wayne

Karma: 244

wayne 22 Dec 2022 5:22 UTC
35 points
9 ∶ 7
on: Link-post for Caroline Ellison’s Guilty Plea
This updates me to 90-10 fraud. Sophisticated parties generally don’t plead guilty to crimes they did not commit, and both Ellison and Wang are well-represented. I was probably overly optimistic with earlier predictions, perhaps in part due to positive personal interactions with Sam.
Very sad for everyone involved.

wayne 14 Dec 2022 19:22 UTC
7 points
1 ∶ 2
in reply to: Jason’s comment on: Sam Bankman-Fried has been arrested
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.

wayne 13 Dec 2022 21:27 UTC
8 points
3 ∶ 1
in reply to: Jason’s comment on: Sam Bankman-Fried has been arrested
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.

wayne 13 Dec 2022 21:16 UTC
16 points
3 ∶ 5
in reply to: Jason’s comment on: Sam Bankman-Fried has been arrested
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.)
What links here?
- Simon_M's comment on Link-post for Caroline Ellison’s Guilty Plea by Lauren Maria (22 Dec 2022 14:36 UTC; 37 points)

wayne 13 Dec 2022 2:28 UTC
21 points
4 ∶ 1
in reply to: Jason’s comment on: Sam Bankman-Fried has been arrested
I think it’s very very fast. A few possibilities:
1. Concerned he’s a flight risk.
2. Overwhelmingly clear evidence, most likely in the form of a cooperating witness who can provide documents proving fraud, e.g., records showing Sam saying, “We’re going to have to lie to our customers to cover our losses.”
3. Concerned about additional harm he could cause, e.g., the mysterious withdrawals from FTX accounts shortly after the collapse.
Of these 3, the last 2 seem most likely to me. Sam probably isn’t a flight risk, given that he has deep connections in the United States.

wayne 13 Dec 2022 2:22 UTC
23 points
7 ∶ 17
on: Sam Bankman-Fried has been arrested
This updates me significantly in favor of thinking there is fraud. The conviction rate for the feds is 90+%, and the SDNY has a particularly good reputation – probably the best of any US Atty office in the nation.

It’s also possible that SDNY has jumped the gun due to public pressure. But I’m doubtful the US Attorney would bring this case unless there’s pretty clear evidence of fraud. The US Attorney in SDNY, Damian Williams, is someone who has extensive experience litigating securities cases and presumably has personally vetted the evidence, given the prominence of this case.
Very sad if it’s truly the case that this is fraud.

I think I’ve gone from 70-30 to 50-50, for the probability of mistake vs fraud.
What links here?
- Simon_M's comment on Link-post for Caroline Ellison’s Guilty Plea by Lauren Maria (22 Dec 2022 14:36 UTC; 37 points)

wayne 2 Dec 2022 22:04 UTC
3 points
0 ∶ 0
in reply to: Lukas_Gloor’s comment on: SBF’s recent live interview at the DealBook Summit
This is helpful. I might give the interview another listen with these particular issues in mind.

wayne 2 Dec 2022 17:03 UTC
1 point
0 ∶ 0
in reply to: Lukas_Gloor’s comment on: SBF’s recent live interview at the DealBook Summit
What do we think might have been evasive in his answers?
I would have to re-listen to the interview to see what mistakes he admitted. But I thought it was pretty clear what mistakes he admitted to, personally: failure to manage risk (e.g., understanding how likely it would be that there would be a simultaneous drop in collateral value, and a sudden withdrawal of deposits); failure to maintain corporate controls (e.g., creating red flags or account pauses, if certain accountholders like Alameda exceeded lending limits); and improper account segregation (admitted he did not know about commingling of funds). He did not admit to specific fraud, but that’s consistent with the notion that he did not commit to fraud. He did admit to a number of things that, to me, provide a completely plausible account as to how FTX failed. And they are errors of risk management and even arrogance—but not malice or deceit.

wayne 2 Dec 2022 16:57 UTC
35 points
10 ∶ 4
on: “Insider EA content” in Gideon Lewis-Kraus’s recent New Yorker article
I’ve worked to pitch (and in some cases, been the target of) investigative pieces for the last 15 or so years of my life, and honestly, nothing here strikes me as particularly troubling. These are routine errors in communication, or cognitive biases (e.g., salience bias), and probably not indications of any sort of wrongful conduct.
- Misstatements about Sam’s frugality. It’s possible there was an effort to mislead, but seems more plausible that this was just salience bias. A billionaire driving a Corolla is salient; owning a luxury condo in the Bahamas is not. Unless there is evidence that people actively misled the reporter, this is not particularly notable to me, other than reminding us all not to fall victim to that bias.
- Warnings about Sam’s misbehavior. Say someone causes others to find them completely ethical in 99.9% of all interactions. That’s a very high rate! But once one becomes prominent, even a very high rate of perceived ethical behavior will lead to a high number of warnings because the number of interactions increases exponentially. Every prominent person has at least some people saying, “They’re unethical.” This is often because the prominent person merely turned a request down, when many requests are being made. (I am much less prominent than Sam but have had this happen to me many times.) I find the failure to respond to the exceedingly vague allegations against Sam unremarkable.
- Sam’s contradictions on malaria nets. You can read this as a lie. You can also read this as changing sentiments. We all contradict ourselves, and this is especially true when we are talking about highly speculative questions, such as cause prioritization, where our evidentiary basis is often quite slim, and where much depends on relatively small differences in the assumptions we make (e.g., a small change in the probability of hostile AGI). It is possible Sam is lying about his commitment to malaria nets to cover up his crimes. It’s also possible that he just changed his mind, or at different moments, has a different emotional and rhetorical commitment to various causes. To give another example, Sam once stated that he was very committed to animal protection. Over time, he shifted his commitments and seemed more focused on concerns such as AI. I don’t see that as a lie, even though I disagreed with it. It’s just change.
The main thing that I would find concerning in this piece is the excessive focus on PR by EA leaders. Don’t focus on PR. Focus on trying to get a true and accurate account out there in the media. It’s very hard to manipulate or even strategize about how to portray yourself. It’s much easier to be real, because you don’t have to constantly perform. That should be a norm within EA, especially among leaders.

wayne 2 Dec 2022 3:00 UTC
2 points
0 ∶ 0
on: In Defense of SBF
Great post and glad to see contrarian takes. (That’s true as a general matter but I also happen to agree with this one :P)

Couple quick thoughts:

1. Loyalty is important not just as a personal virtue but for efforts at collective action because it convinces people to engage in long term altruistic thinking. Hahrie Han has done some important empirical work showing that people are motivated to help when they have a sense of a shared past, shared future. Sudden ruptures in social relationships are very destructive for fostering that culture.
2. Good decision-making generally does not involve dramatic changes to our beliefs. This is one of the less-known aspects of Tetlock’s research on super predictors. They very rarely make large updates but are rather making small updates based on continuous data; they don’t overcorrect when the mob moves. It seems likely to me that this is an example where we can try to put Tetlock’s research to effect. I don’t see the sort of dramatic evidence I would need to change my mind about SBF (though I also probably did not view him as highly as many others; my prior was that Sam was a very smart guy who was well intentioned but going in the wrong direction in life.)
3. Good decision-making requires avoiding the Fundamental Attribution Error. I imagine most people are aware of the FAE on this forum. But I blogged about systemic forces that seem more important to me, in the collapse of FTX, than any of Sam’s personal misdeeds.

wayne 2 Dec 2022 2:54 UTC
1 point
1 ∶ 1
in reply to: Austin’s comment on: wayne’s Shortform
Great post.

wayne 1 Dec 2022 2:54 UTC
1 point
1 ∶ 1
in reply to: Jason’s comment on: SBF Dealbook Thread
I don’t see this screenshot as evidence as to the amount that FTX was entitled to use for other customers’ leverage, including Alameda. It seems to be a snapshot of current margin lending?

If the point of this screenshot is to show there was hidden margin lending to Alameda, that wasn’t being disclosed, fair point. But it’s possible that Alameda had a special vehicle that wasn’t picked up on the dashboard because of the size of its allowed margin and because FTX (arrogantly) figured that Alameda was involved in relatively risk-free trading. That seems to be what it was started to do—engage in supposedly “risk-free” arbitrage.
The notion of risk-free arbitrage is probably incorrect. But Sam would not be the first person to believe in it.

wayne 1 Dec 2022 2:19 UTC
4 points
1 ∶ 0
in reply to: Jason’s comment on: SBF Dealbook Thread
Agreed on how interviews will play with a judge. If there is evidence of his guilt, and he went on Dealbook to double down on his fraud, that is going to affect sentencing significantly. Speaking publicly about the case is a pretty good signal that Sam genuinely does not think he has criminal liability.

wayne 1 Dec 2022 2:09 UTC
13 points
3 ∶ 2
in reply to: Habryka’s comment on: SBF Dealbook Thread
I think what Sam is saying here is true, if customer deposits are being used as leverage and not as investments.
It’s arguably a bit misleading, if Alameda was a customer with a seemingly unlimited line of credit. Bu t what Sam is saying is still true.
I respond to the TOS points above. But to me—and I could be wrong on this, as I have not been in securities litigation for many years—the terms of service aren’t really dispositive.

wayne 1 Dec 2022 2:06 UTC
14 points
2 ∶ 0
in reply to: RyanCarey’s comment on: SBF Dealbook Thread
I disagree with the legal conclusion in the Axios article, as someone who has litigated securities fraud cases. The relevant language isn’t dispositive to me. This appears to be the key term:

None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat Digital Assets in User’s Accounts as belonging to FTX Trading.

There are a few issues with trying to say this proves that using customer accounts (e.g., for Alameda) is a violation of the terms of service. First, the provision only states that FTX trading cannot be the recipient of a loan. It does not say other account holders cannot be the recipient of a loan. Second, using non-segregated customer deposits for another customer’s leveraged trading may not be a loan. This is something I would have to legally research, but the usage of a customer’s funds is probably considered something like a bailment and not a loan. For example, there’s no principal or interest.
I’m honestly not particularly interested in the terms of service, however, in determining whether Sam committed fraud. I’m more interested in how FTX was marketing its product, and whether it promised risk-free deposits. Most people do not read the terms of service, and if FTX promised account segregation and risk-and-interest free deposits, I would say that there’s a greater argument that Sam committed fraud—rather than poor risk management.
Separately, assuming you are the same Ryan Carey I met many years ago, it’s nice to speak to you again. Hope all is well.

wayne 1 Dec 2022 1:56 UTC
15 points
3 ∶ 0
in reply to: wayne’s comment on: SBF Dealbook Thread
I would also add, as a long time criminal defendant myself and someone who is very much against mass incarceration, that I may have a bias here, as I do not want to see anyone sent to prison. Even my worst enemy. Jails and prisons are cruel places, and there is relatively little evidence (if any) that they serve any rehabilitative purpose. That may be biasing my assessment of Sam because I do not WANT to see him (or anyone else, really) in prison.

wayne 1 Dec 2022 1:50 UTC
8 points
0 ∶ 0
in reply to: RyanCarey’s comment on: SBF Dealbook Thread
Thanks for these replies.
I haven’t seen any evidence that FTX promised to never invest customer deposits. Does anyone have a link? My understanding is that FTX offered customers the opportunity to make leveraged trades, i.e., to bet more than the money they had in their accounts. This suggests to me that FTX was not just an exchange but a lender, which is a very different sort of financial beast (with a different risk profile). I also understand that there was a significant interest rate on the customer accounts -- 6% -- which adds weight to that conclusion. You can’t get a return on investment without risk.

I’d also love to see links to the terms of service, as I’ve seen many state that Sam violated the terms of service but little evidence to that effect. I’ve seen one document that indicated the property of customers was their own. That’s not legally dispositive of the issue, as FTX never claimed to have an ownership interest in the customer deposits. The question is what it was allowed to do with customer deposits and, for example, whether it was required to keep segregated accounts. Far larger and more sophisticated entities, like MF Global, have failed with account segregation, so it would not surprise me if FTX failed as well.

The basic problem is this. Even if you WANT to prevent yourself from using customer deposits, if you are a lender to various account holders (including ordinary retail customers) and you are not properly segregating the funds, then when a bunch of people borrow money from you, beyond what they invested into their account, they will inevitably tap into the money of other customers. Corporate controls, account segregation, etc will prevent this. But early stage companies very often fail with this sort of thing because it’s hard, and often very labor intensive. I can see FTX not imposing a limit on Alameda’s right to leverage because: (a) they were overconfident in the ability of Alameda to manage risk; (b) they never thought that Alameda’s leverage would dip into the amount other customers needed; and/or (c) they assumed incorrectly that some form of legal segregation of accounts would prevent the technical removal of customer accounts from happening.
I don’t know what the right answer is to any of these questions. What I do know, having looked at the inside of collapsing financial institutions, is that it is far far far more complicated than most people think. It is one of the reasons why there was no criminal prosecution in the MF Global case, despite what seemed to me far clearer evidence of wrongful conduct.
Re: prediction markets, they are interesting, and I hadn’t seen them before. Slightly moves my needle towards actual fraud, maybe back to 75-25. But I’m not sure this is a scenario where we should expect prediction markets, at least in the short term, to be particularly reliable, due to herding effects. See here.
What links here?
- Simon_M's comment on Link-post for Caroline Ellison’s Guilty Plea by Lauren Maria (22 Dec 2022 14:36 UTC; 37 points)

wayne 30 Nov 2022 23:59 UTC
11 points
4 ∶ 16
in reply to: Agustín Covarrubias’s comment on: SBF’s recent live interview at the DealBook Summit
Agree with your impression. But I would give this interview more weight than you do. In my experience—around 15 years of legal work (including as both a lawyer, and as a defendant) - it is exceedingly rare for a defendant who has bad intentions to speak openly about what they did. SBF is probably already a defendant in any number of cases, and some of them may eventually be criminal.

The fact that he is speaking openly and transparently comes at significant personal risk and is much more consistent with the notion that he acted in good faith.

I was probably 75-25 on good faith/fraud prior to this interview. I’m probably 80-20 or 85-15, after this interview.

PS Great summary. This is helpful, as I missed part of the interview.
What links here?
- Simon_M's comment on Link-post for Caroline Ellison’s Guilty Plea by Lauren Maria (22 Dec 2022 14:36 UTC; 37 points)

wayne 30 Nov 2022 23:30 UTC
14 points
3 ∶ 9
on: SBF Dealbook Thread
Background: I practiced securities litigation in the post 2008 time period. I don’t know Sam personally, though I’ve had some chats with him over the years. My assessment of his impact on the movement I am most involved in—animal rights—is mostly negative, though I think his negative impacts were very well intentioned.

I disagree with Daedelus’s comment that Sam’s statements were not credible. I have worked with much larger and more sophisticated financial institutions which, when caught up in a mania (or a panic), had similarly poor controls.

I thought Sam came across as credible and honest.

I’d also add that, the fact that he spoke openly about the collapse, is a strong sign to me that there was not bad intent. Lawyers will almost always tell people not to say anything once litigation, much less criminal prosecution, is a possibility. (I have given many clients this advice myself and, indeed, there is a thread in this forum giving the same advice.) That advice is not unreasonable, if your goal is just self interest and preservation. But the fact that he was willing to speak openly about this, in direct contradiction to his lawyers’ advice, suggests strongly that his intentions are good.

I’d go so far as to call it brave.

I have a personal friend who lost his entire savings in the collapse of FTX. It’s a terrible thing. But I don’t know that this is a case of fraud. Seems just as likely, if not moreso, that this is just a classic bank run.

wayne 30 Nov 2022 23:23 UTC
19 points
4 ∶ 1
on: wayne’s Shortform
Three social forces at the root of FTX’s collapse
Hi folks, I shared some thoughts I wrote up about Sam Bankman-Fried. I worry that there’s a bit of a social cascade that’s leading us to draw the wrong lessons from what happened. I’m not 100% confident in either the facts of what happened—though, as a former securities litigator in the post 2008 period, I think I have more experience than most—but I don’t see a particularly compelling case for fraud. I also think the focus on a single person’s supposed indiscretions, whether true or otherwise, may distract us from deeper systemic problems that FTX’s collapse represents.

Very interested in others’ thoughts, and especially thoughts on my diagnosis of cultural norms in EA that may have contributed to the problem at FTX. Here’s the link:

https://simpleheart.substack.com/p/in-defense-of-sam-bankman-fried