Some Comments on the Recent FTX TIME Article

Ben_West20 Mar 2023 17:36 UTC
296 points
38 commentsEA link

Background

  1. Alameda Research (AR) was a cryptocurrency hedge fund started in late 2017.

  2. In early 2018, approximately half the employees quit, including myself and Naia Bouscal, the main person mentioned in the TIME article. At the time, I had considered AR to have failed, and I think even the people who stayed would have agreed that it had not achieved what it had wanted to.

  3. Later in 2018, some of the remaining AR staff started working on a cryptocurrency exchange named FTX. FTX grew to become a multibillion-dollar company.

  4. In late 2022, FTX collapsed. It has since been alleged that FTX defrauded their investors by misrepresenting the relationship between AR and FTX,[1] and that this effectively led to them stealing customer deposits.[2]

  5. The recent TIME article doesn’t make a very precise argument; here is my attempt at steelmanning/​clarifying a major argument made in that article, which I will then respond to:

    1. Some EAs worked at AR before FTX started

    2. Even though those EAs (including myself) quit before FTX was founded and therefore could not have had any first-hand knowledge of this improper relationship between AR and FTX, they knew things (like information about Sam’s character) which would have enabled them to predict that something bad would happen[3]

    3. This information was passed on to “EA leaders”, who did not take enough preventative action and are therefore (partly) responsible for FTX’s collapse

Personal Background

I worked at Alameda Research (AR) for about three months in early 2018. I was not involved in stealing FTX customer funds, and hopefully people trust me about that claim, if only because I quit before FTX was founded.

To make my COI clear: I left the company I founded to join AR; doing so was very costly to me; AR crashed and burned within a few months of me joining; I blamed this crashing and burning largely on Sam.

People who know I had a bad experience at AR are sometimes surprised that I’m not on the “obviously Sam was obviously 100% evil” bandwagon. I’ve been wanting to write something but found it hard because there weren’t specific things I could react to, it was just some vague difference in vibes.

So I appreciate the TIME article sharing some specific things that “EA Leaders” allegedly knew which the author suggests should have caused them to predict FTX’s fraud.

My Experience at AR at a High Level

I thought Sam was a bad CEO. I think he literally never prepared for a single one-on-one we had, his habit of playing video games instead of talking to you was “quirky” when he was a billionaire but aggravating when he was my manager, and my recollection is that Alameda made less money in the time I was there than if it had just simply bought and held bitcoin.

But my opinion of Sam overall was more positive than the sense I get from the statements in the TIME article. (This is not very surprising, given that the TIME article consists of statements that were probably intentionally selected to be the worst possible thing the journalist could find someone to say about Sam.)

It’s hard to convey nuance in these posts, and I’m sure someone is going to interpret me as trying to defend Sam here. This is not what I’m trying to do, but I do think it’s worth trying to share my reflections to help others refine their models.

Adding my personal experience to supplement some statements from the article

But one of the people who did warn others about Bankman-Fried says that he openly wielded this power when challenged. “It was like, ‘I could destroy you,’” this person says. “Will and Holden would believe me over you. No one is going to believe you.”

I don’t want to speak for this person, but my own experience was pretty different. For example: Sam was fine with me telling prospective AR employees why I thought they shouldn’t join (and in fact I did do this),[4] and my severance agreement didn’t have any sort of non-disparagement clause. This comment says that none of the people who left had a non-disparagement clause, which seems like an obvious thing a person would do if they wanted to use force to prevent disparagement.[5]

Early Alameda executives also believed he had reneged on an equity arrangement that would have left Bankman-Fried with 40% control of the firm, according to a document reviewed by TIME.

I assume this is referring to an agreement between Sam and Tara, the cofounders of AR. My understanding of what happened is different, but someone told me that my understanding is incorrect. So I’m not sure what actually happened here, but I am 80%+ confident that the story is more complicated than the TIME article implies.

I can share what I do know about, which is my own equity arrangement:

  1. When I joined AR, Sam and I discussed an equity amount.

  2. I quit before any paperwork could be signed memorializing this though. (I was only at AR for about three months.)

  3. Obviously since no paperwork was signed, there was no clause which covered this scenario. Most startups have a one year vesting cliff, meaning that the employee loses 100% of their equity if they quit within the first year.

  4. I expect most startup CEOs would have said something like “hey, we didn’t actually agree to anything here, and even if we did it probably would have had a clause meaning that you don’t get any equity after quitting so soon, so I’m giving you nothing.”

  5. Instead, AR gave me a cash payment which was equal to the equity amount we informally agreed times the most recent company valuation (although the valuation of AR at the time was low).

  6. I considered this fair, maybe even more fair than what the average startup would have done.

“We didn’t know how much money we actually had. We didn’t have a clear accounting record of all the trades we’d done,” Bouscal says.

I agree that AR had bad accounting as a startup, and I agree with the implication that it was possible to predict that this would be correlated with AR/​FTX having bad accounting as a mature company — I think this is a big area where I plausibly could have made a better prediction.

That being said, I still feel confused and surprised about how bad FTX’s accounting actually was. Sam’s reports make it seem like they just were not tracking asset values at all? And somehow they were doing this while having audited financials, passing due diligence from major investors, etc.? And Sam was supposedly a great fundraiser but was circulating a balance sheet with a $8B line item for “hidden poorly labeled account”? I would find it pretty helpful for someone to explain what actually happened here because this violates my models of how the world works.

(One obvious explanation is that people often cover up fraud by claiming it was simply incompetence, and maybe FTX is exaggerating its level of accounting incompetence for this reason. I don’t fully buy this story though.[6])

Next Steps

As mentioned, I had and still have a lot of negative feelings about Sam. But at least on a couple specific points, my experience was different from the source(s) of this article in a way that paints a less clear story of Sam’s character.

It might turn out that people were aware of stronger warning signs than those listed in the TIME article. It might also be the case that individuals could be better at predicting risk. But even if those things could have theoretically worked in the FTX case, protecting ourselves solely through better noticing “warning signs” feels fragile.

Instead, I would prefer due diligence processes which are not entirely reliant upon warning signs being triggered and evaluated until something like certainty is achieved.

In a future post, I would like to describe examples of due diligence processes that run “by default” and are less reliant upon warning signs being triggered.

Note: these are my ideas, not my employer’s. There are a bunch of people who I’ve talked about these ideas with and I am grateful to all of them, but special thanks on this post to Lizka Vaintrob, Jonas Vollmer, and Lacey Walker.

  1. ^

    There are some additional charges, but my understanding is that the biggest ones stem from this misrepresentation.

  2. ^

    I’ve mostly seen this claim in popular media where it isn’t very precisely defined, but I think the precise version of the claim is that allowing AR to maintain a negative balance effectively let them use customer deposits as collateral, which is effectively stealing them. I’m not entirely sure though.

  3. ^

    Note that there are valid additional criticisms to be made here, notably that FTX leadership were involved in EA. But I don’t think the article is making these criticisms, and I want to keep this post targeted to this particular article.

  4. ^

    Or at least I’m not aware of any way I’ve suffered retribution as a result. Presumably he wasn’t super thrilled with me telling his prospective employees not to join.

  5. ^

    Though obviously there are reasons you still might not have the clause even if you wanted to prevent disparagement, e.g. you thought having the clause would itself be a cause for disparagement.

  6. ^

    For example, FTX’s new CEO has slammed their accounting practices, and I don’t understand why he would be incentivized to lie here

Ben_West20 Mar 2023 17:36 UTC
296 points
38 commentsEA link