This is it exactly. He was running a confidence game. There are some big parallels with Bernie Madoff in fact. Spinning a story of financial genius out of a lucky break he got early on that had higher than typical returns, but in a market small enough to fly under the radar of the big players. The big difference is that SBF had less sense and let it spin out of control way too fast and hastened his own demise. At least Madoff got to live most of his life before he got sent to jail.

That's the thing - he successfully ran a lot of involved arbitrage and other legitimate trading tricks before he decided to run the confidence game. Unlike Madoff, he could have retired before the FTX scam with "buy a jet every year" kind of cash.

Is there actually good visibility on the profits of the earlier trading?

There's indication it was in the higher 9 digits.

He found a niche in a Japanese exchange that was difficult to break into due to onerous banking regulations. Made a nice little chunk of change but it was a small potatoes thing. The numbers only look big because it was early days of crypto and the inherent inflation was through the roof.

I don't think SBF was a scammer in the Bernie Madoff sense. I don't think he set out to intentionally scam anyone. I just think he was so arrogant that he thought he could do whatever he wanted. He thinks he's smart and the rest of the world is dumb. He thinks the legal system is just something to "route around." Not because he wants to steal money but because, if there's money in "his" account, does it really matter if it technically belongs to a customer? He seeemed genuinely surprised at the verdict, and he's acted all along as if he were, not exactly innocent but undeserving of all this bother.

How does using a random number generator in sizing the insurance fund fit into that view?

Like every other decision SBF would prefer you not examine: It fits because the ends justify the means.

It's important for the business that the insurance fund is safe. If you look closely you will find that it is unsafe. But if people believe it is safe you won't need the insurance fund, so do whatever you need to to inspire confidence in the insurance fund.

The safety (or not) of the insurance fund is not related to the need for it. The need would come from a counterparty defaulting - which is generally unrelated.

That's typical startup shenanigans, not specific to FTX. Lying to customers and embellishing the truth is business as usual. I'm sure they hoped that the plan is that at one point they'd turn this into a real insurance fund.

If that is the case then the standard operating procedures of startups is fraud, not that Sam isn't somehow a deliberate scammer and con artist.

FTX had "infinite money", so the actual insurance fund was that supply of money; having a pretend number on the front page was simpler than actually implementing it; in a sense it was a favor to investors, because it saved on operational costs.

(All things SBF may have told himself.)

Yeah, Madoff was a scammer, SBF is a megalomaniac. He thought he couldn't fail, and thus the rules didn't apply to him. So, when he did (predictably) fail his reaction as basically a big "I didn't mean to do anything wrong, therefore I shouldn't be punished" makes sense. But hey you know what, this is why we have rules. Not following the rules was actually the wrong thing, not losing people's money, which--crucially--he couldn't have done had he followed the rules.

I feel like justice is being done here, but there's a sense in which SBF and his cohort are the victims here. A world of zero interest rate incentives/people, a trendy money machine in crypto, a general sense that old people/regulations are impoverishing us all with their nervous sclerosis, all created an environment where--in hindsight--this was inevitable. If not FTX then someone else.

I think people are 100% right to call out the press/publications/investors/regulators who flat out encouraged this charade to continue well beyond the point where it was an obvious scam, and I think we really need to examine the VC culture of "find (or create) a young megalomaniac, give them tons of money, ... profit". How do we think these things will turn out? Will we spend billions of dollars building Uber, which at this point is an app that shows you ads and incidentally hails a cab? Will we spend billions of dollars building trash companies that scam people? Will we spend billions of dollars building Airbnb, which was pretty ruinous for cities and at this point not even a good business? Will we spend billions of dollars building e-scooter companies that exist essentially to create tons of e-waste that litters our sidewalks and landfills?

It's nuts. Please just fund day care.

Yes, I agree with that.

It's undeniable he committed fraud, repeatedly lied to his clients and tried to make them give him money by telling them tales that weren't true.

But it also seems likely he thought he was clever/lucky enough that it would all work out in the end.

That makes the intent different, and culpability is always about intent.

In fact SBF reminds me more of Billy McFarland (of Fyre Festival fame) than of Madoff.

>It's undeniable he committed fraud, repeatedly lied to his clients and tried to make them give him money by telling them tales that weren't true.

What on earth is the difference between this and Madoff?

>But it also seems likely he thought he was clever/lucky enough that it would all work out in the end.

What on earth is the difference between this and Madoff?

>That makes the intent different

Why do you assume bad intent in one case and none in the other? SBF stole customer money and used it for political donations during one of the most heated, divisive, controversial elections in recent American history. He's the sitting President's largest donator, and he's going to prison for fraud. The potential consequences here are massive.

There's a possibility that the customers of FTX recover most or all of their money, thanks to SBF's investments.

Those investments were fraudulent because they were made without the consent of the people providing the money, but they were investments nonetheless: SBF was buying assets, not just pissing money away in jets and catering (although he also did that).

In Madoff's case there were no assets at all. It was not possible for Madoff to convince himself he was doing something that may become viable, given enough time. It was possible for SBF.

I think that's a pretty big difference.

(Also, campaign finance violations are not part of the trial that just ended, at all.)

SBF strikes me as someone who firmly believes ends-justify-the-means, and as such, if all his victims could be made whole, then he couldn't have committed any fraud. However, Matt Levine put it best:

> You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison.

It had to do with lack of internal controls that safeguard the organization and its custodied assets from both employee mistakes and fraud. That's a part of engineering high-assurance high-integrity systems and SOP at big exchanges, banks, and similar orgs.

It was fraud. They specifically wrote the code to allow them to move funds from customers to alameda.

This wasn’t a case of poor engineering practices or poor internal controls. It wasn’t a mistake. It was all very intentional

Yeah but if you want to scam why would you want to engineer the company you are creating to prevent you from scamming.

SBF has just been convicted of committing intentional fraud, not just "lack of internal controls". Was it an oversight to use rand() to generate your deposit insurance figures, or add that switch to allow Alameda unlimited rights to dip into the customer fund kitty?

That's true of course, but every control can be turned off. In this case, they wanted to turn every safeguard off.

Lack of internal controls will cause some peon that you employ to steal money from you/lose your money.

Lack of internal controls isn't the reason for why the CEO and owner of FTX is funneling billions of its customer dollars into a company he owns - Alameda.

It's just straight up fraud.

Loose, or rather non existant, controls also allow you, as senior management to get away with even worse fraud without one of your employees realizing.

He's not senior management. He's the owner. It doesn't matter what your controls are, if he wants you to eat paste and hand him over the keys to the production database so that he could delete it, you can comply, or he can fire you.

You should probably let some other adult, (and the FBI) know if the owner asks you to do that, but you can't physically stop him. It's his company. He has complete power over it. It's not a democracy, there's no checks and balances on the power of an owner-CEO.

That's what internal controls are there for to prevent. Especially for owner-CEOs. FTX set up shop somewhere in the carribean just to avoid that kind of oversight and control. I can hardly imagine a bigger red flag than that.

That people just accept that founder CEOs are allowed to do everything with their companies, and their companies money, is troubling. Because, as soon as said company is a seperate legal entity, it is the companies assets and not the founders anymore.

Maybe even CompSci graduates shoupd get some basics of business, legal and ethics during their studies.

> lack of internal controls that safeguard the organization

That's a bit like:

"The bank robbers' mistake was a lack of internal control and security advisors who could have safeguarded them from robbing banks"

It sounds silly but you are not a bank robber before any attempted robbery or at least sincere planning of such.

There is a very fine line between fraud and financial engineering. Perhaps none at all.

Yes, but he crossed the fine line by like 500 kms.

Anyone, who gets into building a company in the crypto space is a scammer. Period.

That's a bit spicy. Don't forget we're on the Y Combinator forums, so this may read as an attack against their investment strategy - not even dang can protect us here.

This forum actively supported deplatforming crypto source from VCS hosts so I'm pretty sure it being YCombinator doesn't matter at all.

Putting money into crypto is not investing. It's gambling.

I think that's either untrue, or at least there are different levels of scaminess. I put some money into FTX to short Celsius (another scam) and would have been happy with the service if they hadn't gone and stolen my money. I mean you could argue that any trading of crypto is inherently a scam but there are some consenting adults who chose to do it.

"...would have been happy with the service if they hadn't gone and stolen my money."

That's a pretty big caveat, though.

I am talking about people who "build" these exchanges and platforms and new protocols and shitcoins. Anyone peddling anything under Web3, DeFi, Blockchain, NFT etc is a scammer. People who think they are trading or investing are the suckers.