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I have a lot of sympathy (or maybe pity) for SBF. "Stole client funds" appears to have solidified as a meme much the same way "crossed state lines" had in the Rittenhouse case.
I think it's hard for people, including technologists who haven't worked as quants, to appreciate the level of technology risk that's present in quant trading. In most of tech your biggest risk is having all of your data destroyed, and you can address that with well worn improvements in backups. You also risk being hacked but those breaches tend to be embarrassing rather than company ending. Even Sony, which was pwned as hard as you could possibly be pwned, ultimately recovered. But an additional risk in quant trading is accidentally and irrecoverably giving all of your assets away in a few seconds.
Even companies that are following all of the rules and have the right number of members of the professional management class in their ranks can destroy themselves in a matter of minutes. Knight Capital Group destroyed itself in 30 minutes by (with some creative license) failing to follow heroic practices around retiring old flags in protobufs.
Alameda/FTX had a culture that resembled "move fast and break things". They grew extremely quickly. I'm highly skeptical they were able to stand up robust accounting and practices to mitigate technology risks in so short a time.
When SBF says he didn't realize they were leveraged due to accounting error, I believe him. It's not like you can just install the QuickBooks Enterprise Crypto Derivatives Exchange plugin. All of this stuff was bespoke, and in a hurry.
When you thought you had $30b in assets and minimal liabilities, you can spend a billion or two on indulgences, charitable giving and campaign contributions. Your can say confidently you're not investing client funds. If those assets are suddenly marked down 90% you look like a fraud and you're in deep shit.
That's the nature of the business and he knew the risks. But probably in hindsight I'm sure he wishes he had been even more careful.
This isn't to say that I believe he definitely didn't commit fraud. Rather this is me saying that as someone who has pushed code that I thought accidentally gave away $10 million of my employer's money (the gigantic exhale of relief came when we learned I failed to scale by 1000x in the reporting and not the ordering), I am defaulting to blaming it on stupidity before malice.
The FTX terms of service were very clear in saying that client digital assets belonged to the client, were the property of the client, were under the control of the client and were not to be loaned or traded out. "Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading. None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading;"
Caroline admitted that in fact they intentionally transferred/loaned these customer deposits to Alameda. That is straight up embezzlement, go directly to jail, do not pass Go, do not collect $200.
This is like a bank drilling into a customer's safe deposit box to take their gold, lending out the gold and then losing it. It's theft, not merely a trading mistake.
You're assuming there was a bank account called CLIENT FUNDS and another account called EXCHANGE FUNDS and they decided to raid the CLIENT FUNDS one to make bets.
What if there was actually just a gigantic intermingled account and the separation between client funds and exchange funds were records in an accounting system that, when they snapped it to reality, they realized the funds they had left were smaller than what they were liable for in client redemptions?
Someone better at financial accounting than me explain this, because it sounds like he was hiding funds:
This runs all through the bankruptcy filing when parsing the "balance sheets" provided for the various 'silos'. So whatever fund they were keeping as CUSTOMER FUNDS, they sure weren't keeping any separate records of "we took in $50 million of customer money that wanted to buy crypto and bought $X million of crypto with it, and here's a list of the customer accounts with who owns what".
That's going beyond carelessness. But if I'm interpreting it wrongly and there's an honest reason for doing this, go ahead and explain it to me. For instance, this is one of the "balance sheets" where the Customer Custodial Funds are the fiat balances, but whatever crypto assets they might have held aren't anywhere:
So this is showing "We have $102,225,000 in customer funds (paper money) and we owe them that amount back" but nothing about "and we bought such-and-such amount of crypto as instructed by them", if I am interpreting this correctly.
It sounds like when you opened an account at FTX, wired them money, and then bought bitcoin with it, no bitcoin was ever necessarily bought. You just got a bitcoin-denominated claim on FTX assets.
That's where the shazam part comes in. It's not at all clear if (1) they took your money and told you it was invested but they spent it on personal loans and Sam's big nap time beanbag (2) they took your money and issued you their own tokens in magic beans (3) they took your money, bought bitcoin, and then wheeee! gambling! oopsies, lost it! never mind, try again with new monies!
Money was certainly coming in, and it was certainly going out, but the in-between part of whose money where when wasn't being tracked. Or at least, only Bankman-Fried knew where it was going. At least, that's how it seems.
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The fact that all the dollars were sloshing around in a single big pool doesn't negate the fact that many of them weren't FTX'S dollars, but instead customer dollars. Instead, the act of throwing the money into a single big pool itself is evidence that FTX and SBF were extremely reckless with client funds, and didn't care that the money wasn't theirs in the first instance.
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