Two possible legal consequences of this information I can think of off the top of my head (please consult your lawyer about your individual legal situation!):
Some people may be counting on a limited protection from fraudulent-conveyance actions for certain charitable contributions made by natural persons. See 11 USC 548(a)(2). The allegations would make FTX closer to something like a Ponzi scheme, and the (a)(2) exception does not even potentially apply where the obligation or transfer was made with “actual intent to hinder, delay, or defraud” a creditor. One might think that straight-out stealing money out of customer accounts and then immediately turning it over to a charity would count.
Certain defenses are available to some transferees who act(ed) in good faith. E.g., 11 USC 550(b)(1) protects certain non-initial transferees who take “for value, . . . in good faith, and without knowledge of the voidability of the transfer avoided.” Although one could argue about whether a person or entity already had enough notice about the possibly embezzled nature of the funds, it would seem difficult to establish good faith / without knowledge for any transfers made after senior government officials at SDNY, SEC, and CFTC have made this accusation so clearly.
Edit to add: It increases the likelihood that everyone involved was “insolvent” when all relevant transfers were made, or were “engaged in business or a transaction . . . for which any property remaining with the debtor was an unreasonably small capital” for purposes of 11 USC 548(a)(1)(B). That satisfies one of the two major requirements for fraudulent conveyance.
I already thought this was highly probable, so I didn’t think to add it at first. (Given FTX’s professed business model, I would characterize having assets that were less than 100% of customer deposits as an unreasonably small capital, but maybe that’s just me . . .).
Certainly consult an attorney if you are holding unspent FTX grant funds.
The above answer is focused only on bankruptcy issues. That’s almost water under the bridge at this point: it is a virtual certainty that all FTX grant funds can be clawed back by the bankruptcy estate. That’s not even a legitimate dispute any more. It’s just a matter of whether your particular grant is small enough that you might fly under the radar (unlikely, and if that’s the thin reed you are relying on then you are as unwise as an FTX investor).
The above answer overlooks that—since a federal criminal indictment has now issued—those holding unspent FTX grant funds are now holding known stolen proceeds. This is now the criminal law realm, not the bankruptcy realm. If someone robs a jewelry store and then gives you a stolen necklace, once you learn that the necklace is stolen property you do not have the right to keep it. You must return it to the jewelry store. If you otherwise dispose of it, after learning that it was stolen, you do so at your peril. Potential criminal peril.
People now know that all FTX funds were, and are, stolen. At this point there is no genuine question about what to do with unspent FTX funds.
It is remarkable (from someone outside the EA community) the self-serving denial and rationalization that is going on about what to do with unspent FTX grant funds. There is only one lawful (and ethical) answer.
Can you cite a criminal prosecution under these circumstances—a scammer converts client funds and donates them to an unknowing charity, which does not return them on its own initiative? I can think of a counterexample—Minnesota retroactively changed its fraudulent conveyance law to protect certain charities who had received donations from Ponzi scammer Tom Peters. That wouldn’t have accomplished anything of note if retention of those funds was a crime. Somewhat similar discussion here with the American Cancer Society successfully defending a clawback in a Ponzi-like case. Do you think their lawyers just missed that these charities were holding on to stolen funds, and the federal courts that decided those cases couldn’t be bothered to mention that in passing?
There has also been zero discussion of potential criminal consequences in any statement I’ve read by a lawyer in the press about this matter. Notably, if the USA for SDNY viewed the situation the way you do, he would have presumably done more than “ask that you work with us . . . ” And the world’s most powerful person with a law degree has been mum so far on whether he will return $5.2MM in contributions from SBF.
Two possible legal consequences of this information I can think of off the top of my head (please consult your lawyer about your individual legal situation!):
Some people may be counting on a limited protection from fraudulent-conveyance actions for certain charitable contributions made by natural persons. See 11 USC 548(a)(2). The allegations would make FTX closer to something like a Ponzi scheme, and the (a)(2) exception does not even potentially apply where the obligation or transfer was made with “actual intent to hinder, delay, or defraud” a creditor. One might think that straight-out stealing money out of customer accounts and then immediately turning it over to a charity would count.
Certain defenses are available to some transferees who act(ed) in good faith. E.g., 11 USC 550(b)(1) protects certain non-initial transferees who take “for value, . . . in good faith, and without knowledge of the voidability of the transfer avoided.” Although one could argue about whether a person or entity already had enough notice about the possibly embezzled nature of the funds, it would seem difficult to establish good faith / without knowledge for any transfers made after senior government officials at SDNY, SEC, and CFTC have made this accusation so clearly.
Edit to add: It increases the likelihood that everyone involved was “insolvent” when all relevant transfers were made, or were “engaged in business or a transaction . . . for which any property remaining with the debtor was an unreasonably small capital” for purposes of 11 USC 548(a)(1)(B). That satisfies one of the two major requirements for fraudulent conveyance.
I already thought this was highly probable, so I didn’t think to add it at first. (Given FTX’s professed business model, I would characterize having assets that were less than 100% of customer deposits as an unreasonably small capital, but maybe that’s just me . . .).
Certainly consult an attorney if you are holding unspent FTX grant funds.
The above answer is focused only on bankruptcy issues. That’s almost water under the bridge at this point: it is a virtual certainty that all FTX grant funds can be clawed back by the bankruptcy estate. That’s not even a legitimate dispute any more. It’s just a matter of whether your particular grant is small enough that you might fly under the radar (unlikely, and if that’s the thin reed you are relying on then you are as unwise as an FTX investor).
The above answer overlooks that—since a federal criminal indictment has now issued—those holding unspent FTX grant funds are now holding known stolen proceeds. This is now the criminal law realm, not the bankruptcy realm. If someone robs a jewelry store and then gives you a stolen necklace, once you learn that the necklace is stolen property you do not have the right to keep it. You must return it to the jewelry store. If you otherwise dispose of it, after learning that it was stolen, you do so at your peril. Potential criminal peril.
People now know that all FTX funds were, and are, stolen. At this point there is no genuine question about what to do with unspent FTX funds.
It is remarkable (from someone outside the EA community) the self-serving denial and rationalization that is going on about what to do with unspent FTX grant funds. There is only one lawful (and ethical) answer.
Can you cite a criminal prosecution under these circumstances—a scammer converts client funds and donates them to an unknowing charity, which does not return them on its own initiative? I can think of a counterexample—Minnesota retroactively changed its fraudulent conveyance law to protect certain charities who had received donations from Ponzi scammer Tom Peters. That wouldn’t have accomplished anything of note if retention of those funds was a crime. Somewhat similar discussion here with the American Cancer Society successfully defending a clawback in a Ponzi-like case. Do you think their lawyers just missed that these charities were holding on to stolen funds, and the federal courts that decided those cases couldn’t be bothered to mention that in passing?
There has also been zero discussion of potential criminal consequences in any statement I’ve read by a lawyer in the press about this matter. Notably, if the USA for SDNY viewed the situation the way you do, he would have presumably done more than “ask that you work with us . . . ” And the world’s most powerful person with a law degree has been mum so far on whether he will return $5.2MM in contributions from SBF.