At Oliver’s request I dug into the Madoff case a little, to see if there was anything we could learn from.
Epistemic status: I am not a lawyer and I spent 2.5 hours on this, one of which was unproductively wrestling with the court records database, the worst database UI in the history of databases.
The following are court cases I found related to Madoff Investments:
Bernie Madoff pled guilty and never went to trial. It wasn’t even a negotiated plea bargain, just a straight guilty please (probably so he didn’t have to testify against anyone)
His two top lieutenants took plea deals and never went to trial (but did testify elsewhere).
5 other employees had a joint criminal trial. The Madoff case broke in 2008, they were indicted in 2010 (not all together), the case went to trial in 2013, and took 8 months to complete. Appeals continued until 2016.
The main trustee in charge of clawback filed “over 1,000” civil suits aimed at clawing back money. None of the ones I found in the news went to trial, although some got very close. I probably identified <20 cases, primarily the largest ones.
The lawsuits were (reportedly) aimed at people who took more money out than they had ever put in. The ones that made the news typically had a component of “knew or should have known Madoff was a fraud” and encouraging others to invest. However the money recovered went to a general fund, not the people they specifically were responsible for bringing to Madoff.
I found a handful of other lawsuits brought against the same entities from the large set of civil suits. None of these appear to have gone to trial, although they got very little coverage so it’s hard to say.
So that’s one trial. I spent an hour trying to get a witness list and failing, and am now hoping someone reads this and Cunningham’s laws me. You’re looking for S.D.N.Y., No. 09-mag-2484 or 1:10-cr-00228, transcripts are $6+ a page to get quickly. You might be able to do better going to the courthouse in NYC.
In the meantime:
That trial had “over 40” witnesses. Let’s call it 43.
The trial lasted 8 months, although not ever day had witness testimony.
Of those witnesses I found the following:
2 Expert witnesses/investigators who clearly opted in
That leaves 30+ witnesses unaccounted for, which isn’t really enough to draw interesting conclusions, especially without knowing the denominator of who could have been called.
3 character witnesses (which is presumably voluntary)
1 contractor
Defendants: 2
Expert Witnesses: 3
Non-enron character witnesses: 11
The prosecution also shared its prospective witness list. It has 31 names, of which 23 testified, plus another 2 who weren’t on the original list. Of those two, one was an FBI agent for whom this was part of his job, and another was an Enron employee brought in as a rebuttal witness.
Enron produced a lot of trials, of which this is only one. There were so many trials Wikipedia didn’t even bother to list all of them (example), plus the senate hearings, extradition trials, appeals, etc. This is a very narrow slice of who had to testify about Enron.
But all of the witnesses either opted in (as character or expert witnesses, or investigators), worked for the company or person that committed crimes, or worked for the auditing firm that missed the crimes. None of these seem equivalent to the people I imagine you are talking to or about here. Could you give some specific examples of witnesses in positions similar to those people, in cases similar to FTX’s likely case? I’m happy with a very broad definition of similar, and I would absolutely believe they exist and I missed them. I’m a non-expert who has looked at two cases so far and both are missing crucial aspects of EA’s relationship to FTX. But I’m clearly not going to find them very fast.
Full disclosure: habryka is paying me for this research. He didn’t review either comment before publication but I did talk to him about my findings as I was working. I meant to include this in the first comment but the “(paid)” in “At Oliver’s (paid) request” got lost in an edit somewhere.
The scope of what the prosecution has to prove in a criminal prosecution can be surprisingly narrow. Specifically, the prosecution needs to prove the elements of the charged offenses—not the entire scope of the criminal enterprise. Assuming there is a conviction, other information can come in at sentencing where the proof is much simpler. In contrast, in civil litigation, you need a much more complete picture to establish who the bankruptcy estate might be able to get money from.
As this article notes, the Madoff trustee’s firm ran up $1.4B in legal fees as of last year on civil litigation. You note that they filed about 1,000 civil lawsuits—I suspect there were significantly more targets than that because the trustee viewed litigation as a last resort when settlement negotiations failed. I have no way of knowing how many different individuals and entities got hit with depositions and discovery demands in those 1,000+ cases . . . but I would suspect the average number of depositions and discovery demands in a filed civil case is greater than one each. The trustee had to be doing something substantial to justify the court approving all those fees . . .
I suspect there was less civil litigation around Enron, but for reasons that aren’t helpful here. Enron was a publicly-traded corporation, and IIRC the bulk of the losses were equity (people who held Enron stock that was overvalued due to fraudulent financial reports). Neither Enron nor those who lost money on Enron stock would be expected to have a claim against people who traded in its stock without knowledge of the fraud. Among other reasons, Enron itself wasn’t a party to those transactions, so its bankruptcy estate would have no clawback claims against third parties who sold Enron stock to other third parties for more than it was ultimately worth.
I don’t think this supports any conclusions yet, it’s two cases and I only got a full witness list for one of those. I would love to see any examples of witnesses who were in roughly the position EA leadership or members (allegedly) are- people who received money for charitable purposes, from someone who earned it through fraud and needs to pay it back, but weren’t close relatives or could otherwise be considered tightly aligned with their funder. Or someone like Holden, whose org AFAIK didn’t receive any FTX money at all.
(FTR I think Holden waiting until his takes are cold is entirely reasonable, I think the speed of response on the EAF is overheated, but given the trials could take over a decade, establishing the risks of speaking candidly before they are entirely resolved seems valuable).
I don’t see anyone analogous to him, or even to someone who actually works at anthropic, the Enron witness list. Can you point to examples of analogous people in other cases?
As Tyler mentioned, it would be a massive effort to try to identify everyone who had been served with a discovery request or a deposition demand in a related civil proceeding. As in, it could take a hundred hours or more in Madoff (probably somewhat less in Enron), and the list might not be complete. So I don’t think that is a good use of anyone’s time.
I 100% agree that processing everyone who’d been touched by any Madoff case would be a massive undertaking and not worth the time. Which is why I didn’t ask for it. Right now I’m just asking for a single example of people in the reference class this post is discussing, being involved in the case. That’s definitely not the last question I’m going to ask, but it seems like a good starting place.
Maybe this is one of those dumb questions that’s so obvious to everyone with any expertise that they are laughing at me, and it takes a minute think of a specific example because it’s so common an expert would never bother to remember specifics. In that case, I expect experts to still be able to produce an example with a tiny amount of work once they stop laughing. And given legal advices’ reputation for overcaution in general, I think asking for examples and eventually numbers for a particular piece of advice is a fair request.
Alternately, I’d love to see legal experts replace Habryka’s guesstimate with more informed ones. My understanding from your comment here is that you’re not comfortable with that because the question isn’t well-defined. I think defining different scenarios and providing numbers for those (including some that are obviously materially different from this case, both to signal that the numbers can’t be applied directly and because it’s useful for teaching principles). Or add error bars until comfortable.
None of us are experts on the Madoff litigation itself—and even someone who had worked on it at a staff level would have only worked on a tiny sliver of it and would only have a small fraction of the universe of discovery targets in their mind.
I can partially quantify an estimate of how many entities experienced significant discovery burdens (e.g., sitting for a deposition, having to search and turn over significant documents, answering interrogatories) due to the Madoff civil litigation. Let’s set the lower error bar at 1,000 because there were 1,000 civil suits. Let’s guess a error bar extending to 10,000 based on Federal Rule of Civil Procedure 30(a)(2)(a)(i), which allows ten depositions per side without specific court approval—keeping in mind that there are other ways to burden a defendant or third party without taking their deposition. Although there is still significant uncertainty there, the number of civil suits (and the massive amount expended by the trustee) are far better predictors of someone getting tangled up in this than whether they were called to testify in a criminal trial.
I didn’t account for the fact that the Madoff trustee settled many of the estate’s claims without litigation—that means the 1,000 number is probably too low for our purposes. Nobody knows which claims will settle—which would affect which 1,000 to 10,000 get hit. So the universe of people who might reasonably expect to be in that 1,000 to 10,000 is maybe double that.
Are any EA leaders among the 20,000 people the debtor’s counsel would be most interested in hearing from? And could any statements by those people add them (or their colleagues/contacts) to that list, increase their exposures, or convince debtor’s counsel to spend more resources digging into them? That requires knowing more about the FTX situation, what the EA leaders know, and how their statements would read than any of us know.
We don’t know the facts—no one fully does at this stage—but there is an excellent chance the people who worked on the FTX Future Fund will be on a list, there is a strong chance that top officials at anyone who received more than $5MM from the Future Fund will be on a list (moderate chance at lower levels), there is a strong chance that anyone who was a regular correspondent with SBF or another key figure will be on a list. I believe most EA leaders are in one of those categories—or are an associate of someone who is in those categories and whose situation could be complicated by the first person speaking freely for reasons Tyler explained.
Thank you, this is exactly what I was hoping for! I have several questions.
Could you expand on how lawyers can create costs for 3rd parties, even without depositions?
I don’t understand why you’re using the exact same number as the Madoff clawbacks. I looked at it more for ratios: out of 40,000 investors (another source says 37k), 2,000 were net positive, and ~half of those were sued.* Your intuitions about where lines might be drawn were really helpful here, although I don’t feel like I have the level of clarity I want yet.
Suppose someone gets on a list: what happens next? how much of that is set in stone? What changes could someone induce by talking publicly? Some guesses I have are getting deposed versus not, deposition takes n% longer, personal records get subpoenaed where they otherwise wouldn’t have.
*Note that it’s not 1000+ cases that went to trial, it’s 1,000 lawsuits filed (apologies for leaving the citation out earlier, I meant to include it). I have yet to find any that went to trial, although some clearly got far enough to be prepping witnesses. That’s about what the trustee initially estimated- that out of 2000 net beneficiaries of Madoff, he’d go after about half of them. It’s not clear to me anyone gave back money without a lawsuit being filed.
As far as what kind of pain the legal process imposes on those who get caught up in it, the bulk comes prior to trial. So the fact that these cases didn’t go to trial doesn’t move the needle much. Actual trials in cases between midsize+ corporations are fairly uncommon, as the EV of the litigation is usually pretty clear after discovery ends and any summary-judgment motions are litigated to resolve disputed issues of law. Few cases of that sort are dependent on disputed witness testimony or the like.
The biggest practical pain point is document discovery, potentially having to go through potentially tens to hundreds of thousands of pages of documents to figure out which are responsive to the other side’s document demands and what has to be turned over. In a really simple case with 1,000 pages of material held by a few employees, responding to discovery can still potentially take several dozen hours of attorney time (plus client time), so let’s ballpark $10K on the low end per new third-party target. It is really hard to assess how much responsive material a third party could have. $100K might be a reasonable high-end estimate. For a major target like CEA/EV, maybe an order of magnitude higher.
For an entity that is already a target, let’s start with attorney fees. Although I expect entities on the other side spent less than the trustee’s $1.4B, half to 70 percent of that wouldn’t surprise me at all. So mid-six figures per target seems ballpark plausible on average. Much of that would be in discovery. Giving the opponent more information up front would likely allow them to justify more burdensome discovery to the judge. I would guestimate a 10-25% uplift in litigation costs per target from making a statement. Obviously it depends on what the statement says—but if the statement says nothing of substance, issuing it would have little value in the first place?
There’s also the risk of more easily triggering lawsuits from third party plaintiffs. Under Federal Rule of Civil Procedure 11, an attorney or party cannot file a complaint or pleading without conducting a reasonable investigation into the merits of the complaint (more or less). Giving a statement that isn’t 100 percent exculpatory makes it very easy for some would-be plaintiffs to meet their Rule 11 obligations and file a suit that wouldn’t have been filed otherwise. It’s possible, but less likely, that an organization’s statement could trigger a suit against a third party. Moreover, having a statement to hang their hat on likely makes it easier for would-be litigants to write their complaints in a way that survives the first, relatively inexpensive shot you get to get rid of a case (a Rule 12(b) motion to dismiss, see the Supreme Court’s decisions in Iqbal and Twombly if you want to geek out on that standard).
If you look at sanctions awards in frivolous cases (e.g., the “Kraken” election litigation in Michigan), you’ll see that defendants often can spend 250K on beating them back. That could be higher or lower based on the nature of the litigation. So I’m going to assign an EV of 250k as a rough estimate to a mid-to-larger org’s exposure for speaking out, which could represent a few really quick suits, one Kraken-level suit, or 0.1-0.2 of a more significant class action.
An organization also needs to be very careful in its public statements because they are admissions that can be used against it in court to devastating effect. That means it probably should conduct its own internal investigation before committing to a position that says anything substantive. Employees are known to . . . misremember or forget stuff when the facts don’t make them look good. Human nature. Depending on the organization’s risk tolerance, potential exposure, and amount of material, $25K-$250K per organization could be a reasonable estimate (but I’ve never been involved in pricing them, and I think a good investigation of CEA/EV would be higher given how much involvement it seems to have had with SBF directly).
Plus, a detailed statement gives the opponent a roadmap to make their discovery and litigation strategies more effective. At my upper-end estimate of the amount at stake, even a few percent increase in the estate’s chance of winning against EV/CEA alone could have a negative seven-figure EV. This would be lower for other organizations of course.
Cynically, there is also the chance that an organization knows it is toast, and that putting out a statement that would basically concede that is a great way to hasten the end. You can decide for yourself what the utility (or disutility) of keeping an organization running for an extra 2-3 years might be.
All of that is really conjectural on my end, but hopefully it gives you some basis for how a lawyer (who I emphasize has zero inside knowledge at all!) might try to quantify the costs of speaking rather than maintaining radio silence. I have low confidence in that quanitification. I would never attempt to quantify in this way for a client; the error bars are just too large.
Ultimately, it is a client decision whether the client should talk about pending litigation. Only in rare cases is silence not the correct decision from a legal perspective. However, clients make decisions against their legal interest for any number of reasons. Sometimes these are poor decisions, sometimes the client decides they have non-legal interests that they properly judge to outweigh their legal interests.
Apologies for the delay, and thank you, this is really helpful in fleshing out my models.
Am I correct that there is a ceiling on the amount of discovery that can be done? Once you have to turn over every document, there are no more documents to turn over. So the costs of speaking should asymptote over time? If not, what costs are increasingly linearly or faster?
> if the statement says nothing of substance, issuing it would have little value in the first place
is this true? I imagine there are some statements that are interesting to the EA community but bear no legal weight (“we believe fraud is bad”), and others contain information that would have been in discovery anyway.
I get the feeling one thing going on is that there are safe statements, but it’s hard for laypeople to identify them ahead of time (see: SBF outlining his incompetence as if that was a defense instead of evidence of a crime). So lawyers default to the much easier to follow “please shut the hell up”.
Do you have estimates for client time? I expect many EA orgs to care more about that than lawyers fees, especially if potential increases are only on the order of 25%.
There is likely a ceiling effect, either on the volume of discoverable things or the other side’s CEA of marginal discovery.
I think major orgs have made “we think fraud is bad” statements. I assume no one thinks fraud is good, or would admit to it if they did, so those statements have zero value to me.
Whether there are other safe statements depends on the organization’s exposure, but in many cases your lawyers would have to engage in a lot of independent factfinding to figure out if that’s the case (including needing to figure out information not held by your organization or publicly available). On the other hand, “no one here ever interacted with SBF, took FTX money, or gave him much thought” is likely safe if true and shouldn’t require much work.
There were no safe statements a lawyer could identify for SBF—that would require identifying, accessing, and ingesting all material info DOJ would obtain on him, which was/is impossible.
Really hard for me to estimate staff time given the nature of the case. You probably can substitute lawyer time for staff time for many tasks if you value staff time at mote than the lawyer’s rate.
If you’re doing a CEA, you should consider that discovery will probably happen under a protective order and any litigation will very likely be settled in a way where there is minimal leakage of the discovered info. So I don’t think it is correct to assume that unfavorable information will be publicly disclosed no matter what.
So I don’t think it is correct to assume that unfavorable information will be publicly disclosed no matter what.
This feels like a nonsequitur to me. The question is “is there information an org or person might like to disclose, but shouldn’t, due to its effect on legal risk (including procedural burden)?”. If the entity doesn’t want the information to be public then this question doesn’t arise (we could argue about whether orgs have a proactive moral duty to confess to crimes, but that’s definitely not the question here).
It sounds like you’re saying there is a ceiling on the burden for discovery, trial, etc, so at a certain point new statements can’t increase that burden, although they could have other negative consequences. Is that correct?
There is certainly a ceiling. Then again, your organization ceasing to exist because it’s overrun with legal bills and/or a crippling judgment is entered against it is a ceiling, and for smaller organizations (especially those that spent grant funds and are already going to get hit with a clawback) it may well be a realistic estimate of the ceiling.
As far as a non sequitur, I think we’re interested in somewhat different questions. My formulation is more: “What are the relative costs and benefits of making statements and releasing information on this matter?” I don’t find comparing benefits to only the increase in legal risk to be particularly decision-relevant on what organizations should do. I think almost any statement that is not “we’re giving back all the money, right now” is going to be net negative PR, and I think the increased risk of public disclosure of unfavorable information has to be considered to answer my question (it’s OK if it isn’t part of your question).
I’m not sure how to ask this but it seems like you’re...angry?… at me for trying to be precise about this? I’m not trying to challenge you, I just want to double crux to discover where our assessments differ. I thought that might have been any number of places you have expertise and I don’t, but now it seems like maybe you just don’t see value in public sense-making.
If the point of this is to try to quantify things like lawyer time, witness time, etc., in large matters like this, that’s going to be a REALLY heavy lift that the above just scratches the surface of and would require pulling together info from a huge number of sources, including public dockets that are daunting both in size and difficulty to work with. Not to knock the effort so far. It’s just a huge lift that would take hours and hours and require a lot of knowledge about how US court systems work to get right.
If one were to venture such a thing, a good place to start (but by no means a comprehensive source) would be fee applications in bankruptcy courts. That said, I’d advise against it. Feels like a lot of work that is very unlikely to move the needle in this discussion.
I agree the systemic effort is likely not worth it.
I think part of the problem is that, almost by definition, the people who have any expertise at all in law have also been inculcated in a culture that is extremely averse to both risks and quantified estimates. That leaves people without expertise but higher tolerance for risk and quantification (like Habryka) to come up with their own numbers and perhaps not respect the expertise behind the caution enough. I was hoping to unstick that log jam by introducing specifics that could be discussed at the object level. And I consider your suggestion to look at fee applications in bankruptcy court to be a success on that front, although the problem is very far from resolved.
Would you be willing to sit down with me and operationalize or parameterize some beliefs, which we can then send a legal researcher after? Or something like a double crux collaboration.
I find it completely plausible that there are a ton of hidden costs I could never find as an amateur, but I do want to have hard data instead of merely taking your word for it. I think using your guidance to figure out the right questions to get hard data on might be a huge win.
Habryka has confirmed he’s happy to pay for your time. Given that and the fact that he’s currently paying an expensive non-expert researcher (me), I’m extremely confident that if we find questions with the right level of tractability and meaning, he’ll cover the eventual legal researcher as well, although I didn’t wait for answer before posting this.
When you make a recommendation that people’s silence is based on “sound legal reasoning” you are implicitly claiming that you know the expected cost of the actions, and that the cost outweighs the benefits.
Yes, getting a robust estimate that is airtight is going to be hard, but in the OP you are already making a claim that you have an estimate of the relevant costs, and you should be able to quantify that estimate, at least with error bounds that could potentially span one or two orders of magnitude.
If you can’t actually put any expected cost to your estimate, or you are genuinely so uncertain about the actual cost here that you can’t give any number, then I don’t see how the reasoning in the OP checks out, since in that case it seems quite plausible that people are making a mistake by overestimating the cost, and the benefits actually hugely outweigh the costs.
Like, I understand that sometimes an estimate can be based on personal experience and intuitions whose generators are hard to elicit, but my sense is in this situation, if you are confident in the costs outweighing the benefits, then you should be able to produce some kind of estimate here (though I am not saying that this is a total universal, a basketball player can be confident they can make a shot, with very little ability to explain why they think that).
I would definitely be up for it! Happy to coordinate a good time via DM. Will also send you my phone number that you can call any time in the next few hours.
And even if someone did all that work, we wouldn’t know to what extent the quantum of legal effort/drama in a particular fraud-bankruptcy case was a good predictor of the quantum of legal effort/drama in this one. We would need to know significantly more about the facts than is publicly known to adjust the quantums from similar cases into a semi-reliable estimate for this one.
At Oliver’s request I dug into the Madoff case a little, to see if there was anything we could learn from.
Epistemic status: I am not a lawyer and I spent 2.5 hours on this, one of which was unproductively wrestling with the court records database, the worst database UI in the history of databases.
The following are court cases I found related to Madoff Investments:
Bernie Madoff pled guilty and never went to trial. It wasn’t even a negotiated plea bargain, just a straight guilty please (probably so he didn’t have to testify against anyone)
His two top lieutenants took plea deals and never went to trial (but did testify elsewhere).
5 other employees had a joint criminal trial. The Madoff case broke in 2008, they were indicted in 2010 (not all together), the case went to trial in 2013, and took 8 months to complete. Appeals continued until 2016.
The main trustee in charge of clawback filed “over 1,000” civil suits aimed at clawing back money. None of the ones I found in the news went to trial, although some got very close. I probably identified <20 cases, primarily the largest ones.
The lawsuits were (reportedly) aimed at people who took more money out than they had ever put in. The ones that made the news typically had a component of “knew or should have known Madoff was a fraud” and encouraging others to invest. However the money recovered went to a general fund, not the people they specifically were responsible for bringing to Madoff.
I found a handful of other lawsuits brought against the same entities from the large set of civil suits. None of these appear to have gone to trial, although they got very little coverage so it’s hard to say.
So that’s one trial. I spent an hour trying to get a witness list and failing, and am now hoping someone reads this and Cunningham’s laws me. You’re looking for S.D.N.Y., No. 09-mag-2484 or 1:10-cr-00228, transcripts are $6+ a page to get quickly. You might be able to do better going to the courthouse in NYC.
In the meantime:
That trial had “over 40” witnesses. Let’s call it 43.
The trial lasted 8 months, although not ever day had witness testimony.
Of those witnesses I found the following:
2 Expert witnesses/investigators who clearly opted in
Matthew Cohen, Bruce Dubinsky
6Employees of Madoff who could predict they would be called in (this includes the plea bargainers)
Winnifer Jackson, David Kugel, Enrica Cotellessa-Pitz, Friehling, Konigsburg, DiPascali
2 defendents
Bonventre, Bongiorno
That leaves 30+ witnesses unaccounted for, which isn’t really enough to draw interesting conclusions, especially without knowing the denominator of who could have been called.
The main Enron trial was much more cooperative and provided full lists of witnesses, with profiles.
Wall Street Journal profiles of prosecution witnesses:
Enron Employees and contractors: 20
Arthur Andersen Employes: 2
Criminal Investigators: 1
Other: 2
Rob Barone, managing director at S&P who previously oversaw an assessment of Enron
Glenn Ray, a stockbroker who managed a defendent’s sale of Enron stock
Wall Street Journal profiles of defense witnesses:
Enron employees: 15
11 material
3 character witnesses (which is presumably voluntary)
1 contractor
Defendants: 2
Expert Witnesses: 3
Non-enron character witnesses: 11
The prosecution also shared its prospective witness list. It has 31 names, of which 23 testified, plus another 2 who weren’t on the original list. Of those two, one was an FBI agent for whom this was part of his job, and another was an Enron employee brought in as a rebuttal witness.
Enron produced a lot of trials, of which this is only one. There were so many trials Wikipedia didn’t even bother to list all of them (example), plus the senate hearings, extradition trials, appeals, etc. This is a very narrow slice of who had to testify about Enron.
But all of the witnesses either opted in (as character or expert witnesses, or investigators), worked for the company or person that committed crimes, or worked for the auditing firm that missed the crimes. None of these seem equivalent to the people I imagine you are talking to or about here. Could you give some specific examples of witnesses in positions similar to those people, in cases similar to FTX’s likely case? I’m happy with a very broad definition of similar, and I would absolutely believe they exist and I missed them. I’m a non-expert who has looked at two cases so far and both are missing crucial aspects of EA’s relationship to FTX. But I’m clearly not going to find them very fast.
Full disclosure: habryka is paying me for this research. He didn’t review either comment before publication but I did talk to him about my findings as I was working. I meant to include this in the first comment but the “(paid)” in “At Oliver’s (paid) request” got lost in an edit somewhere.
I would maybe edit it in?
I’m not sure what conclusion this would support.
The scope of what the prosecution has to prove in a criminal prosecution can be surprisingly narrow. Specifically, the prosecution needs to prove the elements of the charged offenses—not the entire scope of the criminal enterprise. Assuming there is a conviction, other information can come in at sentencing where the proof is much simpler. In contrast, in civil litigation, you need a much more complete picture to establish who the bankruptcy estate might be able to get money from.
As this article notes, the Madoff trustee’s firm ran up $1.4B in legal fees as of last year on civil litigation. You note that they filed about 1,000 civil lawsuits—I suspect there were significantly more targets than that because the trustee viewed litigation as a last resort when settlement negotiations failed. I have no way of knowing how many different individuals and entities got hit with depositions and discovery demands in those 1,000+ cases . . . but I would suspect the average number of depositions and discovery demands in a filed civil case is greater than one each. The trustee had to be doing something substantial to justify the court approving all those fees . . .
I suspect there was less civil litigation around Enron, but for reasons that aren’t helpful here. Enron was a publicly-traded corporation, and IIRC the bulk of the losses were equity (people who held Enron stock that was overvalued due to fraudulent financial reports). Neither Enron nor those who lost money on Enron stock would be expected to have a claim against people who traded in its stock without knowledge of the fraud. Among other reasons, Enron itself wasn’t a party to those transactions, so its bankruptcy estate would have no clawback claims against third parties who sold Enron stock to other third parties for more than it was ultimately worth.
I don’t think this supports any conclusions yet, it’s two cases and I only got a full witness list for one of those. I would love to see any examples of witnesses who were in roughly the position EA leadership or members (allegedly) are- people who received money for charitable purposes, from someone who earned it through fraud and needs to pay it back, but weren’t close relatives or could otherwise be considered tightly aligned with their funder. Or someone like Holden, whose org AFAIK didn’t receive any FTX money at all.
(FTR I think Holden waiting until his takes are cold is entirely reasonable, I think the speed of response on the EAF is overheated, but given the trials could take over a decade, establishing the risks of speaking candidly before they are entirely resolved seems valuable).
Doesn’t Holden have close personal ties to Anthropic, which is potentially a huge target?
Oh I had indeed forgotten that.
I don’t see anyone analogous to him, or even to someone who actually works at anthropic, the Enron witness list. Can you point to examples of analogous people in other cases?
As Tyler mentioned, it would be a massive effort to try to identify everyone who had been served with a discovery request or a deposition demand in a related civil proceeding. As in, it could take a hundred hours or more in Madoff (probably somewhat less in Enron), and the list might not be complete. So I don’t think that is a good use of anyone’s time.
I 100% agree that processing everyone who’d been touched by any Madoff case would be a massive undertaking and not worth the time. Which is why I didn’t ask for it. Right now I’m just asking for a single example of people in the reference class this post is discussing, being involved in the case. That’s definitely not the last question I’m going to ask, but it seems like a good starting place.
Maybe this is one of those dumb questions that’s so obvious to everyone with any expertise that they are laughing at me, and it takes a minute think of a specific example because it’s so common an expert would never bother to remember specifics. In that case, I expect experts to still be able to produce an example with a tiny amount of work once they stop laughing. And given legal advices’ reputation for overcaution in general, I think asking for examples and eventually numbers for a particular piece of advice is a fair request.
Alternately, I’d love to see legal experts replace Habryka’s guesstimate with more informed ones. My understanding from your comment here is that you’re not comfortable with that because the question isn’t well-defined. I think defining different scenarios and providing numbers for those (including some that are obviously materially different from this case, both to signal that the numbers can’t be applied directly and because it’s useful for teaching principles). Or add error bars until comfortable.
None of us are experts on the Madoff litigation itself—and even someone who had worked on it at a staff level would have only worked on a tiny sliver of it and would only have a small fraction of the universe of discovery targets in their mind.
I can partially quantify an estimate of how many entities experienced significant discovery burdens (e.g., sitting for a deposition, having to search and turn over significant documents, answering interrogatories) due to the Madoff civil litigation. Let’s set the lower error bar at 1,000 because there were 1,000 civil suits. Let’s guess a error bar extending to 10,000 based on Federal Rule of Civil Procedure 30(a)(2)(a)(i), which allows ten depositions per side without specific court approval—keeping in mind that there are other ways to burden a defendant or third party without taking their deposition. Although there is still significant uncertainty there, the number of civil suits (and the massive amount expended by the trustee) are far better predictors of someone getting tangled up in this than whether they were called to testify in a criminal trial.
I didn’t account for the fact that the Madoff trustee settled many of the estate’s claims without litigation—that means the 1,000 number is probably too low for our purposes. Nobody knows which claims will settle—which would affect which 1,000 to 10,000 get hit. So the universe of people who might reasonably expect to be in that 1,000 to 10,000 is maybe double that.
Are any EA leaders among the 20,000 people the debtor’s counsel would be most interested in hearing from? And could any statements by those people add them (or their colleagues/contacts) to that list, increase their exposures, or convince debtor’s counsel to spend more resources digging into them? That requires knowing more about the FTX situation, what the EA leaders know, and how their statements would read than any of us know.
We don’t know the facts—no one fully does at this stage—but there is an excellent chance the people who worked on the FTX Future Fund will be on a list, there is a strong chance that top officials at anyone who received more than $5MM from the Future Fund will be on a list (moderate chance at lower levels), there is a strong chance that anyone who was a regular correspondent with SBF or another key figure will be on a list. I believe most EA leaders are in one of those categories—or are an associate of someone who is in those categories and whose situation could be complicated by the first person speaking freely for reasons Tyler explained.
Thank you, this is exactly what I was hoping for! I have several questions.
Could you expand on how lawyers can create costs for 3rd parties, even without depositions?
I don’t understand why you’re using the exact same number as the Madoff clawbacks. I looked at it more for ratios: out of 40,000 investors (another source says 37k), 2,000 were net positive, and ~half of those were sued.* Your intuitions about where lines might be drawn were really helpful here, although I don’t feel like I have the level of clarity I want yet.
Suppose someone gets on a list: what happens next? how much of that is set in stone? What changes could someone induce by talking publicly? Some guesses I have are getting deposed versus not, deposition takes n% longer, personal records get subpoenaed where they otherwise wouldn’t have.
*Note that it’s not 1000+ cases that went to trial, it’s 1,000 lawsuits filed (apologies for leaving the citation out earlier, I meant to include it). I have yet to find any that went to trial, although some clearly got far enough to be prepping witnesses. That’s about what the trustee initially estimated- that out of 2000 net beneficiaries of Madoff, he’d go after about half of them. It’s not clear to me anyone gave back money without a lawsuit being filed.
As far as what kind of pain the legal process imposes on those who get caught up in it, the bulk comes prior to trial. So the fact that these cases didn’t go to trial doesn’t move the needle much. Actual trials in cases between midsize+ corporations are fairly uncommon, as the EV of the litigation is usually pretty clear after discovery ends and any summary-judgment motions are litigated to resolve disputed issues of law. Few cases of that sort are dependent on disputed witness testimony or the like.
The biggest practical pain point is document discovery, potentially having to go through potentially tens to hundreds of thousands of pages of documents to figure out which are responsive to the other side’s document demands and what has to be turned over. In a really simple case with 1,000 pages of material held by a few employees, responding to discovery can still potentially take several dozen hours of attorney time (plus client time), so let’s ballpark $10K on the low end per new third-party target. It is really hard to assess how much responsive material a third party could have. $100K might be a reasonable high-end estimate. For a major target like CEA/EV, maybe an order of magnitude higher.
For an entity that is already a target, let’s start with attorney fees. Although I expect entities on the other side spent less than the trustee’s $1.4B, half to 70 percent of that wouldn’t surprise me at all. So mid-six figures per target seems ballpark plausible on average. Much of that would be in discovery. Giving the opponent more information up front would likely allow them to justify more burdensome discovery to the judge. I would guestimate a 10-25% uplift in litigation costs per target from making a statement. Obviously it depends on what the statement says—but if the statement says nothing of substance, issuing it would have little value in the first place?
There’s also the risk of more easily triggering lawsuits from third party plaintiffs. Under Federal Rule of Civil Procedure 11, an attorney or party cannot file a complaint or pleading without conducting a reasonable investigation into the merits of the complaint (more or less). Giving a statement that isn’t 100 percent exculpatory makes it very easy for some would-be plaintiffs to meet their Rule 11 obligations and file a suit that wouldn’t have been filed otherwise. It’s possible, but less likely, that an organization’s statement could trigger a suit against a third party. Moreover, having a statement to hang their hat on likely makes it easier for would-be litigants to write their complaints in a way that survives the first, relatively inexpensive shot you get to get rid of a case (a Rule 12(b) motion to dismiss, see the Supreme Court’s decisions in Iqbal and Twombly if you want to geek out on that standard).
If you look at sanctions awards in frivolous cases (e.g., the “Kraken” election litigation in Michigan), you’ll see that defendants often can spend 250K on beating them back. That could be higher or lower based on the nature of the litigation. So I’m going to assign an EV of 250k as a rough estimate to a mid-to-larger org’s exposure for speaking out, which could represent a few really quick suits, one Kraken-level suit, or 0.1-0.2 of a more significant class action.
An organization also needs to be very careful in its public statements because they are admissions that can be used against it in court to devastating effect. That means it probably should conduct its own internal investigation before committing to a position that says anything substantive. Employees are known to . . . misremember or forget stuff when the facts don’t make them look good. Human nature. Depending on the organization’s risk tolerance, potential exposure, and amount of material, $25K-$250K per organization could be a reasonable estimate (but I’ve never been involved in pricing them, and I think a good investigation of CEA/EV would be higher given how much involvement it seems to have had with SBF directly).
Plus, a detailed statement gives the opponent a roadmap to make their discovery and litigation strategies more effective. At my upper-end estimate of the amount at stake, even a few percent increase in the estate’s chance of winning against EV/CEA alone could have a negative seven-figure EV. This would be lower for other organizations of course.
Cynically, there is also the chance that an organization knows it is toast, and that putting out a statement that would basically concede that is a great way to hasten the end. You can decide for yourself what the utility (or disutility) of keeping an organization running for an extra 2-3 years might be.
All of that is really conjectural on my end, but hopefully it gives you some basis for how a lawyer (who I emphasize has zero inside knowledge at all!) might try to quantify the costs of speaking rather than maintaining radio silence. I have low confidence in that quanitification. I would never attempt to quantify in this way for a client; the error bars are just too large.
Ultimately, it is a client decision whether the client should talk about pending litigation. Only in rare cases is silence not the correct decision from a legal perspective. However, clients make decisions against their legal interest for any number of reasons. Sometimes these are poor decisions, sometimes the client decides they have non-legal interests that they properly judge to outweigh their legal interests.
Apologies for the delay, and thank you, this is really helpful in fleshing out my models.
Am I correct that there is a ceiling on the amount of discovery that can be done? Once you have to turn over every document, there are no more documents to turn over. So the costs of speaking should asymptote over time? If not, what costs are increasingly linearly or faster?
> if the statement says nothing of substance, issuing it would have little value in the first place
is this true? I imagine there are some statements that are interesting to the EA community but bear no legal weight (“we believe fraud is bad”), and others contain information that would have been in discovery anyway.
I get the feeling one thing going on is that there are safe statements, but it’s hard for laypeople to identify them ahead of time (see: SBF outlining his incompetence as if that was a defense instead of evidence of a crime). So lawyers default to the much easier to follow “please shut the hell up”.
Do you have estimates for client time? I expect many EA orgs to care more about that than lawyers fees, especially if potential increases are only on the order of 25%.
There is likely a ceiling effect, either on the volume of discoverable things or the other side’s CEA of marginal discovery.
I think major orgs have made “we think fraud is bad” statements. I assume no one thinks fraud is good, or would admit to it if they did, so those statements have zero value to me.
Whether there are other safe statements depends on the organization’s exposure, but in many cases your lawyers would have to engage in a lot of independent factfinding to figure out if that’s the case (including needing to figure out information not held by your organization or publicly available). On the other hand, “no one here ever interacted with SBF, took FTX money, or gave him much thought” is likely safe if true and shouldn’t require much work.
There were no safe statements a lawyer could identify for SBF—that would require identifying, accessing, and ingesting all material info DOJ would obtain on him, which was/is impossible.
Really hard for me to estimate staff time given the nature of the case. You probably can substitute lawyer time for staff time for many tasks if you value staff time at mote than the lawyer’s rate.
If you’re doing a CEA, you should consider that discovery will probably happen under a protective order and any litigation will very likely be settled in a way where there is minimal leakage of the discovered info. So I don’t think it is correct to assume that unfavorable information will be publicly disclosed no matter what.
This feels like a nonsequitur to me. The question is “is there information an org or person might like to disclose, but shouldn’t, due to its effect on legal risk (including procedural burden)?”. If the entity doesn’t want the information to be public then this question doesn’t arise (we could argue about whether orgs have a proactive moral duty to confess to crimes, but that’s definitely not the question here).
It sounds like you’re saying there is a ceiling on the burden for discovery, trial, etc, so at a certain point new statements can’t increase that burden, although they could have other negative consequences. Is that correct?
There is certainly a ceiling. Then again, your organization ceasing to exist because it’s overrun with legal bills and/or a crippling judgment is entered against it is a ceiling, and for smaller organizations (especially those that spent grant funds and are already going to get hit with a clawback) it may well be a realistic estimate of the ceiling.
As far as a non sequitur, I think we’re interested in somewhat different questions. My formulation is more: “What are the relative costs and benefits of making statements and releasing information on this matter?” I don’t find comparing benefits to only the increase in legal risk to be particularly decision-relevant on what organizations should do. I think almost any statement that is not “we’re giving back all the money, right now” is going to be net negative PR, and I think the increased risk of public disclosure of unfavorable information has to be considered to answer my question (it’s OK if it isn’t part of your question).
I would note that there is a huge jump from “unfavorable information” to “confess to crimes”—for instance, there is generally no duty to rescue in common-law jurisdictions (which would include the US and UK).
I’m not sure how to ask this but it seems like you’re...angry?… at me for trying to be precise about this? I’m not trying to challenge you, I just want to double crux to discover where our assessments differ. I thought that might have been any number of places you have expertise and I don’t, but now it seems like maybe you just don’t see value in public sense-making.
My two cents: I don’t read any negative emotions from Jason’s comment
If the point of this is to try to quantify things like lawyer time, witness time, etc., in large matters like this, that’s going to be a REALLY heavy lift that the above just scratches the surface of and would require pulling together info from a huge number of sources, including public dockets that are daunting both in size and difficulty to work with. Not to knock the effort so far. It’s just a huge lift that would take hours and hours and require a lot of knowledge about how US court systems work to get right.
If one were to venture such a thing, a good place to start (but by no means a comprehensive source) would be fee applications in bankruptcy courts. That said, I’d advise against it. Feels like a lot of work that is very unlikely to move the needle in this discussion.
I agree the systemic effort is likely not worth it.
I think part of the problem is that, almost by definition, the people who have any expertise at all in law have also been inculcated in a culture that is extremely averse to both risks and quantified estimates. That leaves people without expertise but higher tolerance for risk and quantification (like Habryka) to come up with their own numbers and perhaps not respect the expertise behind the caution enough. I was hoping to unstick that log jam by introducing specifics that could be discussed at the object level. And I consider your suggestion to look at fee applications in bankruptcy court to be a success on that front, although the problem is very far from resolved.
Would you be willing to sit down with me and operationalize or parameterize some beliefs, which we can then send a legal researcher after? Or something like a double crux collaboration.
I find it completely plausible that there are a ton of hidden costs I could never find as an amateur, but I do want to have hard data instead of merely taking your word for it. I think using your guidance to figure out the right questions to get hard data on might be a huge win.
Habryka has confirmed he’s happy to pay for your time. Given that and the fact that he’s currently paying an expensive non-expert researcher (me), I’m extremely confident that if we find questions with the right level of tractability and meaning, he’ll cover the eventual legal researcher as well, although I didn’t wait for answer before posting this.
When you make a recommendation that people’s silence is based on “sound legal reasoning” you are implicitly claiming that you know the expected cost of the actions, and that the cost outweighs the benefits.
Yes, getting a robust estimate that is airtight is going to be hard, but in the OP you are already making a claim that you have an estimate of the relevant costs, and you should be able to quantify that estimate, at least with error bounds that could potentially span one or two orders of magnitude.
If you can’t actually put any expected cost to your estimate, or you are genuinely so uncertain about the actual cost here that you can’t give any number, then I don’t see how the reasoning in the OP checks out, since in that case it seems quite plausible that people are making a mistake by overestimating the cost, and the benefits actually hugely outweigh the costs.
Like, I understand that sometimes an estimate can be based on personal experience and intuitions whose generators are hard to elicit, but my sense is in this situation, if you are confident in the costs outweighing the benefits, then you should be able to produce some kind of estimate here (though I am not saying that this is a total universal, a basketball player can be confident they can make a shot, with very little ability to explain why they think that).
Does it make sense to have a quick chat about this in realtime? I’d be open to that and think it would be more productive.
I would definitely be up for it! Happy to coordinate a good time via DM. Will also send you my phone number that you can call any time in the next few hours.
And even if someone did all that work, we wouldn’t know to what extent the quantum of legal effort/drama in a particular fraud-bankruptcy case was a good predictor of the quantum of legal effort/drama in this one. We would need to know significantly more about the facts than is publicly known to adjust the quantums from similar cases into a semi-reliable estimate for this one.