7 ms·

That's one theory. Of course, given the depth of financial depravity on display here and the incredible thinness of the financial defense, one must also entert

by jerf 4y ago

That's one theory. Of course, given the depth of financial depravity on display here and the incredible thinness of the financial defense, one must also entertain the theory that they did do the due diligence, they were aware of how dangerous this was, and they invested anyhow for other reasons. And that those reasons are probably not good. There have been many cases where companies go to great lengths to do accounting alchemy to fool even very smart auditors, but we are clearly not dealing with that here. Binance or whoever was offering to buy FTX out literally figured out within single-digit hours of looking at FTX's books that they were not interested. A person skilled in the art can literally glance at these books and figure out that they are worthless. I do not believe there is any credible theory that any investor could possibly have been unaware of these issues. FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni while you get sprayed with Red Flag perfume [1]. [1]: https://www.youtube.com/watch?v=HKk91x0Yg7Q https://www.youtube.com/watch?v=HKk91x0Yg7Q

muggermuch 4y ago
>FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni. Lol. This should be a framed quote.
abluecloud 4y ago
>And that those reasons are probably not good. what would those be?
- jaywalk 4y ago
  Money laundering.
  - hungryforcodes 4y ago
    Money laundering -- whatever. Simple greed explains it.
    - jaywalk 4y ago
      It could be simple greed by incredibly simple-minded VCs or it could be something worse. Somebody asked what the something worse could be, and I replied. We are learning more and more about all of this each day. There was massive fraud going on within FTX, and I don't think it's terribly far-fetched to believe that it wasn't contained within the company. Simple greed explains it -- whatever.
  - tedunangst 4y ago
    That's always the "next level" explanation for fraud, but how and why? What did Sequoia get out of this? Who's giving them dirty money?
    - jaywalk 4y ago
      It isn't necessarily that Sequoia (or any of the other VCs) had dirty money to launder. It could have also been that they wanted to use clean money for unclean purposes. To be clear: I'm just letting my mind wander in response to your question, not saying that's what happened.
      - tedunangst 4y ago
        I heard George Soros gave $200m to Sequoia to give to FTX to give to antifa to smuggle yellow cake disguised as children's pronouns.
        PubliusMI 4y ago
- saberdancer 4y ago
  Get in a ponzi while the going is good?
maCDzP 4y ago
Who here is going to start a kickstarter for those books? I mean - who doesn’t love pop up books?
nu11ptr 4y ago
"FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni while you get sprayed with Red Flag perfume [1]." OMG - I'm dying here. You really shouldn't have buried that at the bottom of your reply because many will miss it. Perfectly written. I love it.
- mananaysiempre 4y ago
  Somewhat related Soviet joke: A Westerner arrives in the USSR. Walks absentmindedly along the street, boom, open manhole, falls down, climbs up all covered in sewage, shouts, furious: “What the hell? Couldn’t they have put up a red flag or something like normal people?” A passerby replies: “You’re from the airport?” “Yeah.” “You’ve seen the huge red flag on the roof, right?”
tqi 4y ago
Agree that while "they got swept up in the moment" is a reasonable theory (Hanlon's razor and what not), it also seem very plausible that they knew it was risky but not how risky, and felt like there was still a positive expected value because they would be able sell their coins early (I saw a tweet about how a16z is still up 5x on it's crypto investments because of this[1]). [1] https://twitter.com/mims/status/1592934095117426689 https://twitter.com/mims/status/1592934095117426689
- jerf 4y ago
  I suspect that's the most plausible, least "evil" theory. Although that still leaves them knowingly gambling that bigger fools, who they intend to take advantage of, will come along later, so I personally wouldn't consider that "good". But I also won't deny it's a dog-eat-dog world at that level and everyone playing at that level is already aware and taking that into account. In that case it just turns out they were the dogs eaten instead of the victors.
  - tqi 4y ago
    Oh to be clear, I think that line of reasoning (if that is in fact how they felt) is morally questionable at best.
  - glenngillen 4y ago
    A cynical, but not entirely incorrect, take could be that greater fool theory is a pretty critical part of the VC model. The final fool in that process being when they offload to the public markets.
ryandrake 4y ago
I wonder if those other reasons simply were the guy's background and pedigree. Silicon Valley is no different than Wall Street in its obsession with having the "right" educational background, having the "right" parents, having the "right" connections and so on. So many doors in corporate hiring can be bypassed with "Went to MIT" and "Stanford parents" and I wonder if they can also be bypassed by founders looking for investment.
- three_seagrass 4y ago
  That's at least one strong reason - VCs look at the person as much as the business. Crypto was filled with sleazy car-salesman "investor" types at the time Alameda Research was looking for funding. So when in came someone with a Jane Street background and not a single flashy Ferrari in their driveway, the dam broke on VCs finally being able to pour money into the crypto space on a decent looking founder.
  - deleted 4y ago
    [deleted]
  - SauciestGNU 4y ago
    If that's how unsophisticated these VC operations are then I think we'll see a lot of them lose their shirts in the coming macroeconomic environment. Which will consequently make future funding rounds all the more difficult.
    - boppo1 4y ago
      Unless the Fed blinks.
      - nxm 4y ago
        The closer to an election, the more likely the case
      - oarabbus_ 4y ago
        Just today the Fed governors stated inflation has not been sufficiently curtailed... https://www.cnbc.com/2022/11/17/feds-bullard-says-rate-hikes-have-had-only-limited-effects-on-inflation-so-far.html https://www.cnbc.com/2022/11/17/feds-bullard-says-rate-hikes...
tfehring 4y ago
> I do not believe there is any credible theory that any investor could possibly have been unaware of these issues. I'm not convinced that the issues that caused Binance to back out even existed the last time FTX raised outside capital (March 2022 according to Crunchbase). My understanding is that in March, FTX had a basically normal balance sheet for a crypto exchange, with roughly enough non-FTT assets to balance against its liabilities. Alameda was an over-leveraged crypto hedge fund, which in hindsight wasn't great news for Alameda's investors or creditors. But there's a world where Alameda goes to zero but FTX is mostly fine. After all, FTX would automatically recalculate margin levels and liquidate assets as needed every 30 seconds. If they did that with Alameda like they would have for an arms length counterparty....I'm not going to say that FTX would have been unscathed - a lot of those loans seem to have been secured by FTT, plus Alameda seems to have made up a lot of FTX's trading volume - but the end result of incinerating billions of dollars' worth of customer deposits wasn't inevitable. IMO, FTX's fate wasn't sealed until its management team built a backdoor into its systems to siphon customers' assets to Alameda. And that probably didn't happen til summer, months after its last funding round.
- justincormack 4y ago
  It appears (although everything is unclear) that the 8bn hole was caused by customer dollar payments for ftx going to alameda as ftx didn’t actually have a bank account. For three years. So unclear it was ever good.
  - skippyboxedhero 4y ago
    This alone is quite incredible. FTX, as a business, never actually existed. It was all just a smoke screen for his hedge fund. Employees were stealing from the company, there were no internal controls...the rules for VC are...different. If you were on a Board and this happened on your watch, you would never work on another Board again. If you did this in PE, fired. If you invested in such a public company, very likely fired or irreparable damage to your reputation. Sequoia are a huge fund, they are one of the doyens of the industry...it isn't even that they failed, they didn't even put in place the mechanism to try to protect their investor's money. It is unbelivable.
jandrese 4y ago
What blows my mind is that SBF is going to investors asking for money in his billion dollar "no you can't look at the books" crypto hedge fund while looking like he's playing hookie from his math class and playing video games during the pitch meeting and the supposedly very serious Wall Street types went "Wow! This guy is amazing! All the money he wants and more!".
- peanuty1 4y ago
  It was Sequoia that was impressed by him during the pitch where he was playing League of Legends, not Wall St.
- xdavidliu 4y ago
  the sequioa people had no idea what he was wearing during the pitch, nor did they know at the time that he was gaming. they could only hear his voice.
seagullrific 4y ago
> FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo. - https://archive.ph/1tjP5 https://archive.ph/1tjP5 This is an extraordinary number of high-profile companies which either failed to do due diligence, or were knowingly, deliberately doing shady dealings. Not great to have to choose between incompetence and shadiness at any of those, but those are the two options, and each should be investigated for throwing their [customers'] money into an obvious scam.
- nradov 4y ago
  There's a third option: FOMO. They didn't want to look stupid later for failing to invest in case FTX turned out to be the next big thing, so they took a gamble.
  - p0pcult 4y ago
    But doesnt FOMO-driven action require lack of due diligence? You may be right that it was indeed FOMO, but its not the FOMO that caused the error, it's the lack of DD that comes with FOMO.
  - christophilus 4y ago
    That falls under “incompetence”.
  - ineedasername 4y ago
    I think that's a very good point. Though also think if I was doing a sort of PhD dissertation exploring the different aspects of malfeasance vs. incompetence that FOMO might ultimately be found as some flavor of incompetence. Though also have a dotted line in the tree diagram leading over to some branch of malfeasance as well.
  - oarabbus_ 4y ago
    This strikes me as unlikely. A VC does not look stupid for passing on an investment, even one that would've been successful. Do you think 90% of that list "looks stupid" for not having invested in Google? These big name VCs reached their status through vision, extreme due diligence, and of course luck; not from FOMOing into investments.
deleted 4y ago
[deleted]
lern_too_spel 4y ago
He did not open his books to investors. https://www.nytimes.com/2022/11/11/technology/ftx-investors-venture-capital.html https://www.nytimes.com/2022/11/11/technology/ftx-investors-... “Sam Bankman-Fried’s pitch to investors was not much of a pitch: It was a take-it-or-leave-it offer. “In meetings to raise money for his cryptocurrency exchange FTX over the last year, the entrepreneur left little room for negotiation, two investors said. FTX was his company, Mr. Bankman-Fried told them, and he planned to run it with little oversight. Interested investors should ‘support him and observe,’ one investor who heard the pitch said.”
- jerf 4y ago
  Is that the whiff of Red Flag perfume I smell? A meta reply to several of the commentors here is that we're not talking about JoeBob's Angel Investing who got lucky with his bait shack and has a few hundred thousand more than he knows what to do with to throw around. These are nominally the top tech investors in the world, along with lots of other people who should know what they are doing. Investing in a business in a KNOWN risky and volatile area calls for MORE due diligence, not less. If they didn't do it, we are certainly in the position of trying to figure out the exact distribution between stupid and evil. "Oh, poor us, we asked him to show us the books and he said 'no' and we just couldn't help but throw tens of millions of dollars at him" is bullshit. This isn't hopskotch at the local elementary school. The only even remotely sane conclusion to come to in that circumstance is not only "no", but a NO! yelled back over your shoulder as you flee as fast as your feet will take you. This is failure so profound that your brain is having trouble wrapping itself around it and you are thinking to yourself, surely they knew what they were doing and I'm just not seeing it? No. Have more confidence in yourself and less in others of supposed authority.
  - lern_too_spel 4y ago
    This isn't an isolated incident. Theranos had no product. Many investors invest in founders instead of the idea, thinking that good founders know when to pivot. Occasionally, a founder doubles down on a bad idea and hides that they've figured out it was a bad idea from investors, but it is hard to predict if a founder will do this ahead of time. That said, my own opinion is that anybody who invests in the crypto space is either a scammer or a rube.
jasmer 4y ago
I like a good conspiracy theory, but it's unrealistic to expect that the investors knew about this. If they did, they would know there'd be a 100% chance that it would blow up. This is some serious balance sheet depravity. This is not like the CEO buying up companies with a conflict of interest, or billing the company for their private jet. All of that is plausibly legit. When there are no financial controls at all, money is being looted, it will go down. VC funds normally don't do due diligence so long as some other entity did it in the round, there is legit oversight on the board etc.. in this case, their own controls failed. All of the funds who invested in FTX need a serious audit of policy. This is a dereliction of responsibility, not just a 'bad bet' and so heads should roll. They probably won't though.

by jerf 4y ago

muggermuch 4y ago

>FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni. Lol. This should be a framed quote.

abluecloud 4y ago

>And that those reasons are probably not good. what would those be?

jaywalk 4y ago
Money laundering.
- hungryforcodes 4y ago
  Money laundering -- whatever. Simple greed explains it.
  - jaywalk 4y ago
    It could be simple greed by incredibly simple-minded VCs or it could be something worse. Somebody asked what the something worse could be, and I replied. We are learning more and more about all of this each day. There was massive fraud going on within FTX, and I don't think it's terribly far-fetched to believe that it wasn't contained within the company. Simple greed explains it -- whatever.
- tedunangst 4y ago
  That's always the "next level" explanation for fraud, but how and why? What did Sequoia get out of this? Who's giving them dirty money?
  - jaywalk 4y ago
    It isn't necessarily that Sequoia (or any of the other VCs) had dirty money to launder. It could have also been that they wanted to use clean money for unclean purposes. To be clear: I'm just letting my mind wander in response to your question, not saying that's what happened.
    - tedunangst 4y ago
      I heard George Soros gave $200m to Sequoia to give to FTX to give to antifa to smuggle yellow cake disguised as children's pronouns.
      - PubliusMI 4y ago
saberdancer 4y ago
Get in a ponzi while the going is good?

maCDzP 4y ago

Who here is going to start a kickstarter for those books? I mean - who doesn’t love pop up books?

nu11ptr 4y ago

"FTX's books don't so much have red flags as that they are printed on red flags, with ink derived from red flags, a custom-made red cover made out of more red flags, and each page, when opened, has pop-up red flags along with a little electronic speaker that plays Red Flag by Antigoni while you get sprayed with Red Flag perfume [1]." OMG - I'm dying here. You really shouldn't have buried that at the bottom of your reply because many will miss it. Perfectly written. I love it.

mananaysiempre 4y ago
Somewhat related Soviet joke: A Westerner arrives in the USSR. Walks absentmindedly along the street, boom, open manhole, falls down, climbs up all covered in sewage, shouts, furious: “What the hell? Couldn’t they have put up a red flag or something like normal people?” A passerby replies: “You’re from the airport?” “Yeah.” “You’ve seen the huge red flag on the roof, right?”

tqi 4y ago

Agree that while "they got swept up in the moment" is a reasonable theory (Hanlon's razor and what not), it also seem very plausible that they knew it was risky but not how risky, and felt like there was still a positive expected value because they would be able sell their coins early (I saw a tweet about how a16z is still up 5x on it's crypto investments because of this[1]). [1] https://twitter.com/mims/status/1592934095117426689 https://twitter.com/mims/status/1592934095117426689

jerf 4y ago
I suspect that's the most plausible, least "evil" theory. Although that still leaves them knowingly gambling that bigger fools, who they intend to take advantage of, will come along later, so I personally wouldn't consider that "good". But I also won't deny it's a dog-eat-dog world at that level and everyone playing at that level is already aware and taking that into account. In that case it just turns out they were the dogs eaten instead of the victors.
- tqi 4y ago
  Oh to be clear, I think that line of reasoning (if that is in fact how they felt) is morally questionable at best.
- glenngillen 4y ago
  A cynical, but not entirely incorrect, take could be that greater fool theory is a pretty critical part of the VC model. The final fool in that process being when they offload to the public markets.

ryandrake 4y ago

I wonder if those other reasons simply were the guy's background and pedigree. Silicon Valley is no different than Wall Street in its obsession with having the "right" educational background, having the "right" parents, having the "right" connections and so on. So many doors in corporate hiring can be bypassed with "Went to MIT" and "Stanford parents" and I wonder if they can also be bypassed by founders looking for investment.

three_seagrass 4y ago
That's at least one strong reason - VCs look at the person as much as the business. Crypto was filled with sleazy car-salesman "investor" types at the time Alameda Research was looking for funding. So when in came someone with a Jane Street background and not a single flashy Ferrari in their driveway, the dam broke on VCs finally being able to pour money into the crypto space on a decent looking founder.
- deleted 4y ago
  [deleted]
- SauciestGNU 4y ago
  If that's how unsophisticated these VC operations are then I think we'll see a lot of them lose their shirts in the coming macroeconomic environment. Which will consequently make future funding rounds all the more difficult.
  - boppo1 4y ago
    Unless the Fed blinks.
    - nxm 4y ago
      The closer to an election, the more likely the case
    - oarabbus_ 4y ago
      Just today the Fed governors stated inflation has not been sufficiently curtailed... https://www.cnbc.com/2022/11/17/feds-bullard-says-rate-hikes-have-had-only-limited-effects-on-inflation-so-far.html https://www.cnbc.com/2022/11/17/feds-bullard-says-rate-hikes...

tfehring 4y ago

> I do not believe there is any credible theory that any investor could possibly have been unaware of these issues. I'm not convinced that the issues that caused Binance to back out even existed the last time FTX raised outside capital (March 2022 according to Crunchbase). My understanding is that in March, FTX had a basically normal balance sheet for a crypto exchange, with roughly enough non-FTT assets to balance against its liabilities. Alameda was an over-leveraged crypto hedge fund, which in hindsight wasn't great news for Alameda's investors or creditors. But there's a world where Alameda goes to zero but FTX is mostly fine. After all, FTX would automatically recalculate margin levels and liquidate assets as needed every 30 seconds. If they did that with Alameda like they would have for an arms length counterparty....I'm not going to say that FTX would have been unscathed - a lot of those loans seem to have been secured by FTT, plus Alameda seems to have made up a lot of FTX's trading volume - but the end result of incinerating billions of dollars' worth of customer deposits wasn't inevitable. IMO, FTX's fate wasn't sealed until its management team built a backdoor into its systems to siphon customers' assets to Alameda. And that probably didn't happen til summer, months after its last funding round.

justincormack 4y ago
It appears (although everything is unclear) that the 8bn hole was caused by customer dollar payments for ftx going to alameda as ftx didn’t actually have a bank account. For three years. So unclear it was ever good.
- skippyboxedhero 4y ago
  This alone is quite incredible. FTX, as a business, never actually existed. It was all just a smoke screen for his hedge fund. Employees were stealing from the company, there were no internal controls...the rules for VC are...different. If you were on a Board and this happened on your watch, you would never work on another Board again. If you did this in PE, fired. If you invested in such a public company, very likely fired or irreparable damage to your reputation. Sequoia are a huge fund, they are one of the doyens of the industry...it isn't even that they failed, they didn't even put in place the mechanism to try to protect their investor's money. It is unbelivable.

jandrese 4y ago

What blows my mind is that SBF is going to investors asking for money in his billion dollar "no you can't look at the books" crypto hedge fund while looking like he's playing hookie from his math class and playing video games during the pitch meeting and the supposedly very serious Wall Street types went "Wow! This guy is amazing! All the money he wants and more!".

peanuty1 4y ago
It was Sequoia that was impressed by him during the pitch where he was playing League of Legends, not Wall St.
xdavidliu 4y ago
the sequioa people had no idea what he was wearing during the pitch, nor did they know at the time that he was gaming. they could only hear his voice.

seagullrific 4y ago

> FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo. - https://archive.ph/1tjP5 https://archive.ph/1tjP5 This is an extraordinary number of high-profile companies which either failed to do due diligence, or were knowingly, deliberately doing shady dealings. Not great to have to choose between incompetence and shadiness at any of those, but those are the two options, and each should be investigated for throwing their [customers'] money into an obvious scam.

nradov 4y ago
There's a third option: FOMO. They didn't want to look stupid later for failing to invest in case FTX turned out to be the next big thing, so they took a gamble.
- p0pcult 4y ago
  But doesnt FOMO-driven action require lack of due diligence? You may be right that it was indeed FOMO, but its not the FOMO that caused the error, it's the lack of DD that comes with FOMO.
- christophilus 4y ago
  That falls under “incompetence”.
- ineedasername 4y ago
  I think that's a very good point. Though also think if I was doing a sort of PhD dissertation exploring the different aspects of malfeasance vs. incompetence that FOMO might ultimately be found as some flavor of incompetence. Though also have a dotted line in the tree diagram leading over to some branch of malfeasance as well.
- oarabbus_ 4y ago
  This strikes me as unlikely. A VC does not look stupid for passing on an investment, even one that would've been successful. Do you think 90% of that list "looks stupid" for not having invested in Google? These big name VCs reached their status through vision, extreme due diligence, and of course luck; not from FOMOing into investments.

deleted 4y ago

[deleted]

lern_too_spel 4y ago

He did not open his books to investors. https://www.nytimes.com/2022/11/11/technology/ftx-investors-venture-capital.html https://www.nytimes.com/2022/11/11/technology/ftx-investors-... “Sam Bankman-Fried’s pitch to investors was not much of a pitch: It was a take-it-or-leave-it offer. “In meetings to raise money for his cryptocurrency exchange FTX over the last year, the entrepreneur left little room for negotiation, two investors said. FTX was his company, Mr. Bankman-Fried told them, and he planned to run it with little oversight. Interested investors should ‘support him and observe,’ one investor who heard the pitch said.”

jerf 4y ago
Is that the whiff of Red Flag perfume I smell? A meta reply to several of the commentors here is that we're not talking about JoeBob's Angel Investing who got lucky with his bait shack and has a few hundred thousand more than he knows what to do with to throw around. These are nominally the top tech investors in the world, along with lots of other people who should know what they are doing. Investing in a business in a KNOWN risky and volatile area calls for MORE due diligence, not less. If they didn't do it, we are certainly in the position of trying to figure out the exact distribution between stupid and evil. "Oh, poor us, we asked him to show us the books and he said 'no' and we just couldn't help but throw tens of millions of dollars at him" is bullshit. This isn't hopskotch at the local elementary school. The only even remotely sane conclusion to come to in that circumstance is not only "no", but a NO! yelled back over your shoulder as you flee as fast as your feet will take you. This is failure so profound that your brain is having trouble wrapping itself around it and you are thinking to yourself, surely they knew what they were doing and I'm just not seeing it? No. Have more confidence in yourself and less in others of supposed authority.
- lern_too_spel 4y ago
  This isn't an isolated incident. Theranos had no product. Many investors invest in founders instead of the idea, thinking that good founders know when to pivot. Occasionally, a founder doubles down on a bad idea and hides that they've figured out it was a bad idea from investors, but it is hard to predict if a founder will do this ahead of time. That said, my own opinion is that anybody who invests in the crypto space is either a scammer or a rube.

jasmer 4y ago

I like a good conspiracy theory, but it's unrealistic to expect that the investors knew about this. If they did, they would know there'd be a 100% chance that it would blow up. This is some serious balance sheet depravity. This is not like the CEO buying up companies with a conflict of interest, or billing the company for their private jet. All of that is plausibly legit. When there are no financial controls at all, money is being looted, it will go down. VC funds normally don't do due diligence so long as some other entity did it in the round, there is legit oversight on the board etc.. in this case, their own controls failed. All of the funds who invested in FTX need a serious audit of policy. This is a dereliction of responsibility, not just a 'bad bet' and so heads should roll. They probably won't though.