I think these are good things to consider. The following model is simplified and somewhat generic, but might be helpful.
One can analogize the debtor’s litigation efforts as the mirror universe equivalent of EA’s efforts to research and prioritize new causes. With cause evaluation, the people who you are getting information from are cooperative and have somewhat of a bias toward you “choosing” them. In litigation, the other side is trying to make your life as difficult as possible and does not want to be “chosen.”
The debtor’s resources are limited, and investigating targets costs money. Investigating a target thoroughly costs lots of money. This means that, like in EA, the debtor does not maximally investigate all potential targets. Investigated / not-investigated is not a binary; the selected target also should hope that the debtor decides after a shallow investigation that it isn’t worth the resources to continue digging.
The classic first method is to demand documents in discovery—you have to demand a wide range of documents because doing otherwise gives the target too much room to slither out. That means you’ll get a lot—and the target is motivated to put as much hay in the haystack as possible to make it hard for you to find any needles.
So, as the party seeking discovery, you have to make informed decisions about how much discovery to push for (and may have to justify that to the judge). A target’s public statements can give you a clue about where in the haystack the needles might be found. They could be used to justify to the court that your discovery requests are reasonable and you’re not on an unsupported fishing expedition.
In short, I don’t think “everything will come out in discovery anyway” is a fair assumption. As far as the possible bad outcomes, it’s hard to predict from the outside but I expect most risks would be institutional rather than personal (e.g., employee Z of organization Y did something bad, and the court decides that organization Y is also liable because employee Z was acting in the scope of their employment). I don’t know the financial status of any EA leaders, but I expect many are not worth litigating against much in their personal capacities for any personal liabilities they have.
Interesting, thanks. Re litigation, what would be an example of a possible litigation against an EA org (or an individual working for them)? I can’t really think of anything much that would be potential for litigation. I mean, I don’t think “x warned that SBF was a bad character because he screwed over y; z didn’t take any significant action re SBF’s role in EA” (to paraphrase what might’ve happened around 2018 re Alameda, based on public claims), would be anything more than bad for PR/reputation for those involved (and by extension EA), but correct me if I’m wrong.
That’s a good question, which is impossible to answer without knowing the underlying facts.
The most obvious possibility to me is that the state of mind could be relevant to a clawback defense. The following is not intended as actual legal analysis, but only as illustrative of the type of potential issues that the lawyers could be pondering. Section 550 gives some protections to certain subsequent transferees if they meet certain requirements including that they acted “without knowledge of the voidability of the transfer avoided.” At least in the Madoff context, the court of appeals held that the trustee did not have to show the sbsequent transferee was willfully blind to obvious red flags. It was enough to show that the subsequent transferee was on inquiry notice (basically that they knew enough to know they should have investigated further).
I am having a hard time coming up with non-clawback exposures to the debtor on the facts known to me. That does not mean they don’t exist.
I guess there could be exposures to victims—similar to the lawsuit filed against Tom Brady et al. -- if someone was found to have affirmatively promoted FTX in violation of applicable law and/or with good reason to believe it was a fraud. That seems rather unlikely to me as to the organizations. Or let’s say someone knowingly facilitated SBF making an investment into a third-party company despite strong reason to believe FTX was a fraud, and the third-party company was harmed as a result. I’m not convinced the third-party company would have a successful cause of action against the facilitator without more. But in the facilitator’s shoes, I’d rather not advertise what information I may have known about FTX and when. When you get sued, you lose by incurring the cost and pain of defending yourself—the question is whether you also lose in other ways too.
I think these are good things to consider. The following model is simplified and somewhat generic, but might be helpful.
One can analogize the debtor’s litigation efforts as the mirror universe equivalent of EA’s efforts to research and prioritize new causes. With cause evaluation, the people who you are getting information from are cooperative and have somewhat of a bias toward you “choosing” them. In litigation, the other side is trying to make your life as difficult as possible and does not want to be “chosen.”
The debtor’s resources are limited, and investigating targets costs money. Investigating a target thoroughly costs lots of money. This means that, like in EA, the debtor does not maximally investigate all potential targets. Investigated / not-investigated is not a binary; the selected target also should hope that the debtor decides after a shallow investigation that it isn’t worth the resources to continue digging.
The classic first method is to demand documents in discovery—you have to demand a wide range of documents because doing otherwise gives the target too much room to slither out. That means you’ll get a lot—and the target is motivated to put as much hay in the haystack as possible to make it hard for you to find any needles.
So, as the party seeking discovery, you have to make informed decisions about how much discovery to push for (and may have to justify that to the judge). A target’s public statements can give you a clue about where in the haystack the needles might be found. They could be used to justify to the court that your discovery requests are reasonable and you’re not on an unsupported fishing expedition.
In short, I don’t think “everything will come out in discovery anyway” is a fair assumption. As far as the possible bad outcomes, it’s hard to predict from the outside but I expect most risks would be institutional rather than personal (e.g., employee Z of organization Y did something bad, and the court decides that organization Y is also liable because employee Z was acting in the scope of their employment). I don’t know the financial status of any EA leaders, but I expect many are not worth litigating against much in their personal capacities for any personal liabilities they have.
Interesting, thanks. Re litigation, what would be an example of a possible litigation against an EA org (or an individual working for them)? I can’t really think of anything much that would be potential for litigation. I mean, I don’t think “x warned that SBF was a bad character because he screwed over y; z didn’t take any significant action re SBF’s role in EA” (to paraphrase what might’ve happened around 2018 re Alameda, based on public claims), would be anything more than bad for PR/reputation for those involved (and by extension EA), but correct me if I’m wrong.
That’s a good question, which is impossible to answer without knowing the underlying facts.
The most obvious possibility to me is that the state of mind could be relevant to a clawback defense. The following is not intended as actual legal analysis, but only as illustrative of the type of potential issues that the lawyers could be pondering. Section 550 gives some protections to certain subsequent transferees if they meet certain requirements including that they acted “without knowledge of the voidability of the transfer avoided.” At least in the Madoff context, the court of appeals held that the trustee did not have to show the sbsequent transferee was willfully blind to obvious red flags. It was enough to show that the subsequent transferee was on inquiry notice (basically that they knew enough to know they should have investigated further).
I am having a hard time coming up with non-clawback exposures to the debtor on the facts known to me. That does not mean they don’t exist.
I guess there could be exposures to victims—similar to the lawsuit filed against Tom Brady et al. -- if someone was found to have affirmatively promoted FTX in violation of applicable law and/or with good reason to believe it was a fraud. That seems rather unlikely to me as to the organizations. Or let’s say someone knowingly facilitated SBF making an investment into a third-party company despite strong reason to believe FTX was a fraud, and the third-party company was harmed as a result. I’m not convinced the third-party company would have a successful cause of action against the facilitator without more. But in the facilitator’s shoes, I’d rather not advertise what information I may have known about FTX and when. When you get sued, you lose by incurring the cost and pain of defending yourself—the question is whether you also lose in other ways too.