Doesn’t really change my views that much. Maybe I’m 45 − 55 for mistake-fraud now, from 50-50. There’s no smoking gun documents or communications in the complaint. It’s possible they are hiding the ball, at this point. Perhaps they have a fragile witness who they don’t want to expose to public scrutiny. (Caroline Ellison or one of the other high level executives seem like the most likely candidates.) But I don’t see proof beyond a reasonable doubt that this is fraud.
The key thing to note is that, legally, Sam’s subjective intent (and not whether customers were harmed or felt deceived) is what ultimately matters. I think it also matters morally, though of course extreme negligence is immoral too. There are a lot of troubling circumstantial allegations made—e.g., the fact that customer deposits were in some cases going directly into Alameda-controlled accounts, while Sam was promising folks that the two entities were separate and that customer accounts were segregated—but unless the prosecution can prove beyond a reasonable doubt that Sam intentionally committed fraud, they should lose their case. (Does not mean they actually WILL lose their case, as in cases such as this, with so much public pressure, juries are quick to condemn even if the evidence is insufficient.) I can see an early-stage startup putting funds into the wrong bank account simply because it was convenient, and then forgetting about it later when it was convenient to forget about it. That’s not fraud. That’s negligence and incompetence.
I still think the very fact that the feds filed charges is significant evidence that fraud was committed. But without hearing Sam’s side of the story, it’s really hard to say, from these relatively-barebones complaints, that there is clear evidence of fraud. Sam will likely have explanations for all the decisions made, e.g., the special coding for Alameda’s margin (“We felt Alameda was a safe counterparty, and important to the business, and would have given the same treatment to any similarly-situated customer.”). Until I hear that evidence—or see CLEAR evidence of fraud -- it’s hard to assess the relatively general allegations made in this complaint.
An example of clear evidence of fraud would be something like this in the coplaint: “In August 2022, Bankman-Fried, realizing that Alameda’s creditors were demanding more collateral, wrote to his team members: ‘I don’t care what the terms of service say, and I don’t care what we promised investors and customers. Send the money to Alameda immediately, so we can solve their balance sheet problem. And don’t tell anyone about this.’ ”
Instead this complaint has reasonable circumstantial evidence of guilt but nothing that, to me, leaps out as clear and convincing evidence of fraud. Of course, the prosecution will have much more time to develop their case. But if the complaint is all they have, I think they are going to have trouble winning this case. (I should add; the complaint is rarely all a prosecutor has, and I still think that SDNY probably would not have brought this case without something strong, e.g., a cooperating witness who can testify about agreements to lie to investors. Remembering the base rate of conviction, 90+%, is pretty important here.)
PS I’m curious. What was your take? I have a defendant bias, as someone who has done criminal defense work. Do you think I’m missing some smoking gun in this complaint that, at this point, shows that the prosecution has a very strong case? Fraud cases are very hard to prove, in my experience, even pursuant to the civil burden of proof.
I wouldn’t expect a smoking gun to show up in either a SEC civil complaint or a criminal indictment. Many fraud cases are built on a number of events, the cumulative weight of which makes an innocent explanation implausible. And I think I—and in general, jurors—are more willing to infer state of mind from the circumstances than you seem to be.
I think the most significant paragraph in the SEC complaint is probably paragraph 41 in which SBF explicitly directs special treatment for Alameda. “On multiple occasions, Bankman-Fried directed FTX to increase the amount by which Alameda could maintain a negative balance in its account.” That isn’t consistent with an early design failure that everyone forgot about, or SBF being asleep at the switch / ignorant / negligent while things happened. It supports a finding of actual knowledge (and intent) that Alameda was eating into customer funds.
But maybe more importantly, it supports a conclusion that the various representations made to investors and customers (directly and through the media) about the “arms-length” relationship between the two were false and SBF knew it. Those representations were almost certainly made with the intent to encourage investment and depositing. Sure sounds like a scheme to “obtain[] money or property by means of false or fraudulent pretenses, representations, or promises . . . .” 18 USC 1343 (wire fraud statute).
FTX had no plausible claim of legal right to knowingly appropriate customer funds to allow another customer (much less an insider) to run a massive negative balance unless the customer opted-in to that. “The concept of fraud includes the act of embezzlement, which is the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s own care by another.” Carpenter v. United States, 484 U.S. 19, 27 (1987) (cleaned up). Finally, the timing, size, and low/non-documented nature of the “loans” to SBF while the ship was starting to sink is itself significant evidence of a purpose to defraud—again, that doesn’t really match the idea that SBF honestly thought he was making legitimate business decisions.
These are very sound, reasonable points. Agreed that the allegation that he repeatedly raised Alameda’s line of credit, and its ability to carry negative balances, seems troubling and inconsistent with his claims that, “I had no idea.” But complaints always sound bad. Hard to know what to make of the story until we’ve heard the other side.
I also would feel more convinced if they stated in the complaint something like the following, “When other employees raised concerns that turning off risk controls for Alameda would be unfair and fraudulent, Bankman-Fried responded, ‘I don’t care if it’s dishonest. We need to make money.’ ”
Complaints don’t have to go into that level of detail, but given the public nature of this prosecution, if I were the USAtty, I would have chosen to do so. The other side will get this evidence eventually, anyways, because it’s legally required discovery. And it will build more public confidence in the prosecution—that it is a legitimate prosecution rather than mob mentality—if they show that they have clear evidence of fraud.
If they have evidence of this sort and are hiding the ball, the best explanation to me is that they are trying to soft pedal their witnesses, to prevent them from backing out of their commitment to provide testimony.
I also would feel more convinced if they stated in the complaint something like the following, “When other employees raised concerns that turning off risk controls for Alameda would be unfair and fraudulent, Bankman-Fried responded, ‘I don’t care if it’s dishonest. We need to make money.’ ”
Sure, I agree that things would be even more apparent if SBF were on the record explicitly condoning fraud. But that’s easily avoidable, so any bad actor who isn’t stupid will find workarounds to communicating in such a self-incriminating way. (From what we’re hearing, there may have been self-deleting chats and emoji reactions instead of diligent record-keeping.) It’s common for liars to leave themselves plausible deniability wherever possible. That’s why a shred of plausible deniability should be worth near to nothing when contrasted with a large amount of circumstantial incriminating evidence. I take moral offense at your slowness to update here: it seems that bad actors have it easy when people on the sidelines predominantly reason the way you do. We should invest at least as much effort steelmanning the case that someone is guilty than that they’re innocent. If they’re guilty, their potential/alleged victims usually vastly outnumber them.
I get the point that ideal justice includes steelmanning the case that someone is innocent or was acting with negligence rather than fraud/malice. So if you’re playing the role of a defender in the legal system, that’s okay! But it should be flagged as such. If we’re approaching this from the perspective of “what’s likely to be the case?” then my worry is that you’re systemically underestimating the probability of fraud/malice if you wait for explicit confessions/smoking guns with the person’s fingerprints. It’s somewhat rare for bad actors to leave these things laying around. Also, and perhaps more importantly, it’s very rare that innocent people maneuver themselves in situations where they face really severe criminal charges and potentially a lifetime in jail. This holds even more so if the person in question seems really smart and competent whenever it isn’t in their advantage to play dumb.
Prosecutors are not supposed to litigate their criminal cases in the media (although they often do). Although you could put explosive stuff in the complaint without violating Model Rules 3.6 and 3.8, it does run the risk of tainting the jury pool. The accountability will come when SBF pleads or when SDNY has to put up or shut up at trial. I don’t think there is a widespread (or even semi-common) belief that SDNY is overplaying its hand. So I would be more worried about handing SBF a potential appellate issue than about public confidence right now.
How does the SEC complaint (and the criminal complaint, if unsealed before you read this) update your assessment?
I read it. (It’s here.)
Doesn’t really change my views that much. Maybe I’m 45 − 55 for mistake-fraud now, from 50-50. There’s no smoking gun documents or communications in the complaint. It’s possible they are hiding the ball, at this point. Perhaps they have a fragile witness who they don’t want to expose to public scrutiny. (Caroline Ellison or one of the other high level executives seem like the most likely candidates.) But I don’t see proof beyond a reasonable doubt that this is fraud.
The key thing to note is that, legally, Sam’s subjective intent (and not whether customers were harmed or felt deceived) is what ultimately matters. I think it also matters morally, though of course extreme negligence is immoral too. There are a lot of troubling circumstantial allegations made—e.g., the fact that customer deposits were in some cases going directly into Alameda-controlled accounts, while Sam was promising folks that the two entities were separate and that customer accounts were segregated—but unless the prosecution can prove beyond a reasonable doubt that Sam intentionally committed fraud, they should lose their case. (Does not mean they actually WILL lose their case, as in cases such as this, with so much public pressure, juries are quick to condemn even if the evidence is insufficient.) I can see an early-stage startup putting funds into the wrong bank account simply because it was convenient, and then forgetting about it later when it was convenient to forget about it. That’s not fraud. That’s negligence and incompetence.
I still think the very fact that the feds filed charges is significant evidence that fraud was committed. But without hearing Sam’s side of the story, it’s really hard to say, from these relatively-barebones complaints, that there is clear evidence of fraud. Sam will likely have explanations for all the decisions made, e.g., the special coding for Alameda’s margin (“We felt Alameda was a safe counterparty, and important to the business, and would have given the same treatment to any similarly-situated customer.”). Until I hear that evidence—or see CLEAR evidence of fraud -- it’s hard to assess the relatively general allegations made in this complaint.
An example of clear evidence of fraud would be something like this in the coplaint: “In August 2022, Bankman-Fried, realizing that Alameda’s creditors were demanding more collateral, wrote to his team members: ‘I don’t care what the terms of service say, and I don’t care what we promised investors and customers. Send the money to Alameda immediately, so we can solve their balance sheet problem. And don’t tell anyone about this.’ ”
Instead this complaint has reasonable circumstantial evidence of guilt but nothing that, to me, leaps out as clear and convincing evidence of fraud. Of course, the prosecution will have much more time to develop their case. But if the complaint is all they have, I think they are going to have trouble winning this case. (I should add; the complaint is rarely all a prosecutor has, and I still think that SDNY probably would not have brought this case without something strong, e.g., a cooperating witness who can testify about agreements to lie to investors. Remembering the base rate of conviction, 90+%, is pretty important here.)
PS I’m curious. What was your take? I have a defendant bias, as someone who has done criminal defense work. Do you think I’m missing some smoking gun in this complaint that, at this point, shows that the prosecution has a very strong case? Fraud cases are very hard to prove, in my experience, even pursuant to the civil burden of proof.
I wouldn’t expect a smoking gun to show up in either a SEC civil complaint or a criminal indictment. Many fraud cases are built on a number of events, the cumulative weight of which makes an innocent explanation implausible. And I think I—and in general, jurors—are more willing to infer state of mind from the circumstances than you seem to be.
I think the most significant paragraph in the SEC complaint is probably paragraph 41 in which SBF explicitly directs special treatment for Alameda. “On multiple occasions, Bankman-Fried directed FTX to increase the amount by which Alameda could maintain a negative balance in its account.” That isn’t consistent with an early design failure that everyone forgot about, or SBF being asleep at the switch / ignorant / negligent while things happened. It supports a finding of actual knowledge (and intent) that Alameda was eating into customer funds.
But maybe more importantly, it supports a conclusion that the various representations made to investors and customers (directly and through the media) about the “arms-length” relationship between the two were false and SBF knew it. Those representations were almost certainly made with the intent to encourage investment and depositing. Sure sounds like a scheme to “obtain[] money or property by means of false or fraudulent pretenses, representations, or promises . . . .” 18 USC 1343 (wire fraud statute).
FTX had no plausible claim of legal right to knowingly appropriate customer funds to allow another customer (much less an insider) to run a massive negative balance unless the customer opted-in to that. “The concept of fraud includes the act of embezzlement, which is the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s own care by another.” Carpenter v. United States, 484 U.S. 19, 27 (1987) (cleaned up). Finally, the timing, size, and low/non-documented nature of the “loans” to SBF while the ship was starting to sink is itself significant evidence of a purpose to defraud—again, that doesn’t really match the idea that SBF honestly thought he was making legitimate business decisions.
These are very sound, reasonable points. Agreed that the allegation that he repeatedly raised Alameda’s line of credit, and its ability to carry negative balances, seems troubling and inconsistent with his claims that, “I had no idea.” But complaints always sound bad. Hard to know what to make of the story until we’ve heard the other side.
I also would feel more convinced if they stated in the complaint something like the following, “When other employees raised concerns that turning off risk controls for Alameda would be unfair and fraudulent, Bankman-Fried responded, ‘I don’t care if it’s dishonest. We need to make money.’ ”
Complaints don’t have to go into that level of detail, but given the public nature of this prosecution, if I were the USAtty, I would have chosen to do so. The other side will get this evidence eventually, anyways, because it’s legally required discovery. And it will build more public confidence in the prosecution—that it is a legitimate prosecution rather than mob mentality—if they show that they have clear evidence of fraud.
If they have evidence of this sort and are hiding the ball, the best explanation to me is that they are trying to soft pedal their witnesses, to prevent them from backing out of their commitment to provide testimony.
Sure, I agree that things would be even more apparent if SBF were on the record explicitly condoning fraud. But that’s easily avoidable, so any bad actor who isn’t stupid will find workarounds to communicating in such a self-incriminating way. (From what we’re hearing, there may have been self-deleting chats and emoji reactions instead of diligent record-keeping.) It’s common for liars to leave themselves plausible deniability wherever possible. That’s why a shred of plausible deniability should be worth near to nothing when contrasted with a large amount of circumstantial incriminating evidence. I take moral offense at your slowness to update here: it seems that bad actors have it easy when people on the sidelines predominantly reason the way you do. We should invest at least as much effort steelmanning the case that someone is guilty than that they’re innocent. If they’re guilty, their potential/alleged victims usually vastly outnumber them.
I get the point that ideal justice includes steelmanning the case that someone is innocent or was acting with negligence rather than fraud/malice. So if you’re playing the role of a defender in the legal system, that’s okay! But it should be flagged as such. If we’re approaching this from the perspective of “what’s likely to be the case?” then my worry is that you’re systemically underestimating the probability of fraud/malice if you wait for explicit confessions/smoking guns with the person’s fingerprints. It’s somewhat rare for bad actors to leave these things laying around. Also, and perhaps more importantly, it’s very rare that innocent people maneuver themselves in situations where they face really severe criminal charges and potentially a lifetime in jail. This holds even more so if the person in question seems really smart and competent whenever it isn’t in their advantage to play dumb.
Prosecutors are not supposed to litigate their criminal cases in the media (although they often do). Although you could put explosive stuff in the complaint without violating Model Rules 3.6 and 3.8, it does run the risk of tainting the jury pool. The accountability will come when SBF pleads or when SDNY has to put up or shut up at trial. I don’t think there is a widespread (or even semi-common) belief that SDNY is overplaying its hand. So I would be more worried about handing SBF a potential appellate issue than about public confidence right now.