I guess the question I have is, if the fraud wasn’t noticed by SBF’s investors, who had much better access to information and incentives to find fraud, why would anyone expect the recipients of his charitable donations to notice it? If it was a failure of the EA movement not to know that FTX was fraudulent, isn’t it many times more of a failure that the fraud was unnoticed by the major sophisticated investment firms that were large FTX shareholders?
I think investing in FTX was genuinely a good idea, if you were a profit maximizer, even if you strongly suspected the fraud. As Jason says, as an investor losing money due to fraud isn’t any worse than losing money because a company fails to otherwise be profitable, so even assigning 20%-30% probability to fraud for a high-risk investment like FTX where you are expecting >2x returns in a short number of years will not make a huge difference to your bottomline.
In many ways you should expect being the kind of person who is willing to commit fraud to be positively associated with returns, because doing illegal and fradulent things means that the people who run the organization take on massive risk where you are not exposed to the downside, but you are exposed to the upside. It’s not worth it to literally invest in fraud, but it is worth it to invest into the kind of company where the CEO is willing to go to prison, since you don’t really have any risk of going to prison, but you get the upside of the legal risk they take on (think of Uber blatantly violating laws until they established a new market, which probably exposed leadership to substantial legal risk, but investors just got to reap the profits).
I wasn’t suggesting we should expect this fraud to have been found in this case with the access that was available to EA sources. (Perhaps the FTXFF folks might have caught the scent if they were forensic accountants—but they weren’t. And I’m not at all confident on that in any event.) I’m suggesting that, in response to this scandal, EA organizations could insist on certain third-party assurances in the future before taking significant amounts of money from certain sources.
Why the big money was willing to fork over nine figures each to FTX without those assurances is unclear to me. But one observation: as far as a hedge fund or lender is concerned, a loss due to fraud is no worse than a loss due to the invested-in firm being outcompeted, making bad business decisions, experiencing a general crypto collapse, getting shut down for regulatory issues, or any number of scenarios that were probably more likely ex ante than a massive conversion scheme. In fact, such a scheme might even be less bad to the extent that the firm thought it might get more money back in a fraud loss than from some ordinarily-business failure modes. Given my understanding that these deals often move very quickly, and the presence of higher-probability failure modes, it is understandable that investors and lenders wouldn’t have prioritized fraud detection.
In contrast, charitable grantees are much more focused in their concern about fraud; taking money from a solvent, non-fraudulent business that later collapses doesn’t raise remotely the same ethical, legal, operational, and reputational concerns. Their potential exposure in that failure mode are likely several times larger than those of the investors/lenders after all non-financial exposures are considered. They are also not on a tight time schedule.
I guess the question I have is, if the fraud wasn’t noticed by SBF’s investors, who had much better access to information and incentives to find fraud, why would anyone expect the recipients of his charitable donations to notice it? If it was a failure of the EA movement not to know that FTX was fraudulent, isn’t it many times more of a failure that the fraud was unnoticed by the major sophisticated investment firms that were large FTX shareholders?
I think investing in FTX was genuinely a good idea, if you were a profit maximizer, even if you strongly suspected the fraud. As Jason says, as an investor losing money due to fraud isn’t any worse than losing money because a company fails to otherwise be profitable, so even assigning 20%-30% probability to fraud for a high-risk investment like FTX where you are expecting >2x returns in a short number of years will not make a huge difference to your bottomline.
In many ways you should expect being the kind of person who is willing to commit fraud to be positively associated with returns, because doing illegal and fradulent things means that the people who run the organization take on massive risk where you are not exposed to the downside, but you are exposed to the upside. It’s not worth it to literally invest in fraud, but it is worth it to invest into the kind of company where the CEO is willing to go to prison, since you don’t really have any risk of going to prison, but you get the upside of the legal risk they take on (think of Uber blatantly violating laws until they established a new market, which probably exposed leadership to substantial legal risk, but investors just got to reap the profits).
I wasn’t suggesting we should expect this fraud to have been found in this case with the access that was available to EA sources. (Perhaps the FTXFF folks might have caught the scent if they were forensic accountants—but they weren’t. And I’m not at all confident on that in any event.) I’m suggesting that, in response to this scandal, EA organizations could insist on certain third-party assurances in the future before taking significant amounts of money from certain sources.
Why the big money was willing to fork over nine figures each to FTX without those assurances is unclear to me. But one observation: as far as a hedge fund or lender is concerned, a loss due to fraud is no worse than a loss due to the invested-in firm being outcompeted, making bad business decisions, experiencing a general crypto collapse, getting shut down for regulatory issues, or any number of scenarios that were probably more likely ex ante than a massive conversion scheme. In fact, such a scheme might even be less bad to the extent that the firm thought it might get more money back in a fraud loss than from some ordinarily-business failure modes. Given my understanding that these deals often move very quickly, and the presence of higher-probability failure modes, it is understandable that investors and lenders wouldn’t have prioritized fraud detection.
In contrast, charitable grantees are much more focused in their concern about fraud; taking money from a solvent, non-fraudulent business that later collapses doesn’t raise remotely the same ethical, legal, operational, and reputational concerns. Their potential exposure in that failure mode are likely several times larger than those of the investors/lenders after all non-financial exposures are considered. They are also not on a tight time schedule.