiders (Singh) are the source of this detailed information.

Also, see the Reuters story about codebase  changes by Singh.

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Constance Li14
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Is it just me or does anyone else feel like this is moving faster and more decisively than other white collar crimes?

I have a suspicion that it is escalating quickly due in large part to having so much public attention.

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Jason20
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I'm sure it is a factor. But Madoff was arrested two days after he confessed to his kids. Making incriminating statements to the media is likewise an excellent way to make the prosecutor's job in getting a grand jury indictment really easy.

One advantage of nabbing him early is that if he's willing to cooperate in getting assets back, the sooner he starts the more effective that will be. Plus, as with Madoff, there are some reasons to be concerned about him squirreling away money.

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