[Animats]

U.S. Department of Justice lawyers are already closing in.[1]

Using customer funds held in custody is theft. Period. People go to jail for this.

This may be the biggest embezzlement of customer funds held in custody in history. Most scams involve misuse of funds invested, not just held in custody. The biggest outright theft of this type seems to have been Peregrine Financial.[2] That was $200 million, far smaller than this one.

What happened to the CEO of Peregrine? Here he is, 10 years after conviction:

    Bureau of Prisons Inmate Locator
    RUSSELL R WASENDORF
    Register Number: 12191-029
    Age:   74
    Race:  White
    Sex:  Male
    Located at: Jesup FCI
    Release Date: 02/19/2054

[1] https://fortune.com/crypto/2022/11/10/ftx-sam-bankman-fried-...

[2] https://archives.fbi.gov/archives/omaha/press-releases/2013/...

[sillysaurusx]

I just want to say, you have some of the most fantastic coverage of events like this.

It feels like having an investigative journalist on payroll. The delay between an Animats comment and this showing up in the news is significant. Thank you!

(I remember your comments about the CEO that forged pay stubs being similarly excellent. Someday it might be worth collating them. In the meantime, whenever Animats says CEO Foobar is going to prison, Foobar had better start mentally preparing themselves for the journey.)

[Animats]

It's just knowing some basic financial history. Crypto scams are not new kinds of scams. They're mostly scams from the 18th and 19th centuries, with a new paint job. "Extraordinary Popular Delusions and the Madness of Crowds" (1841), has the first time around for most of these bad ideas. Mass market scams first got going when newspapers appeared. At last, you could reach large numbers suckers at low cost. Before newspapers, scamming was a one-on-one in person thing.

We still have both mass-market and one-on-one scams, but now they can both be done remotely. There's not much originality. It's mostly the same old scams of a few standard types, sometimes in new packaging.

[sillysaurusx]

I find all of it so fascinating. I wrote up Wasendorf’s story just now, mostly out of curiosity: https://news.ycombinator.com/item?id=33565992

Stories like that are really interesting to dig into. They all seem to get caught because the world changes (audits happening via internet in Wasendorf’s case, the economy imploding and sinking Alameda’s risky investments, etc) rather than from any particular mistake. The mistake always seems to be that they started cheating in the first place, and then it was just a matter of time.

Of course, we only hear about the ones who were caught. It makes you wonder how many stories like this were swept under the rug — if Alameda had made money instead of losing it, FTX would probably still be online, even though they’d still be committing the same large scale fraud.

Anyway, thanks again for all this, and especially for all the detail you put in. (Your comment pointing out that SBF is firmly under the SEC’s jurisdiction was wonderful.)

[shorthistory]

I may have missed it-but where is the source/evidence that some(all) this fraud is under SEC's jurisdiction?

[sillysaurusx]

Right this way! https://news.ycombinator.com/item?id=33550020

[sillysaurusx]

By the way, that Wasendorf story (Animats’ second link) is quite interesting. He skimmed $200M by forging bank statements and was eventually caught only when the world switched to electronic auditing. Previously he was able to fool everyone by intercepting the snail mail: https://www.forbes.com/sites/walterpavlo/2012/07/13/pfgbests...

[neomantra]

Any delay is related to the window size, MSS, and the amount of un-ACKed data ;)

[nullc]

> This may be the biggest embezzlement of customer funds held in custody in history.

I wouldn't be surprised to learn that the amount of actual customer funds that went in were much smaller than claimed.

Keep in mind FTX was mostly 'perpetuals' -- fake assets. It might be that a lot of the customer funds were just fictional gains, also may be that a lot of them were paper value owned by SBF entities.

I've been trying to find anyone I personally know that had FTX exposure and so far I'm coming up dry.

[coffeebeqn]

How about everyone with assets stuck in FTX that can’t withdraw them? When your accounting is fictional it might be hard to pinpoint who’s money went where but everyone got screwed in the end

[Animats]

There's someone on Reddit who says they had their entire net worth in USDC on FTX.[1]

At least they're at the head of the line in bankruptcy. Custodial funds come ahead of debts.

[1] https://www.reddit.com/r/wallstreetbets/comments/yq6y5d/all_...

[oldgradstudent]

> It might be that a lot of the customer funds were just fictional gains, also may be that a lot of them were paper value owned by SBF entities.

That's true for the numbers used when reporting on Bernie Madoff's Ponzi scheme. Much of the $50B was fictional gains.

There were even clawbacks on the gains of those who withdrew before the collapse.

[nullc]

Interestingly, many madoff victims had paid tons of federal gains taxes on the fictional gains and were unable to get the money back from the government.

Ultimately the US government is the party that gained the most financially from Madoff's scheme!

[oldgradstudent]

Wasn't MF Global several times bigger ($875M) in terms of customer funds used for other purposes, yet no one went to jail?

[nemo44x]

Yeah I think it’s why SBF immediately went on about not knowing everything that was going on, that he messed up by misunderstanding things, etc. He’s trying to lay the groundwork for plausible deniability here.

He will either go to prison or kill himself I would bet.

[gentryb]

Betting someone will kill themselves or go to prison is far from constructive, and is triggering to many. Go to prison is one thing. Suicide is another. It's not a joke.

EDIT: Suicide is something that's hit personally lately - my response was likely something based on that. To the person who responded - I didn't think you considered suicide a joke - and plenty do consider it. It's never a solution though. You even got an upvote.

[nemo44x]

I’m not joking. And I agree it’s a serious matter. But staring down at 40+ years, a significant number of people would kill themselves in his position.

“I’d bet” is a figure of speech. Not the stated desire to gamble.

[from]

He won't get forty years. If he ever is indicted in America, he has to be extradited from the Bahamas first. Anyone with money can delay extradition proceedings for a couple years. Maybe he'll agree to extradition on the condition that he is granted bail in America (where he'll have $200,000 a month security guards from Guidepost Solutions enforce the conditions of his bail). Then he'll have Ben Brafman or a bigger $2000/hour firm, assisted by the world class investigators from Kobre & Kim and other high priced co-counsel negotiate the best deal possible and he'll plea guilty to some counts of wire fraud. Then at sentencing we'll hear about all his great charitable deeds, there'll be 100 letters from high level businessmen, politicians attesting to his great character, how he thought he was doing the right thing but "takes responsbility" for his actions, etc. Then maybe due to the massive losses and large number of victims he gets 10-15 years which of course after the 15% time good credit becomes 8 and a half. Then maybe we'll also find out he had a substance abuse disorder which makes him eligibile for the RDAP program and accordingly a 12 month sentence reduction. He'll also be eligible through the First Step Act to earn sentence reduction through "evidence-based recidivism reduction" classes in prison. And even if there is court ordered restitution almost no one ever pays that or if they do it is only a small fraction (there are major white collar fraudsters on $200/month payment plans for $10 million restitution orders). This is assuming he even faces justice in America because there are reports of several hundred million dollars of crypto being moved out of FTX wallets which to me looks like the internet money version of a "go bag" and someone intending to flee.