The FTX and Alameda estates have filed an adversary complaint against the FTX Foundation, SBF, Ross Rheingans-Yoo, Nick Beckstead, and some biosciences firms, available here. I should emphasize that anyone can sue over anything, and allege anything in a complaint (although I take complaints signed by Sullivan & Cromwell attorneys significantly more seriously than I take the median complaint). I would caution against drawing any adverse inferences from a defendant’s silence in response to the complaint.
The complaint concerns a $3.25MM “philantrophic gift” made to a biosciences firm (PLS), and almost $70MM in non-donation payments (investments, advance royalties, etc.) -- most of which were also to PLS. The only count against Beckstead relates to the donation. The non-donation payments were associated with Latona, which according to the complaint “purports to be a non-profit, limited liability company organized under the laws of the Bahamas[,] incorporated in May 2022 for the purported purpose of investing in life sciences companies [which] held itself out as being part of the FTX Foundation.”
The complaint does not allege that either Beckstead or Rheingans-Yoo knew of the fraud at the core of FTX and Alameda.
It does, however, allege (para. 46) that the “transfers were nominally made on behalf of the FTX Foundation and Latona, but actually were made for the benefit of Bankman-Fried.” This is a weak spot in the complaint for me. There’s a quote from SBF about needing to do some biosecurity work for PR and political reasons (para. 47), but corporations do charitable stuff for PR and political reasons all the time. There are quotations about wanting to de-emphasize the profit motive / potential in public communications (para. 49-50), but if the profits flowed to a non-profit it’s unclear how that would personally enrich SBF.
Quoting Beckstead, the complaint alleges that the investments were “ill-advised and not well-evaluated” (para. 51). It further alleges that there was no, or very little due dilligence (para. 51), such as a lack of any valuation analysis and in most cases lack of access to a data room. As a result, Latona “often paid far more than fair or reasonably equivalent value for the investments” (para. 52). As for the $3.25MM gift, it was “was made in a similarly slapdash fashion” as the Foundation agreed to it without even knowing whether the recipient was a non-profit (para. 53). There are also allegations about how that gift came to be (para. 53-64).
Paragraph 68 is troubling in terms of Latona’s lack of internal controls:
On May 23, 2022, Rheingans-Yoo sent a Slack message to the Head of Operations for FTX Ventures, asking her to wire $50 million to PLS on behalf of Latona, because “Latona doesn’t have a bank account yet, and we’d like to move these funds as soon as possible.” After the Head of Operations inquired why they were wiring $50 million when the SAFE agreement was only for $35 million, Rheingans-Yoo said there was a “separate purchase agreement [that] had a $15mln cash advance.” When the Head of Operations asked for the purchase agreement for $15 million, Rheingans-Yoo replied, “I have an email, no formal agreement,” but “if that’s not sufficient, we can send the 35 first and get the purchase more formally papered.
There apparently wasn’t an attempt to formally paper the $15MM until September, and that paper was woefully vague and inadequate if the complaint is credible (para. 70). Likewise, Rheingans-Yoo allegedly offered to send over $3MM to another firm, Lumen, “on a handshake basis” without any paperwork “while we hammer out the full details” (para. 75). However, the funding was not actually sent until an agreement was signed (para. 78-79). A third investment was made on Rheingans-Yoo’s recommendation despite Beckstead describing it as “unattractive” for various reasons (para. 82-84).
The “donate, then invest” approach seemed to also be in play with a fourth firm called Riboscience. Paragraph 93 doesn’t sound great: “On June 29, 2022, Glenn emailed Rheingans-Yoo that “sufficient time ha[d] passed since the (most generous) donation to the Glenn Labs, that we can now proceed with your desired investment in Riboscience.”
Counts One to Five are similar to what I would expect most clawback complaints would look like. Note that they do not allege any misconduct by the recipients as part of the cause of action, as no such misconduct is necessary for a fraudulent conveyance action. You can also see the bankruptcy power to reach beyond the initial transferee to subsequent transferees under 11 USC 550 at play here. Most of the prefactory material is doubtless there in an attempt to cut off a defense from the defendant biosciences firms that they gave something of reasonably equivalent value in exchange for the investments.
In Count Eleven, the complaint alleges that “Rheingans-Yoo knew that the transactions with the Lifesciences Defendants did not provide and had virtually no prospect of providing Alameda with reasonably equivalent value, and that Bankman-Fried personally benefited from the transactions. Rheingans-Yoo thus knowingly assisted in and/or failed to prevent Bankman-Fried’s breaches of fiduciary duty to Alameda.” (para. 169). This allegedly harmed Alameda to the tune of $68.3MM. Elsewhere, the complaint alleges that ” [u]pon information and belief, Bankman-Fried and Rheingans-Yoo intended to benefit personally from any profits generated by any of these companies if they turned out to be successful and/or developed a successful product.” (para. 5). However, “upon information and belief” is lawyer-speak for “we’re speculating, or at least don’t have a clear factual basis for this allegation yet.”
In Count Twelve, the complaint alleges that “Beckstead and Rheingans-Yoo knew that the transfer to PLS funded by FTX did not provide and had virtually no prospect of providing FTX with reasonably equivalent value, and that Bankman-Fried personally benefited from the transaction. Beckstead and Rheingans-Yoo thus aided and abetted Bankman-Fried’s breaches of fiduciary duty to FTX.” (para. 174). This allegedly harmed FTX to the tune of $3.25MM.
In the end, the complaint doesn’t exactly make me think highly of anyone involved with FTX or the FTX Foundation. However, from my non-specialist eyes, I’m not seeing a slam dunk case for critical assertions about Beckstead and Rheingans-Yoo’s knowledge in paras. 169 and 174.
Just want to say I appreciate your commentary over the past 9 months. Having someone with legal expertise and (what seems to me) a pretty even-handed and sensible perspective is a really valuable contribution.
Thanks for sharing this; I was originally confused by the complaint because I didn’t understand why a nonprofit making unprofitable investments would be cause for concern, but it sounds like your speculation is that the stuff about these being bad investments is included just to prevent the life sciences companies from claiming that the equity Latona received was of reasonably equivalent value and therefore they don’t have to give the money back?
That’s the main purpose of those allegations on my read.
A possible secondary purpose could be to imply something like: these ‘investments’ and ‘donations’ made so little sense that it’s implausible that they were motivated by legitimate charitable purposes. Therefore, the individual defendants must have known (or clearly should have known) there was something nefarious afoot like personally benefitting SBF.
That could be enough to get past a motion to dismiss, where the bar is fairly low (at that stage, the court basically has to accept all factual allegations as pled, and draw all plausible inferences in the plaintiff’s favor) and haul the defendants in for depositions under oath. As I mentioned, I found the complaint to be not particularly convincing in its characterization of the individual defendants’ knowledge—but to be fair to Sullivan & Cromwell, it’s not reasonable to expect a particularly strong case on alleged improper purpose before conducting depositions.
Do you have a take on whether we should read things into them not alleging that Beckstead/RY knew about FTX’s improper use of customer funds?
On the one hand: I assume that if they did have evidence here it would make their case much much stronger, and based on your comments about “upon information and belief” it sounds like they don’t need a very high evidentiary standard to make such an allegation. But on the other: maybe there’s some complex legal strategy I don’t understand which would make them not include this allegation even if they did have evidence.
The complaint only needs to be strong enough to get past a motion to dismiss for now, and it is fairly easy to amend a complaint if need be. There is some benefit to putting your best foot forward, but there are a number of plausible reasons one might not allege knowledge of fraud against depositors despite some evidence. Those reasons follow.
I should note that I personally thought—and still think—it very unlikely that any FTXFF staff knew about the customer fraud. Keeping one’s conspiracy information on a strict need-to-know basis is Being a Fraudster 101, and I can think of no reason why SBF and his co-conspirators would have concluded anyone at FTXFF had a need to know.
Unless they are much richer than charitable foundation officials tend to be, Beckstead and RY are very likely not the primary targets here. There are much bigger fish in this lawsuit and in the pond as a whole. Moreover, as a practical matter, I doubt the recovery against Beckstead and RY would be appreciably higher as a result of proving knowledge about the misuse of customer funds than “merely” proving an allegation that they aided and abetted SBF fleecing FTX (and for RY, Alameda). So the upside of making an allegation of customer-fraud knowledge seems more limited to me than might first appear.
Alleging that someone was basically in on the customer fraud[1]makes that the main story of the complaint and could take the narrative focus away from your primary targets—the biotech firms that actually have (or had) the money.
Judges are human. If one were going to allege that specific individuals were in on the fraud (when the judge knows that allegation wasn’t necessary to make in the complaint), they had best be fairly confident they are going to be able to connect on that allegation. Failure to do so would risk one’s credibility with a judge who will decide billions of dollars worth of other disputes in your case.
My guess is that this complaint has received priority because startups can burn money fast (and may be particularly incentivized to burn fast if they know a clawback suit, which they cannot withstand without some big risks paying off, is coming soon). It’s unlikely that fully investigating Beckstead and RY has been much of a priority.
If substantial evidence existed that a particular person at FTX or FTXFF knew about the fraud, that person would presumably be a significant criminal target. I believe FTX is cooperating with DOJ, and its lawyers would know even without DOJ telling them they should not unnecessarily disclose information that suggests someone is a criminal target. The judge knows the unstated rules too, and wouldn’t hold it against FTX’s lawyers for slow-playing information to avoid compromising a criminal investigation (but would probably be at least annoyed if they compromised one).
This is a weird case in which the plaintiffs probably have much more access to Beckstead and RY’s records than an average plaintiff would have at this stage, maybe more access than Beckstead and RY themselves have! They will need to turn over those records in discovery. However, I could see an argument for not giving defendants a roadmap as to what the plaintiffs already know, in order to potentially preserve some traps for the discovery process. Giving the defendants a roadmap could help them prepare for their interrogatories and depositions.
The FTX and Alameda estates have filed an adversary complaint against the FTX Foundation, SBF, Ross Rheingans-Yoo, Nick Beckstead, and some biosciences firms, available here. I should emphasize that anyone can sue over anything, and allege anything in a complaint (although I take complaints signed by Sullivan & Cromwell attorneys significantly more seriously than I take the median complaint). I would caution against drawing any adverse inferences from a defendant’s silence in response to the complaint.
The complaint concerns a $3.25MM “philantrophic gift” made to a biosciences firm (PLS), and almost $70MM in non-donation payments (investments, advance royalties, etc.) -- most of which were also to PLS. The only count against Beckstead relates to the donation. The non-donation payments were associated with Latona, which according to the complaint “purports to be a non-profit, limited liability company organized under the laws of the Bahamas[,] incorporated in May 2022 for the purported purpose of investing in life sciences companies [which] held itself out as being part of the FTX Foundation.”
The complaint does not allege that either Beckstead or Rheingans-Yoo knew of the fraud at the core of FTX and Alameda.
It does, however, allege (para. 46) that the “transfers were nominally made on behalf of the
FTX Foundation and Latona, but actually were made for the benefit of Bankman-Fried.” This is a weak spot in the complaint for me. There’s a quote from SBF about needing to do some biosecurity work for PR and political reasons (para. 47), but corporations do charitable stuff for PR and political reasons all the time. There are quotations about wanting to de-emphasize the profit motive / potential in public communications (para. 49-50), but if the profits flowed to a non-profit it’s unclear how that would personally enrich SBF.
Quoting Beckstead, the complaint alleges that the investments were “ill-advised and not well-evaluated” (para. 51). It further alleges that there was no, or very little due dilligence (para. 51), such as a lack of any valuation analysis and in most cases lack of access to a data room. As a result, Latona “often paid far more than fair or reasonably equivalent value for the
investments” (para. 52). As for the $3.25MM gift, it was “was made in a similarly slapdash fashion” as the Foundation agreed to it without even knowing whether the recipient was a non-profit (para. 53). There are also allegations about how that gift came to be (para. 53-64).
Paragraph 68 is troubling in terms of Latona’s lack of internal controls:
On May 23, 2022, Rheingans-Yoo sent a Slack message to the Head of
Operations for FTX Ventures, asking her to wire $50 million to PLS on behalf of Latona,
because “Latona doesn’t have a bank account yet, and we’d like to move these funds as soon as possible.” After the Head of Operations inquired why they were wiring $50 million when the SAFE agreement was only for $35 million, Rheingans-Yoo said there was a “separate purchase agreement [that] had a $15mln cash advance.” When the Head of Operations asked for the purchase agreement for $15 million, Rheingans-Yoo replied, “I have an email, no formal agreement,” but “if that’s not sufficient, we can send the 35 first and get the purchase more formally papered.
There apparently wasn’t an attempt to formally paper the $15MM until September, and that paper was woefully vague and inadequate if the complaint is credible (para. 70). Likewise, Rheingans-Yoo allegedly offered to send over $3MM to another firm, Lumen, “on a handshake basis” without any paperwork “while we hammer out the full details” (para. 75). However, the funding was not actually sent until an agreement was signed (para. 78-79). A third investment was made on Rheingans-Yoo’s recommendation despite Beckstead describing it as “unattractive” for various reasons (para. 82-84).
The “donate, then invest” approach seemed to also be in play with a fourth firm called Riboscience. Paragraph 93 doesn’t sound great: “On June 29, 2022, Glenn emailed Rheingans-Yoo that “sufficient time ha[d] passed since the (most generous) donation to the Glenn Labs, that we can now proceed with your desired investment in Riboscience.”
Counts One to Five are similar to what I would expect most clawback complaints would look like. Note that they do not allege any misconduct by the recipients as part of the cause of action, as no such misconduct is necessary for a fraudulent conveyance action. You can also see the bankruptcy power to reach beyond the initial transferee to subsequent transferees under 11 USC 550 at play here. Most of the prefactory material is doubtless there in an attempt to cut off a defense from the defendant biosciences firms that they gave something of reasonably equivalent value in exchange for the investments.
In Count Eleven, the complaint alleges that “Rheingans-Yoo knew that the transactions with the Lifesciences Defendants did not provide and had virtually no prospect of providing Alameda with reasonably equivalent value, and that Bankman-Fried personally benefited from the transactions. Rheingans-Yoo thus knowingly assisted in and/or failed to prevent Bankman-Fried’s breaches of fiduciary duty to Alameda.” (para. 169). This allegedly harmed Alameda to the tune of $68.3MM. Elsewhere, the complaint alleges that ” [u]pon information and belief, Bankman-Fried and Rheingans-Yoo intended to benefit personally from any profits generated by any of
these companies if they turned out to be successful and/or developed a successful product.” (para. 5). However, “upon information and belief” is lawyer-speak for “we’re speculating, or at least don’t have a clear factual basis for this allegation yet.”
In Count Twelve, the complaint alleges that “Beckstead and Rheingans-Yoo knew that the transfer to PLS funded by FTX did not provide and had virtually no prospect of providing FTX with reasonably equivalent value, and that Bankman-Fried personally benefited from the transaction. Beckstead and Rheingans-Yoo thus aided and abetted Bankman-Fried’s breaches of fiduciary duty to FTX.” (para. 174). This allegedly harmed FTX to the tune of $3.25MM.
In the end, the complaint doesn’t exactly make me think highly of anyone involved with FTX or the FTX Foundation. However, from my non-specialist eyes, I’m not seeing a slam dunk case for critical assertions about Beckstead and Rheingans-Yoo’s knowledge in paras. 169 and 174.
Just want to say I appreciate your commentary over the past 9 months. Having someone with legal expertise and (what seems to me) a pretty even-handed and sensible perspective is a really valuable contribution.
Thanks for sharing this; I was originally confused by the complaint because I didn’t understand why a nonprofit making unprofitable investments would be cause for concern, but it sounds like your speculation is that the stuff about these being bad investments is included just to prevent the life sciences companies from claiming that the equity Latona received was of reasonably equivalent value and therefore they don’t have to give the money back?
That’s the main purpose of those allegations on my read.
A possible secondary purpose could be to imply something like: these ‘investments’ and ‘donations’ made so little sense that it’s implausible that they were motivated by legitimate charitable purposes. Therefore, the individual defendants must have known (or clearly should have known) there was something nefarious afoot like personally benefitting SBF.
That could be enough to get past a motion to dismiss, where the bar is fairly low (at that stage, the court basically has to accept all factual allegations as pled, and draw all plausible inferences in the plaintiff’s favor) and haul the defendants in for depositions under oath. As I mentioned, I found the complaint to be not particularly convincing in its characterization of the individual defendants’ knowledge—but to be fair to Sullivan & Cromwell, it’s not reasonable to expect a particularly strong case on alleged improper purpose before conducting depositions.
Do you have a take on whether we should read things into them not alleging that Beckstead/RY knew about FTX’s improper use of customer funds?
On the one hand: I assume that if they did have evidence here it would make their case much much stronger, and based on your comments about “upon information and belief” it sounds like they don’t need a very high evidentiary standard to make such an allegation. But on the other: maybe there’s some complex legal strategy I don’t understand which would make them not include this allegation even if they did have evidence.
I wouldn’t read very much into it.
The complaint only needs to be strong enough to get past a motion to dismiss for now, and it is fairly easy to amend a complaint if need be. There is some benefit to putting your best foot forward, but there are a number of plausible reasons one might not allege knowledge of fraud against depositors despite some evidence. Those reasons follow.
I should note that I personally thought—and still think—it very unlikely that any FTXFF staff knew about the customer fraud. Keeping one’s conspiracy information on a strict need-to-know basis is Being a Fraudster 101, and I can think of no reason why SBF and his co-conspirators would have concluded anyone at FTXFF had a need to know.
Unless they are much richer than charitable foundation officials tend to be, Beckstead and RY are very likely not the primary targets here. There are much bigger fish in this lawsuit and in the pond as a whole. Moreover, as a practical matter, I doubt the recovery against Beckstead and RY would be appreciably higher as a result of proving knowledge about the misuse of customer funds than “merely” proving an allegation that they aided and abetted SBF fleecing FTX (and for RY, Alameda). So the upside of making an allegation of customer-fraud knowledge seems more limited to me than might first appear.
Alleging that someone was basically in on the customer fraud[1]makes that the main story of the complaint and could take the narrative focus away from your primary targets—the biotech firms that actually have (or had) the money.
Judges are human. If one were going to allege that specific individuals were in on the fraud (when the judge knows that allegation wasn’t necessary to make in the complaint), they had best be fairly confident they are going to be able to connect on that allegation. Failure to do so would risk one’s credibility with a judge who will decide billions of dollars worth of other disputes in your case.
My guess is that this complaint has received priority because startups can burn money fast (and may be particularly incentivized to burn fast if they know a clawback suit, which they cannot withstand without some big risks paying off, is coming soon). It’s unlikely that fully investigating Beckstead and RY has been much of a priority.
If substantial evidence existed that a particular person at FTX or FTXFF knew about the fraud, that person would presumably be a significant criminal target. I believe FTX is cooperating with DOJ, and its lawyers would know even without DOJ telling them they should not unnecessarily disclose information that suggests someone is a criminal target. The judge knows the unstated rules too, and wouldn’t hold it against FTX’s lawyers for slow-playing information to avoid compromising a criminal investigation (but would probably be at least annoyed if they compromised one).
This is a weird case in which the plaintiffs probably have much more access to Beckstead and RY’s records than an average plaintiff would have at this stage, maybe more access than Beckstead and RY themselves have! They will need to turn over those records in discovery. However, I could see an argument for not giving defendants a roadmap as to what the plaintiffs already know, in order to potentially preserve some traps for the discovery process. Giving the defendants a roadmap could help them prepare for their interrogatories and depositions.
I would characterize directing the expenditure of FTX or Alameda funds, with knowledge of the underlying depositor fraud, as being “in on it.”
Thanks! This is helpful.