6 ms·

I like how the article acknowledged, ...FTX operated a highly complex corporate structure with dozens of companies... without pointing out that one of the reaso

by btilly 4y ago

I like how the article acknowledged, ...FTX operated a highly complex corporate structure with dozens of companies... without pointing out that one of the reasons for the complex structure was to make the fraud harder to track down.

boeingUH60 4y ago
Are you sure? FTX was collecting deposits in many countries, so I think they had to have local subsidiaries to enable that...The corporate structure seems orthogonal to their fraud
- btilly 4y ago
  Yes, I'm sure. For example FTX was able to claim, with a vague semblance of honesty, that it had assets to cover liabilities. But in fact what it did was transfer money to other companies that were part of the network, like Alameda, and get back tokens with a book value but no real market value, like Serum. On paper both companies had engaged in a fair transaction. In reality customer money got moved to another company that was then free to do with it what it wanted, all hidden behind the corporate structure. Read https://archive.ph/TOgjK https://archive.ph/TOgjK for Matt Levine explaining exactly how this actually worked.
  - basch 4y ago
    That relationship only requires two companies, not 130.
  - tibbar 4y ago
    I don't think this is quite right. Matt is saying that the Serum wasn't exchanged for customer money -- it was more or less created out of thin air. He suggests that most of FTX's magical crypto assets like Serum were created for < 1 billion of customer money. He points out that we don't know from the balance sheet where they flushed the $16billion of investments. (It does seem like a lot of it went to Alameda, but not in exchange for Serum. And we still don't know how Alameda lost all the money it lost.)
    - espadrine 4y ago
      Since they used Serum’s diluted market cap to justify it as an increase in assets, and focused on having more assets than liabilities, it implies they took this higher total asset balance to shoulder liabilities that their existing assets did not cover. Since every dollar they received in customer deposits appeared both in assets and liabilities, the only way they ended up with liabilities that their (non-Serum, non-FTT) assets did not cover, is by exchanging the dollars with something that lost value.
      - tibbar 4y ago
        > Since every dollar they received in customer deposits appeared both in assets and liabilities, the only way they ended up with liabilities that their (non-Serum, non-FTT) assets did not cover, is by exchanging the dollars with something that lost value. That's the way it ought to work in the absence of fraud or theft. But as Matt says, the reason this balance sheet is so insane is that there's no evidence this happened. Only a very small amount of customer dollars could have been used to generate Serum. FTX invented several cryptocurrencies which, at a 10x inflated valuation, obscure the fact that they completely lost $16 billion of assets. In fact, it seems that SBF used a backdoor in his own software to secretly transfer customer funds to Alameda. There's no evidence that any sort of internal accounting actually balanced the books in the way you suggest, which is what's so insane about this whole story.
        lazide 4y ago
        It doesn’t matter how thoroughly you do your double entry accounting if you can’t trust the statement (or there is no statement) you reconcile against. Or no one ever tries to reconcile shit. How does it go again? “ The government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the village watchman, who just puts down what he damn pleases.” - Josiah Stamp
    - djbusby 4y ago
      Alameda Research has a profile on CrunchBase, they invested in a cannabis bank for example.
- zwkrt 4y ago
  There was a breakdown recently that I can't find that showed that FTX's corporate structure was at least an order of magnitude more complex than Lehman Bro's at the time of it's collapse. EDIT: here's the diagrams (thanks HN!) https://www.manchesteropenhive.com/view/9781526100580/figures/Image_228.jpg https://www.manchesteropenhive.com/view/9781526100580/figure... https://i.redd.it/078p4g7m6cz91.jpg https://i.redd.it/078p4g7m6cz91.jpg Note that for LB, like most normal companies, it has subsidiaries where it makes sense to operate under different tax laws, etc. So they have a Japanese company, and Australian company... For FTX there is no such rhyme or reason. Most of the entities outside of DE are in Antigua, Seychelles, Cayman Islands, Switzerland. I don't know enough about finance to understand if this is a red flag, but given the circumstances the intent behind such a structure is certainly suspiscious.
  - gruez 4y ago
    >>corporate structure seems orthogonal to their fraud >FTX's corporate structure was at least an order of magnitude more complex than Lehman Bro's at the time of it's collapse. Okay, but what does corporate structure complexity have to do with fraud? It seems like you're trying to argue something along the lines of "lehman brothers was complex and collapsed due to fraud. FTX is even more complex than lehman brothers, therefore it's even more fraud then lehman!", but we didn't even establish how complexity has to do with fraud.
    - grey-area 4y ago
      https://www.tookitaki.com/compliance_hub/shell-companies-money-laundering/ https://www.tookitaki.com/compliance_hub/shell-companies-mon...
      - gruez 4y ago
        It feels like certain terms (eg. "ponzi scheme", "money laundering", "shell companies") get thrown around any time there's any sort of financial malfeasance, without regard to their specific meaning. For the money laundering claim, do we have any reason to believe that SBF is trying to launder money (ie. trying to conceal the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source[1])? Is he secretly also a darknet drug dealer or something? I guess you could argue the embezzle angle, but the guy isn't exactly known for a lavish lifestyle. He does use company funds to fund his charities/PACs and buy expensive properties (I think there was a group penthouse in Bermuda that's for sale now), but that's all in the open. [1] https://en.wikipedia.org/wiki/Money_laundering https://en.wikipedia.org/wiki/Money_laundering
oh_sigh 4y ago
It's also extremely common for totally legit purposes as well. I have some money in fundrise(RE investing crowdfunding), and they have a number of subsidiaries for various reasons invisible to the end user until tax time.
LatteLazy 4y ago
Sorry to be contrary but... Is that actually true in this case? It seems to me that the fraud was very very simple no? The CEO "lent" money from this business (which was really client money) to another business he controlled. That's not exactly complex or novel. I don't even think there was deception within the company was there, he just told people to do it and they did. It isn't like he played a careful, decade long shell game like Enron. This was the digital equivalent of someone putting their hand in the till...
- lazide 4y ago
  Simple that way? Yes, probably. Tracing the actual on the ground transactions and seeing where each dollar went, and figuring out the mechanisms used to actually lift said dollars? That’s what this discussion is about, and it’s not as clearly understood right now.
  - wbc 4y ago
    sure it is! it all went to fiat@, it's marked clearly in the excel spreadsheet and everything
    - lazide 4y ago
      Sure, but $20’s? $100’s? Strippers and blow? We need the answers for the documentaries!
  - LatteLazy 4y ago
    Apparently (per The Break Down podcast) SBF had a back door to the PMS that let him transfer assets without any compliance or accounting blocks or alerts. So he just did it. That's how simple this was. He didn't hide the transfers to Alameda. He just did it... I still find structures like this dumb, though thet are sometimes required by stupid governments.
mNovak 4y ago
Everyone is making a big fuss over the complex corporate structure, and while suspicious, it's also not totally out of the norm. If you've ever seen real-estate syndication deals (another activity with many investors over varying classes), those regularly have a web of dozens of entities just to wrap around a single property.
- ohgodplsno 4y ago
  It might have something to do with the fact that real estate is ripe with fraud and undeclared income too.

by btilly 4y ago

boeingUH60 4y ago

Are you sure? FTX was collecting deposits in many countries, so I think they had to have local subsidiaries to enable that...The corporate structure seems orthogonal to their fraud

btilly 4y ago
Yes, I'm sure. For example FTX was able to claim, with a vague semblance of honesty, that it had assets to cover liabilities. But in fact what it did was transfer money to other companies that were part of the network, like Alameda, and get back tokens with a book value but no real market value, like Serum. On paper both companies had engaged in a fair transaction. In reality customer money got moved to another company that was then free to do with it what it wanted, all hidden behind the corporate structure. Read https://archive.ph/TOgjK https://archive.ph/TOgjK for Matt Levine explaining exactly how this actually worked.
- basch 4y ago
  That relationship only requires two companies, not 130.
- tibbar 4y ago
  I don't think this is quite right. Matt is saying that the Serum wasn't exchanged for customer money -- it was more or less created out of thin air. He suggests that most of FTX's magical crypto assets like Serum were created for < 1 billion of customer money. He points out that we don't know from the balance sheet where they flushed the $16billion of investments. (It does seem like a lot of it went to Alameda, but not in exchange for Serum. And we still don't know how Alameda lost all the money it lost.)
  - espadrine 4y ago
    Since they used Serum’s diluted market cap to justify it as an increase in assets, and focused on having more assets than liabilities, it implies they took this higher total asset balance to shoulder liabilities that their existing assets did not cover. Since every dollar they received in customer deposits appeared both in assets and liabilities, the only way they ended up with liabilities that their (non-Serum, non-FTT) assets did not cover, is by exchanging the dollars with something that lost value.
    - tibbar 4y ago
      > Since every dollar they received in customer deposits appeared both in assets and liabilities, the only way they ended up with liabilities that their (non-Serum, non-FTT) assets did not cover, is by exchanging the dollars with something that lost value. That's the way it ought to work in the absence of fraud or theft. But as Matt says, the reason this balance sheet is so insane is that there's no evidence this happened. Only a very small amount of customer dollars could have been used to generate Serum. FTX invented several cryptocurrencies which, at a 10x inflated valuation, obscure the fact that they completely lost $16 billion of assets. In fact, it seems that SBF used a backdoor in his own software to secretly transfer customer funds to Alameda. There's no evidence that any sort of internal accounting actually balanced the books in the way you suggest, which is what's so insane about this whole story.
      - lazide 4y ago
        It doesn’t matter how thoroughly you do your double entry accounting if you can’t trust the statement (or there is no statement) you reconcile against. Or no one ever tries to reconcile shit. How does it go again? “ The government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the village watchman, who just puts down what he damn pleases.” - Josiah Stamp
  - djbusby 4y ago
    Alameda Research has a profile on CrunchBase, they invested in a cannabis bank for example.
zwkrt 4y ago
There was a breakdown recently that I can't find that showed that FTX's corporate structure was at least an order of magnitude more complex than Lehman Bro's at the time of it's collapse. EDIT: here's the diagrams (thanks HN!) https://www.manchesteropenhive.com/view/9781526100580/figures/Image_228.jpg https://www.manchesteropenhive.com/view/9781526100580/figure... https://i.redd.it/078p4g7m6cz91.jpg https://i.redd.it/078p4g7m6cz91.jpg Note that for LB, like most normal companies, it has subsidiaries where it makes sense to operate under different tax laws, etc. So they have a Japanese company, and Australian company... For FTX there is no such rhyme or reason. Most of the entities outside of DE are in Antigua, Seychelles, Cayman Islands, Switzerland. I don't know enough about finance to understand if this is a red flag, but given the circumstances the intent behind such a structure is certainly suspiscious.
- gruez 4y ago
  >>corporate structure seems orthogonal to their fraud >FTX's corporate structure was at least an order of magnitude more complex than Lehman Bro's at the time of it's collapse. Okay, but what does corporate structure complexity have to do with fraud? It seems like you're trying to argue something along the lines of "lehman brothers was complex and collapsed due to fraud. FTX is even more complex than lehman brothers, therefore it's even more fraud then lehman!", but we didn't even establish how complexity has to do with fraud.
  - grey-area 4y ago
    https://www.tookitaki.com/compliance_hub/shell-companies-money-laundering/ https://www.tookitaki.com/compliance_hub/shell-companies-mon...
    - gruez 4y ago
      It feels like certain terms (eg. "ponzi scheme", "money laundering", "shell companies") get thrown around any time there's any sort of financial malfeasance, without regard to their specific meaning. For the money laundering claim, do we have any reason to believe that SBF is trying to launder money (ie. trying to conceal the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source[1])? Is he secretly also a darknet drug dealer or something? I guess you could argue the embezzle angle, but the guy isn't exactly known for a lavish lifestyle. He does use company funds to fund his charities/PACs and buy expensive properties (I think there was a group penthouse in Bermuda that's for sale now), but that's all in the open. [1] https://en.wikipedia.org/wiki/Money_laundering https://en.wikipedia.org/wiki/Money_laundering

oh_sigh 4y ago

It's also extremely common for totally legit purposes as well. I have some money in fundrise(RE investing crowdfunding), and they have a number of subsidiaries for various reasons invisible to the end user until tax time.

LatteLazy 4y ago

Sorry to be contrary but... Is that actually true in this case? It seems to me that the fraud was very very simple no? The CEO "lent" money from this business (which was really client money) to another business he controlled. That's not exactly complex or novel. I don't even think there was deception within the company was there, he just told people to do it and they did. It isn't like he played a careful, decade long shell game like Enron. This was the digital equivalent of someone putting their hand in the till...

lazide 4y ago
Simple that way? Yes, probably. Tracing the actual on the ground transactions and seeing where each dollar went, and figuring out the mechanisms used to actually lift said dollars? That’s what this discussion is about, and it’s not as clearly understood right now.
- wbc 4y ago
  sure it is! it all went to fiat@, it's marked clearly in the excel spreadsheet and everything
  - lazide 4y ago
    Sure, but $20’s? $100’s? Strippers and blow? We need the answers for the documentaries!
- LatteLazy 4y ago
  Apparently (per The Break Down podcast) SBF had a back door to the PMS that let him transfer assets without any compliance or accounting blocks or alerts. So he just did it. That's how simple this was. He didn't hide the transfers to Alameda. He just did it... I still find structures like this dumb, though thet are sometimes required by stupid governments.

mNovak 4y ago

Everyone is making a big fuss over the complex corporate structure, and while suspicious, it's also not totally out of the norm. If you've ever seen real-estate syndication deals (another activity with many investors over varying classes), those regularly have a web of dozens of entities just to wrap around a single property.

ohgodplsno 4y ago
It might have something to do with the fact that real estate is ripe with fraud and undeclared income too.