Normally it takes 3-10 years for a VC investment to reach an exit. In crypto, they get tokens that they’ve been able to dump to retail almost immediately. A16Z has a particularly suspicious shitcoin pipeline via their Coinbase board seat.
I hope SEC also ends up prosecuting investors who participated in these token offerings, and ideally also employees who got paid in tokens [1]. But I have no idea if there’s a legal basis because American securities law is designed to protect investors and doesn’t necessarily seem to account for the A16Z-style case where they’re essentially co-conspirators in the fraud: supplying crypto founders with money for marketing which pulled in retail dollars which ended up straight back to the VC’s and founders’ pockets.
[1] What difference does it really make if you’re a founder selling unlicensed securities, or an employee who signed a contract where you get paid in those unlicensed securities and then you dump them on retail investors? The SEC should look at these schemes which were popular with companies that hire on HN too.
Prosecuting those rubes for being among the victims? If there is evidence they pumped and dumped those tokens or didn't report their income correctly, then sure. But otherwise, why prosecute people for being stupid enough to accept payment crypto?
However, it doesn't seem that Sequoia et al had seats on the board, at least from this early 2022 press release [1].
Holding shareholders that are not directors accountable is extremely difficult. This is called "piercing the corporate veil" (worth a google) and is done only vary rarely and in cases of clear and outrageous misconduct attributable to the shareholders themselves—it's so rare because it's antithetical to the entire premise of the "limited" corporation.
[1] https://www.prnewswire.com/news-releases/ftx-us-derivatives-...
It didn't make any rational sense.
Unless the logical conclusion is that it means 'zero liability'.
https://www.economist.com/finance-and-economics/2013/05/04/b...
(Paywall, check google cache)
The SEC is authorized to pursue criminal cases for securities fraud (among many other things). Furthermore, they can refer criminal cases to the Dept of Justice, which has almost certainly happened.
To the extent that FTX defrauded consumers, these will be reflected in civil and criminal cases.
To my knowledge, the SEC does not protect deposits in the event of bankruptcy. Most individuals with assets on deposit at FTX are unsecured creditors.
It's not one or the other, he can be charged for both. It's up to the DOJ to file a criminal case, and they didn't arrest him for no reason.
I’m not sure it’s fair that the big boys get investor treatment and the retail suckers who were led to believe they’re investing get… nothing so far.
An incredible and unforeseeable development!
Surely there will be more charges over time but the end result isn’t going to change much. The wealthy people who’ve been boosting all of this will take the smallest losses of all.
At the same time, I have trouble finding sympathy for anyone involved. SBF is a sociopath, thief and liar.
Those big-name investors should have known better and I'm sure in many cases they did. They probably should start lawyering up too, because they've got investors of their own who have been harmed either through malfeasance of actionable incompetence.
And the 'small time' investors -- mom-and-pop, widows and orphans investing the life savings on the platform -- all crypto is a scam, a Ponzi scheme, at the very best it's a casino or playing the numbers. Always has been. Always will be. All they had to do was open their eyes or maintain critical thinking in the face of promoters trying to bamboozle them.
And yet dumb money says I'm wrong. BTC up 4% on the day....
People rush to simplify here with 'there are no angels" arguments. It doesn't matter that it was crypto. Those funds were stolen.
8% APR from a crypto company was obviously a pyramid scheme. Anybody who put their money into FTX was either unbelievably stupid, or knew they were playing with fire and hoped they wouldn't be the ones to get burnt.
If somehow all the money has been utterly destroyed so nobody involved gets any of it, that would probably be the best outcome. If the cryptobro investors get their money back, they're just going to use it in other scams to hurt more people.
It's almost like it there are fundamental inherent flaws that need to be fixed to continue on and we can't keep treating things like business is usual if we want to enable continued growth vs stagnation due to power concentration like we've seen in non-capitalist systems in the past.
You're going to see the big players like Sequoia get some retribution here and to a magnitude that's significant enough to be usable and recoverable, meanwhile you're going to see all sorts of others life savings evaporate, resulting in a far less recoverable scenario, with little to nothing recovered--at least that's how this tends to play out, historically. Everyone will of course lose, but you'll see disproportionate losses and disproportionate recoverability. Disproportionate wealth as a proxy to power does this.
If I were an individual, I wouldn’t really care about how the criminal charges were structured, since it’s not like I would get any individual benefit out of his jail time, one way or the other.
Yes. But! As an individual I care if the laws protect me. Have they been clever enough to only scam people like me, would they still go to prison?
As long as the answer to that is yes, I don’t mind if something else they have done is easier to prosecute.
The customers will be paid before investors with whatever money is there. This is well established by previous case precedents, including in places like unregulated poker betting sites.
Anybody can have a claim, including the SEC, but the courts decide allocation order.
That really depends whether the investment is structured as a secured loan (senior debt) or not. Secured loans get paid out in full, before the unsecured creditors such as customers.
> but the courts decide allocation order
Mostly that is defined by the laws of the jurisdiction, not the individual court.
In the Bahamas, the ranking of creditors and shareholders are as follows[1]:
Creditors with a mortgage or fixed charge: assets secured in this way are outside the scope of the insolvency.
Costs of insolvency proceedings: all costs and expenses properly incurred in the company's winding-up (including liquidator's fees).
Employees' debts: sums due to employees under the terms of their employment contract.
Preferential payments, such as unpaid taxes, contributions to occupational pension schemes and liability for compensation for injury or occupational disease.
Creditors with a floating charge.
Unsecured creditors.
Shareholder loans.
Shareholders' equity.
Under the Bankruptcy Code, the priority of allowed claims and interests is, in descending order:
Secured claims.
Administrative expenses and priority claims.
General unsecured claims.
Subordinated claims.
Equity interests.
Outside of bankruptcy, creditor ranking is determined by state law and in certain circumstances, the agreement of the parties, such as in an intercreditor agreement. In bankruptcy, the priority of creditors' claims and interests in a debtor's estate is set out in the Bankruptcy Code.
The costs of insolvency proceedings, or administrative costs, may be determined by the liquidator. The liquidator will generally milk the system (within their legal limitations) as much as possible (extremely high charge-out costs per hour, etcetera), so customers will often get didly squat. A senior liquidator might be charged out at say USD800 per hour, down to the secretary who might be charged out at USD120 per hour. The liquidator’s goal is to charge as many hours as possible, without being so extreme that the court pulls them up on it, or to finish up quickly if there is no more money left to suck.
[1] https://uk.practicallaw.thomsonreuters.com/9-518-5211
[2] https://uk.practicallaw.thomsonreuters.com/7-501-6870
[3] https://www.investopedia.com/terms/s/senior-convertible-note...
Like I said, IANAL, but in all the cases I'm aware of customers went first.
This may seem unfair but this is their best shot at securing a conviction. Elizbeth Holmes was convicted for defrauding investors, not users of Theranos devices.
Either way, the money is likely gone. Nobody is being protected.
I mean, given that FTX.us was supposedly completely isolated from FTX.com isn't that true?
Assuming (and I understand this is a big assumption) that SBF is correct that FTX.us deposits were completely isolated and US customers can be reimbursed in full, the only US citizens harmed by this would be Sequoia et al.
Even if it turns out US customers are actually left holding the bag as well, does the SEC even have clear jurisdiction over FTX on that? Maybe? Wouldn't the DOJ criminal charges be much better wrt nailing him for that though?
Seems much easier for the SEC to charge him with defrauding investors, as that's pretty much a slam dunk case at this point and also clearly the jurisdiction of the SEC.
You can draw analogies here to Capone and tax fraud etc. etc.
1 - https://www.sec.gov/litigation/complaints/2022/comp-pr2022-2...
Stealing non-securities you're supposed to store for me is also a crime.
He stole coins, period.
This action is to protect investors. No need to make it into a conspiracy.
The reason SEC moved this fast was to add to their counter-point argument that they should be allowed to fully regulate crypto as securities.
https://www.cnbc.com/video/2022/12/13/regulating-cryptocurre...
If I were a retail investor who lost my savings in FTX, I might be feeling upset that the government is rushing to action in defense of billion-dollar funds whose own due diligence failed massively, while seemingly nothing is being done to help those who invested in crypto based on FTX's Super Bowl ads and celebrity endorsements...
At the same time, I fully understand why it's like this. Because the VCs bought actual FTX shares, the SEC has a clear case of securities fraud. The law is pretty clear about what happens when you sell shares in your company and lie about it.
In contrast, it's not really settled whether the little people who sent money to FTX in exchange for a crypto ledger entry were actually buying securities, commodities, custodial services, or something else — maybe nothing at all. (The crypto guys love this ambiguity, of course! They've been lobbying for regulation that keeps crypto in a no-man's-land where tokens that look and work like securities would still be something else.)
This seems to be the reason why the SEC doesn't have a clear-cut case to protect FTX customers, but does have a case to protect rich VC crypto-bro partners.