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Notes -
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.
Disagree here. It's not fraud. They just exploited one glaring huge loophole in every law that lawmakers ignore it so often that the only reason I could think of it is purposeful. The loophole is - quantity has quality of it's own.
Think of it that way - driving people has always been legal. Carpooling is also universally legal. Being reimbursed on expenses that you incur while helping people is also legal. Posting a message on your condo message board - I am working here, so I can drive back and forth 3 people every day to this point in the morning and evening is once again legal. It is also legal if a friend calls you with - my girlfriend is here, she needs someone to pick her up at the airport, and leave her at my apartment, and I am out of town. Now come Uber - the ever helping carebears - they just provide a software that makes coordination and communication easy, and they just help people with the reimbursements. They are not a taxi company. They are saving the planet by increasing carpooling. Think of the trees. And the saved CO2. And if you have good and expensive lawyers they can explain for a long long time the stark differences between them and the taxi companies. Same with airbnb. They take some informal behavior and turn it up to 11.
The loophole doesn't work. In cities where only taxis can offer rides for hire (including San Francisco at the time Uber started), Uber is an unlicensed taxi, and therefore illegal. Every city that has litigated this point has won, and driven Uber out. The exception is the one that matters - in San Francisco, where it all started, Uber were able to delay for long enough to build up sufficient lobbying power that they could get the California legislature to change the law before the case got to trial.
In cities where pre-booked livery cars (AmE)/minicabs (BrE) are legal, Uber has generally ended up complying with the laws and operating a licensed minicab service.
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Giving your congressman money is legal. Having your congressman vote on a bill is legal. Giving your congressman money so that he will vote a particular way on a bill is illegal.
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This is an interesting way of seeing it. I can think of a lot of regulated activities that can simply be broken down into a series of unregulated activities. Does this ever win in court, or do judges always slap it down with something like "don't try to be cute; the greater picture is obviously that you ran an unregulated taxi"?
*EDIT: I guess this is probably why legal systems rely so much on subjective human judgement rather than applying purely mechanistic rules, as the latter would be tricked by breaking down a regulated activity into a series of unregulated ones, but humans would probably just see what happened for what it is.
The Uber thing isn’t even as clever as you’re describing. At least in New York the rule was you couldn’t do flag stops unless you were a “taxi.” But you could always call someone and arrange a pickup. Uber is that with an app instead of a catchy commercial and a memorable phone number.
There are additional rules for livery car services beyond the requirement to book in advance - notably that people driving commercially should have commercial insurance. My understanding was that Uber initially ignored these rules in NYC but eventually ended up complying.
London was a slightly unusual case in that our minicab law was sufficiently flexible that Uber decided to comply from day 1. For the same reason, there was a healthy ecosystem of minicab apps before Uber arrived. Uber outcompeted them on price and convenience by being willing to lose money hand-over-fist. Now that Uber are making a (tiny) operating profit, they have the same prices as traditional minicab firms.
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