As for an ethical answer, I think it strengthens the argument that many (probably not all!) organizations have been unjustly enriched and need to return some money, even if it has already been “spent.” I propose a presumptive guidepost that each grantee has an obligation to return money equal to the benefit it derived from the ill-gotten funds. I don’t think “we spent it” is necessarily a sufficient ethical defense, but the calculus will depend on the individual grantee’s situation.
Let’s take “DonateWisely” as our first hypothetical—I am basing this off of an organization that I don’t think has any significant exposure but for which the concept would be easy to understand. DonateWisely received $125MM from FTX. As a result, it lowered its funding bar from 10 utilions per dollar to 8 utilions per dollar, and the marginal effect of the extra $125MM was that a project at 8 utilons got funded. So DonateWisely’s charitable mission has been unjustly enriched to the tune of 1 billion utilons.
Absent special circumstances, it now needs to disgorge itself of 1 billion utilons to restore itself to the financial state it would be in but for its acceptance of FTX money. But the funding bar is now back to 10 utilons because of the lower amount of funding available to DonateWisely. Thus, disgorgement requires a return of at least $100MM to disgorge 1 billion utilons. (I am not expressing an opinion in this post about whether DonateWisely should return $125MM; the point of this exercise is to set a floor for the principle that the organization should not retain any benefit from the ill-gotten funds, a floor that accounts for certain reliance interests.)
On the other side of the spectrum, we have Jane Smith, an individual who received a $50,000 research grant and actually performed the research before learning of the fraud. But for FTX funding, Jane would have gotten a job at Google at which she would have earned more than $50,000. Jane has not been unjustly enriched at all. (This will generally be the analysis for all employees, vendors, etc. of grantees—they do not need to feel unjustly enriched.)
I can see two adjustments people may wish to make that I would not generally consider:
The grantee might have gotten other funding but for FTX. This is speculative. To the extent this is based on an assumption that other funders would have spent more in this space but for FTX, those funders can now demonstrate that by choosing to backfill money for FTX grantees. To the extent a grantee believes that another funder (AF) would have funded them instead of one of AF’s actual grantees, I think the grantee is stuck with their choice of funder. In that counterfactual world, someone else got money they would not have received but for FTX’s activity—but there’s no way to identify them or persuade them to cough up some repayments. So there is no practical way to offload the FTX grantee’s ethical burden onto organizations which received grants from other funders. Of course, if AF-funded organizations wish to share in the pain, that would be ethically salutary but not obligatory.
The grantee has probably suffered non-financial damages like reputational loss, stress, disruption, etc. But no one is getting compensated for these sorts of damages (which the depositors have as well), and I think they have to fall where they lie. Otherwise, the grantee is claiming a right to keep some of the benefit of the depositor’s funds to offset damages caused by FTX’s misconduct. The depositors didn’t compel anyone to take FTX money, and the partial relief they will receive should not be further diminished by shielding grantees from the indirect costs of their decision to take money from FTX.
That is not intended as a criticism of grantees that took money from FTX—at least most of whom were innocent and non-negligent. Counterparty risk sucks, and there is a lot of unfair pain that must be distributed somehow. In my opinion, it’s not appropriate to ask the depositors to suffer more to cover indirect harms to the grantee attributable to the grantee’s choice of counterparty.
As for an ethical answer, I think it strengthens the argument that many (probably not all!) organizations have been unjustly enriched and need to return some money, even if it has already been “spent.” I propose a presumptive guidepost that each grantee has an obligation to return money equal to the benefit it derived from the ill-gotten funds. I don’t think “we spent it” is necessarily a sufficient ethical defense, but the calculus will depend on the individual grantee’s situation.
Let’s take “DonateWisely” as our first hypothetical—I am basing this off of an organization that I don’t think has any significant exposure but for which the concept would be easy to understand. DonateWisely received $125MM from FTX. As a result, it lowered its funding bar from 10 utilions per dollar to 8 utilions per dollar, and the marginal effect of the extra $125MM was that a project at 8 utilons got funded. So DonateWisely’s charitable mission has been unjustly enriched to the tune of 1 billion utilons.
Absent special circumstances, it now needs to disgorge itself of 1 billion utilons to restore itself to the financial state it would be in but for its acceptance of FTX money. But the funding bar is now back to 10 utilons because of the lower amount of funding available to DonateWisely. Thus, disgorgement requires a return of at least $100MM to disgorge 1 billion utilons. (I am not expressing an opinion in this post about whether DonateWisely should return $125MM; the point of this exercise is to set a floor for the principle that the organization should not retain any benefit from the ill-gotten funds, a floor that accounts for certain reliance interests.)
On the other side of the spectrum, we have Jane Smith, an individual who received a $50,000 research grant and actually performed the research before learning of the fraud. But for FTX funding, Jane would have gotten a job at Google at which she would have earned more than $50,000. Jane has not been unjustly enriched at all. (This will generally be the analysis for all employees, vendors, etc. of grantees—they do not need to feel unjustly enriched.)
I can see two adjustments people may wish to make that I would not generally consider:
The grantee might have gotten other funding but for FTX. This is speculative. To the extent this is based on an assumption that other funders would have spent more in this space but for FTX, those funders can now demonstrate that by choosing to backfill money for FTX grantees. To the extent a grantee believes that another funder (AF) would have funded them instead of one of AF’s actual grantees, I think the grantee is stuck with their choice of funder. In that counterfactual world, someone else got money they would not have received but for FTX’s activity—but there’s no way to identify them or persuade them to cough up some repayments. So there is no practical way to offload the FTX grantee’s ethical burden onto organizations which received grants from other funders. Of course, if AF-funded organizations wish to share in the pain, that would be ethically salutary but not obligatory.
The grantee has probably suffered non-financial damages like reputational loss, stress, disruption, etc. But no one is getting compensated for these sorts of damages (which the depositors have as well), and I think they have to fall where they lie. Otherwise, the grantee is claiming a right to keep some of the benefit of the depositor’s funds to offset damages caused by FTX’s misconduct. The depositors didn’t compel anyone to take FTX money, and the partial relief they will receive should not be further diminished by shielding grantees from the indirect costs of their decision to take money from FTX.
That is not intended as a criticism of grantees that took money from FTX—at least most of whom were innocent and non-negligent. Counterparty risk sucks, and there is a lot of unfair pain that must be distributed somehow. In my opinion, it’s not appropriate to ask the depositors to suffer more to cover indirect harms to the grantee attributable to the grantee’s choice of counterparty.