I agree with you: When I wrote “knew specifics about potential fraud”, I meant it roughly in the sense you described.
To my current knowledge, Nick did not have access to evidence that the funds were likely fraudulently obtained. (Though it’s not clear that I would know if it were the case.)
I think I’d bet at like 6% that evidence will come out in the next 10 years that Nick knew funds were likely fraudulently obtained. I think by normal definitions of those words it seems very unlikely to me.
I would be willing to take the other side of this bet, if the definition of “fraud” is restricted to “potentially stealing customer funds” and excludes thinks like lying to investors.
That was an example; I’d want it to exclude any type of fraud except for the large-scale theft from retail customers that is the primary concern with FTX.
Although at that point—at least in my view—the bet is only about a subset of knowledge that could have rendered it ethically unacceptable to be involved with FTXFF. Handing out money which you believed more likely than not to have been obtained by defrauding investors or bondholders would also be unacceptable, albeit not as heinous as handing out money you believed more likely than not to have been stolen from depositors. (I also think the ethically acceptable risk is less than “more likely than not” but kept that in to stay consistent with Nathan’s proposed bet which used “likely.”)
What if the investor decided to invest knowing there was an X% chance of being defrauded, and thought it was a good deal because there’s still an at least (100-X)% chance of it being a legitimate and profitable business? For what number X do you think it’s acceptable for EAs to accept money?
Fraud base rates are 1-2%; some companies end up highly profitable for their investors despite having committed fraud. Should EA accept money from YC startups? Should EA accept money from YC startups if they e.g. lied to their investors?
I think large-scale defrauding unsuspecting customers (who don’t share the upside from any risky gambles) is vastly worse than defrauding professional investors who are generally well-aware of the risks (and can profit from FTX’s risky gambles).
(I’m genuinely confused about this question; the main thing I’m confident in is that it’s not a very black-and-white kind of thing, and so I don’t want to make my bet about that.)
I don’t know the acceptable risk level either. I think it is clearly below 49%, and includes at least fraud against bondholders and investors that could reasonably be expected to cause them to lose money from what they paid in.
It’s not so much the status of the company as a fraud-commiter that is relevant, but the risk that you are taking and distributing money under circumstances that are too close to conversion (e.g., that the monies were procured by fraud and that the investors ultimately suffer a loss). I can think of two possible safe harbors under which other actors’ acceptance of a certain level of risk makes it OK for a charity to move forward:
In many cases, you could imply a maximum risk of fraud that the bondholders or other lenders were willing to accept from the interest rate minus inflation minus other risk of loss—that will usually reveal that bondholders at least were not factoring in more than a few percent fraud risk. The risk accepted by equity holders may be greater, but usually bondholders take a haircut in these types of situations—and the marginal dollars you’re spending would counterfactually have gone to them in preference to the equity holders. However, my understanding is that FTX didn’t have traditional bondholders.
If the investors were sophisticated, I think the percentage of fraud risk they accepted at the time of their investment is generally a safe harbor. For FTX, I don’t have any reason to believe this was higher than the single digits; as you said, the base rate is pretty low and I’d expect the public discourse pre-collapse to have been different if it were believed to be significantly higher.
However, those safe harbors don’t work if the charity has access to inside information (that bondholders and equity holders wouldn’t have) and that inside information updates the risk of fraud over the base rates adjusted for information known to the bond/equity holders. In that instance, I don’t think you can ride off of the investor/bondholder acceptance of the risk as low enough.
There is a final wrinkle here—for an entity as unregulated as FTX was, I don’t believe it is plausible to have a relatively high risk of investor fraud and a sufficiently low risk of depositor fraud. I don’t think people at high risk of cheating their investors can be deemed safe enough to take care of depositors. So in this case there is a risk of investor fraud that is per se unacceptable, and a risk of investor fraud that implies an unacceptable risk of depositor fraud. The acceptable risk of investor fraud is the lower of the two.
Exception: If you can buy insurance to ensure that no one is worse off because of your activity, there may be no maximum acceptable risk. Maybe that was the appropriate response under these circumstances—EA buys insurance against the risk of fraud in the amount of the donations, and returns that to the injured parties if there was fraud at the time of any donation which is discovered within a six-year period (the maximum statute of limitations for fraudulent conveyance in any U.S. state to my knowledge). If you can’t find someone to insure you against those losses at an acceptable rate . . . you may have just found your answer as to whether the risk is acceptable.
I agree with you: When I wrote “knew specifics about potential fraud”, I meant it roughly in the sense you described.
To my current knowledge, Nick did not have access to evidence that the funds were likely fraudulently obtained. (Though it’s not clear that I would know if it were the case.)
I think I’d bet at like 6% that evidence will come out in the next 10 years that Nick knew funds were likely fraudulently obtained. I think by normal definitions of those words it seems very unlikely to me.
I would be willing to take the other side of this bet, if the definition of “fraud” is restricted to “potentially stealing customer funds” and excludes thinks like lying to investors.
So: excludes securities fraud?
That was an example; I’d want it to exclude any type of fraud except for the large-scale theft from retail customers that is the primary concern with FTX.
Although at that point—at least in my view—the bet is only about a subset of knowledge that could have rendered it ethically unacceptable to be involved with FTXFF. Handing out money which you believed more likely than not to have been obtained by defrauding investors or bondholders would also be unacceptable, albeit not as heinous as handing out money you believed more likely than not to have been stolen from depositors. (I also think the ethically acceptable risk is less than “more likely than not” but kept that in to stay consistent with Nathan’s proposed bet which used “likely.”)
What if the investor decided to invest knowing there was an X% chance of being defrauded, and thought it was a good deal because there’s still an at least (100-X)% chance of it being a legitimate and profitable business? For what number X do you think it’s acceptable for EAs to accept money?
Fraud base rates are 1-2%; some companies end up highly profitable for their investors despite having committed fraud. Should EA accept money from YC startups? Should EA accept money from YC startups if they e.g. lied to their investors?
I think large-scale defrauding unsuspecting customers (who don’t share the upside from any risky gambles) is vastly worse than defrauding professional investors who are generally well-aware of the risks (and can profit from FTX’s risky gambles).
(I’m genuinely confused about this question; the main thing I’m confident in is that it’s not a very black-and-white kind of thing, and so I don’t want to make my bet about that.)
I don’t know the acceptable risk level either. I think it is clearly below 49%, and includes at least fraud against bondholders and investors that could reasonably be expected to cause them to lose money from what they paid in.
It’s not so much the status of the company as a fraud-commiter that is relevant, but the risk that you are taking and distributing money under circumstances that are too close to conversion (e.g., that the monies were procured by fraud and that the investors ultimately suffer a loss). I can think of two possible safe harbors under which other actors’ acceptance of a certain level of risk makes it OK for a charity to move forward:
In many cases, you could imply a maximum risk of fraud that the bondholders or other lenders were willing to accept from the interest rate minus inflation minus other risk of loss—that will usually reveal that bondholders at least were not factoring in more than a few percent fraud risk. The risk accepted by equity holders may be greater, but usually bondholders take a haircut in these types of situations—and the marginal dollars you’re spending would counterfactually have gone to them in preference to the equity holders. However, my understanding is that FTX didn’t have traditional bondholders.
If the investors were sophisticated, I think the percentage of fraud risk they accepted at the time of their investment is generally a safe harbor. For FTX, I don’t have any reason to believe this was higher than the single digits; as you said, the base rate is pretty low and I’d expect the public discourse pre-collapse to have been different if it were believed to be significantly higher.
However, those safe harbors don’t work if the charity has access to inside information (that bondholders and equity holders wouldn’t have) and that inside information updates the risk of fraud over the base rates adjusted for information known to the bond/equity holders. In that instance, I don’t think you can ride off of the investor/bondholder acceptance of the risk as low enough.
There is a final wrinkle here—for an entity as unregulated as FTX was, I don’t believe it is plausible to have a relatively high risk of investor fraud and a sufficiently low risk of depositor fraud. I don’t think people at high risk of cheating their investors can be deemed safe enough to take care of depositors. So in this case there is a risk of investor fraud that is per se unacceptable, and a risk of investor fraud that implies an unacceptable risk of depositor fraud. The acceptable risk of investor fraud is the lower of the two.
Exception: If you can buy insurance to ensure that no one is worse off because of your activity, there may be no maximum acceptable risk. Maybe that was the appropriate response under these circumstances—EA buys insurance against the risk of fraud in the amount of the donations, and returns that to the injured parties if there was fraud at the time of any donation which is discovered within a six-year period (the maximum statute of limitations for fraudulent conveyance in any U.S. state to my knowledge). If you can’t find someone to insure you against those losses at an acceptable rate . . . you may have just found your answer as to whether the risk is acceptable.