It sounds like whether AR borrowing fiat deposits was criminal depends on whether the terms of service prohibited it, allowed it, or failed to comment on the matter.
But am I right in thinking that this is all moot with respect to the question of fraud if you believe the three key witnesses for the prosecution that no one understood what had happened with the $8B in fiat deposits until it had already happened?
Interestingly, a UK lawyer was prevented from testifying for the defense because interpretation of the law—even foreign law—is the presiding judge’s domain. (“The terms and any dispute shall be governed by, and construed in accordance with, English law.”) The lawyer had been planning to argue that, “FTX therefore owed no obligations as trustee of any fiat currency, and its obligations were only those contractual obligations in the Terms. On the English law interpretation of the Terms, FTX was obliged to honour customer withdrawals (i.e. to repay the debt of fiat currency that it owed), but was not constrained to use fiat currency for any particular purpose in the interim.” (see here.)
8.2.6 All Digital Assets are held in your Account on the following basis:
(A) Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading. As the owner of Digital Assets in your Account, you shall bear all risk of loss of such Digital Assets. FTX Trading shall have no liability for fluctuations in the fiat currency value of Digital Assets held in your Account.
(B) None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat Digital Assets in User’s Accounts as belonging to FTX Trading.
(C) You control the Digital Assets held in your Account. At any time, subject to outages, downtime, and other applicable policies (including the Terms), you may withdraw your Digital Assets by sending them to a different blockchain address controlled by you or a third party.
I think these rule out “FTX was obliged to honour customer withdrawals (i.e. to repay the debt of fiat currency that it owed), but was not constrained to use fiat currency for any particular purpose in the interim”:
If Alameda borrowed customer deposits from customers (without customer consent, e.g. not via margin lending or staking or whatever), this would be through FTX. Either:
FTX treated the deposits as belonging to FTX Trading, either intentionally, which makes it theft, or unintentionally, and in either case violates (A). Or,
FTX intended to repay, so FTX was treating the deposits like loans to FTX, which makes them loans, violating (B), and then loaned them out to Alameda.
The fact that FTX customers couldn’t withdraw customer funds during/after the collapse means FTX violated its own terms in (C).
(To be clear, this doesn’t imply intent, which is required for fraud.)
I know this is a digression from the main question of intent but I’m still curious about it: Do we know how much money was actually in the margin lending program? How much of the fiat deposits were available for margin lending? Prosecutors said “from June to November 2022, Alameda had taken between 8 and 12 billion, when there was at most 4 billion in the margin lending program” while the defense said “80 percent of the assets on FTX were margined assets used in futures trading. 80 percent are in this margin trading where customers are always borrowing other customers’ assets.”
If you think SBF didn’t know that AR was “borrowing” client monies until after all such borrowing was done, we’re going to have to agree to disagree on that.
As to the other part: SBF’s conduct happened, in relevant part, in the Southern District of New York (and other conduct happened with a sufficient nexus to SDNY to establish venue there). US law, not English law, governs as to whether various representations targeted at the United States (or with a sufficient nexus to the US) create a relationship of trust that gives rise to the possibility of criminal misappropriation. Also, even if the ToS were a defense as to anyone who had signed it, the alleged false statements also reached many potential customers—say, everyone who watched the Super Bowl. The offense would be complete at that moment; no contract that FTX and a new customer might subsequently sign would change the illegality of those statements.
If SBF thinks Judge Kaplan misinterpreted US law, he can take that up with the United States Court of Appeals for the Second Circuit (and likely will). Interpretation of law being a question for the court is pretty well-established.
Also, I don’t see how the terms of service are even relevant to claims about fraud against investors/lenders. That’s ~$3B on those counts alone.
If you think SBF didn’t know that AR was “borrowing” client monies until after all such borrowing was done, we’re going to have to agree to disagree on that.
No, I was suggesting that I agree with “the three key witnesses for the prosecution that no one understood what had happened with the $8B in fiat deposits until it had already happened”—I wasn’t talking about all borrowing.
I don’t see how the terms of service are even relevant to claims about fraud against investors/lenders. That’s ~$3B on those counts alone.
Maybe, but people have a tendency to lump these different figures together (as it looks like you just did wrt AR’s borrowing) and I don’t think that’s helpful when trying to figure out what exactly FTX did wrong. Why shouldn’t we look at them one by one?
Besides, surely the weaker the case for fraud against customers, the more honest FTX’s self-representation would appear to be, and so the weaker the case for fraud against investors/lenders?
It sounds like whether AR borrowing fiat deposits was criminal depends on whether the terms of service prohibited it, allowed it, or failed to comment on the matter.
But am I right in thinking that this is all moot with respect to the question of fraud if you believe the three key witnesses for the prosecution that no one understood what had happened with the $8B in fiat deposits until it had already happened?
Interestingly, a UK lawyer was prevented from testifying for the defense because interpretation of the law—even foreign law—is the presiding judge’s domain. (“The terms and any dispute shall be governed by, and construed in accordance with, English law.”) The lawyer had been planning to argue that, “FTX therefore owed no obligations as trustee of any fiat currency, and its obligations were only those contractual obligations in the Terms. On the English law interpretation of the Terms, FTX was obliged to honour customer withdrawals (i.e. to repay the debt of fiat currency that it owed), but was not constrained to use fiat currency for any particular purpose in the interim.” (see here.)
From the May 13 2022 FTX Terms of Service:
I think these rule out “FTX was obliged to honour customer withdrawals (i.e. to repay the debt of fiat currency that it owed), but was not constrained to use fiat currency for any particular purpose in the interim”:
If Alameda borrowed customer deposits from customers (without customer consent, e.g. not via margin lending or staking or whatever), this would be through FTX. Either:
FTX treated the deposits as belonging to FTX Trading, either intentionally, which makes it theft, or unintentionally, and in either case violates (A). Or,
FTX intended to repay, so FTX was treating the deposits like loans to FTX, which makes them loans, violating (B), and then loaned them out to Alameda.
The fact that FTX customers couldn’t withdraw customer funds during/after the collapse means FTX violated its own terms in (C).
(To be clear, this doesn’t imply intent, which is required for fraud.)
I know this is a digression from the main question of intent but I’m still curious about it: Do we know how much money was actually in the margin lending program? How much of the fiat deposits were available for margin lending? Prosecutors said “from June to November 2022, Alameda had taken between 8 and 12 billion, when there was at most 4 billion in the margin lending program” while the defense said “80 percent of the assets on FTX were margined assets used in futures trading. 80 percent are in this margin trading where customers are always borrowing other customers’ assets.”
I haven’t looked into this, and based on your comment, you seem more informed than me on this issue.
If you think SBF didn’t know that AR was “borrowing” client monies until after all such borrowing was done, we’re going to have to agree to disagree on that.
As to the other part: SBF’s conduct happened, in relevant part, in the Southern District of New York (and other conduct happened with a sufficient nexus to SDNY to establish venue there). US law, not English law, governs as to whether various representations targeted at the United States (or with a sufficient nexus to the US) create a relationship of trust that gives rise to the possibility of criminal misappropriation. Also, even if the ToS were a defense as to anyone who had signed it, the alleged false statements also reached many potential customers—say, everyone who watched the Super Bowl. The offense would be complete at that moment; no contract that FTX and a new customer might subsequently sign would change the illegality of those statements.
If SBF thinks Judge Kaplan misinterpreted US law, he can take that up with the United States Court of Appeals for the Second Circuit (and likely will). Interpretation of law being a question for the court is pretty well-established.
Also, I don’t see how the terms of service are even relevant to claims about fraud against investors/lenders. That’s ~$3B on those counts alone.
No, I was suggesting that I agree with “the three key witnesses for the prosecution that no one understood what had happened with the $8B in fiat deposits until it had already happened”—I wasn’t talking about all borrowing.
Maybe, but people have a tendency to lump these different figures together (as it looks like you just did wrt AR’s borrowing) and I don’t think that’s helpful when trying to figure out what exactly FTX did wrong. Why shouldn’t we look at them one by one?
Besides, surely the weaker the case for fraud against customers, the more honest FTX’s self-representation would appear to be, and so the weaker the case for fraud against investors/lenders?