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.
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.