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The trial of Sam Bankman-Fried begins tomorrow.
As a person that has worked in crypto quant trading[1], I have the tiniest slice of sympathy for him. He still seems like an unsympathetic freak overall, and has done some stuff that seems pretty unethical, and some of his actions are definitely criminal. He has given EA a bad name as well.
There are certainly a lot of process crimes he's guilty of. The fact that the US has pulled his international operations into US jurisdiction means he's in for a universe of pain and if they can't fight that he's going to jail for infinity years. I consider this legal theory a bit dubious but the US has taken the position that it can prosecute crimes that happen in the rest of the world if they even marginally involve US citizens[2]. Is everyone in the world really supposed to follow US laws? That strikes me as a bad precedent; on the other hand, I also do appreciate it sometimes that the US is an international law enforcer of last resort.
That's not really where my sympathy lies though. He knows he was playing a dangerous game. Pretty much everyone who works in quant finance occupies enough legal gray area to worry that they could all be shut down at any time and end up in court. This is even worse in the crypto era, as the position taken by the SEC and friends is shameful, giving very little guidance on new forms of financial technology and telling firms years later by indictment that they were frowning on their behavior all this time.
Many tradfi firms prostrate themselves before the SEC in the hopes of maintaining a good relationship. Even still, reputable firms who were attempting to operate outside of US jurisdiction have been caught with their pants down in the crypto era e.g. Trading Firm A, B and C in the recent Binance indictment: https://www.bloomberg.com/opinion/articles/2023-03-27/the-cftc-comes-for-binance (paywall bypass: https://archive.ph/aMi5Q )
It's still not clear to me that SBF and FTX spent user funds as a matter of course, or if it effectively became spending user funds because so much of their other assets imploded. Though, again, that's not necessarily a crime if you operate outside of US jurisdiction, which is what their international arm believed it was doing. But, that's also sort of secondary.
The primary question I keep coming back to, and I come to this every time there's a large corporate fraud scandal, is: what is fraud, actually? Because it seems indistinguishable from "I thought our business was legit and every indication I had was that it was legit and then it failed and it failed really hard and lots of people lost money".
FTX was a successful business. It was a high quality crypto exchange among many exchanges where the standard at the time was "complete clown show". They were probably the last people I would have bet on imploding and disappearing user funds. The failure is shocking. It's so shocking it's hard to believe.
One thing that's common to these frauds is that people always seem to have a moment of reckoning where they know they're fucked and they can either pack up and go home and face the consequences, or they double down and hope it'll all work out. Indeed, there are some legendary stories from doubling down: FedEx for example where the CEO literally doubled down with their last remaining $5000 in Las Vegas to turn it into a much needed $27,000 to keep the business alive. In this timeline FedEx is legitimate, but if it hadn't worked out he could've possibly gone to jail.
As far as I can tell Uber was based on complete fraud. Its business plan from day one appeared to be: completely ignore taxi laws the world over and just push out a product that was so much better than calling taxis that before jurisdictions knew what was happening they would have tons of passionate users that would be furious if Uber was taken away. This seems to be a resounding success. But it was very much organized crime? If Uber had failed their founder would have definitely gone to jail. In fact he was involved in so much other generally shady stuff that he was forced out. Yet he definitely moved the needle.
Anyway, this isn't meant to be an impassioned defense of SBF, more like my continuing fascination and horror at this alien thing we call modern business. Poor fool tried to play the game of changing the world and got burned. And in this case the burning is fantastic public spectacle.
EDIT: Matt Levine's newsletter today is about SBF's trial, which hit my inbox right after I submitted this comment. Amazing, as usual. https://www.bloomberg.com/opinion/articles/2023-10-02/sbf-s-defense-will-be-tough
EDIT2: As replies have pointed out, I am probably technically wrong for calling what Uber did fraud. Sorry to distract. I should've made my case that Uber was more like a plan to openly disregard and defy taxi regulations across many jurisdictions with the excuse that this isn't a taxi it's a "carpooling app" tee hee. I think this is an insane business plan and it depended on them delivering an amazingly useful app. And if they hadn't succeeded (by delivering an amazingly useful app) they would've all been busted for something rising to the level of organized crime.
SBF had a weird double-or-nothing gambling philosophy vaguely informed by EA stuff, sure. The weird thing seems to be that he didn't think there would be another severe crypto crash when it had happened like 5 times before in the last 10 years before FTX collapsed.
As @Gillitrut suggests, the SEC (and US taxation regime under the IRS too, if you're talking about personal risk) is essentially the epitome of anarcho-tyranny in the modern age. It has unlimited global jurisdiction to ruin your life; anyone with any money or indeed any business can be fucked for something; the only "defense" is that you (a) help them enough to get other people (or in some other way) so that they let you off, (b) that they show mercy for some other reason (like political connections) or (c) that you have something that makes them look bad. I don't know that all quants operate in this area, the issue for them is that as the LME situation last year showed (where quants made hundreds of millions in losses after the LME reversed $7bn in trades to prevent the whole sector from imploding because pursuing the Chinese metals guy for his assets in China would have been legally impossible; JS etc are now suing), they're not the biggest fish and regulators and exchanges have very little sympathy for them.
Billionaires don't really have a lot of power in the West, or at least most of them don't. If you make it to billionaire status in any way that isn't the most boring, legitimate tech business where your sole pre-IPO investors are legitimate domestic VCs, diligently file everything, pay everything, and operate exclusively domestically in a way that satisfies everyone (and even then...), you can get got for something. The only reason Elon Musk is fine is because the government relies on him for the Ukraine War and for NASA, which means he has leverage. But that leverage isn't because he's 'rich', it's because he controls technology that the state has deemed useful.
That was the biggest BS ever. Trading strategies very rarely just buy and hold, they hedge their exposures. If your trades get cancelled you suddenly have exposure that you didn't account for, and it's likely going to be quite toxic too if everyone else has been handed exposure in the same direction and they all try to get rid of it at the same time.
I agree that it was toxic, but they didn’t really have a choice. Metals is a very small world and if he’d been called and the banks had to try to seize $10bn in Chinese assets (majority located in mainland China and Indonesia via networks of holding companies) they knew they’d be completely screwed. The Bloomberg article said the bankers knew everyone was losing their job and never working in the business again if they fucked it up. As it is there are likely obscure provisions in some ancient administrative bylaw of the LME that mean they can win the lawsuits against the angry traders, but we’ll see. I don’t envy them, but quants also need to know when they’re playing in markets that are a lot less fair than their historical favorites.
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