Money Stuff: FTX Does Some Effective Altruism

Remember FTX? It was wild. FTX was a crypto exchange that collapsed in bankruptcy and fraud charges in late 2022. Before that, though, it was a wildly lucrative business, run sloppily by inexperienced young people out of luxury apartments in the Bahamas, with a distinctive charitable mission. FTX was associated with the Effective Altruism (EA) movement, and its founder, Sam Bankman-Fried, was explicitly looking to earn a lot of money to give to effective charities. I once said to him that he was “in the business of funneling money from people who are going to use it poorly on gambling to, like, animal charities and pandemic preparedness and Joe Biden,” and that was before I knew about the fraud stuff. Even the good story of FTX was that it was a vast machine for extracting money from crypto traders and giving it to effective altruism charities.

In that vein, in April 2022, FTX hired a guy named Ross Rheingans-Yoo to work at the FTX Foundation, its charitable arm. [1]  His employment agreement — “a shared Google Document, ‘Final Ross Terms’” — promised him “a discretionary bonus of at least $1 million,” to be paid half in cash and half in a donation to a charity of his choice. Very FTX: $1 million seems like a nice paycheck for a nonprofit employee, and getting half of his pay in charitable donations was very EA of Rheingans-Yoo. [2]

In September 2022, after about five months of work, Bankman-Fried told Rheingans-Yoo that, “as his bonus for the first half of 2022,” he would get $650,000, plus “another $650k of directed grants to any [Effective-Altruist]-driven cause if you want.” Two months later, FTX went bankrupt. At the time of the bankruptcy, Rheingans-Yoo had apparently not told FTX where to send the $650,000.

So he filed a claim in bankruptcy, asking FTX’s bankruptcy estate to send the $650,000 to the charity of his choice. FTX’s bankruptcy estate fought the claim, arguing that it had no obligation to pay him, but the bankruptcy judge disagreed and awarded him the money. (The $650,000 was an unsecured claim, but FTX ended up recovering more than 100 cents on the dollar for unsecured creditors, [3]  so he got the full amount.)

He asked FTX to send the money to Manifold for Charity, the charitable arm of prediction market Manifold Markets, because of course he did. FTX’s estate objected to this too, arguing that, because FTX was in litigation against Manifold, because Rheingans-Yoo was on Manifold for Charity’s board, and because he would control the disbursement of the money from Manifold, this donation was conflicted: “Rather than seeking to do good, Rheingans-Yoo instead is perpetuating a key component of the FTX fraud in which FTX insiders siphoned money from creditors to donate to ‘charities’ in order to enhance their own personal reputations and line the pockets of their Effective Altruist acquaintances.”

Rheingans-Yoo disagreed, but said that he was “willing to eliminate the parties’ ongoing litigation costs and conserve judicial resources by changing his designation from Manifold for Charity” to another EA charity, 1DaySooner Inc. [4]  But Sullivan & Cromwell, the FTX bankruptcy estate‘s lawyers, wrote back, saying, nope, the court’s order “only permitted distribution on the claim to ‘the Effective Altruism-driven charity,’ designated in writing … and not, for example, to ‘any Effective Altruism-driven charity.’” [5] That is: Because he could give the money to “the EA charity of his choice,” and he chose wrong, he couldn’t choose a different charity. He only had the one shot, and he missed.

One thing that is arguably going on here is that the FTX bankruptcy administrators are extremely and understandably crotchety about the young EA people who worked at FTX. Reading between the lines a bit, you get the sense that Sullivan & Cromwell thinks that the young FTX EAs drove FTX into bankruptcy and stole customer money to give to fake charities, and doesn’t want to give them or their charities any more money.

Another thing that is going on here is that no lawyer can resist the opportunity to say “aha, if this document said ‘a’ you’d get $650,000, but it says ‘the’ so you don’t.” That is the sort of thing that lawyers live for.

Anyway the judge wasn’t having it. Bloomberg Law’s James Nani reports:

 A former Jane Street trader recruited by Sam Bankman-Fried to assist in FTX’s charitable giving defeated opposition from the fallen crypto exchange to send $650,000 of his bonus to an effective altruism-tied nonprofit as part of the bankruptcy.

Ross Rheingans-Yoo can send part of his bonus to 1Day Sooner Inc. because the FTX recovery trust’s lacked any credible basis to oppose it, Judge Karen B. Owens of the US Bankruptcy Court for District of Delaware ruled at a hearing Tuesday. …

Owens allowed Rheingans-Yoo to re-designate the beneficiary of his $650,000 claim from Manifold for Charity to 1Day Sooner, according to a transcript of the hearing. She also granted Rheingans-Yoo’s motion for sanctions against the trust, finding its refusal to permit the re-designation as “completely unreasonable and really just not based in any law or fact” and leading to “wasteful litigation,” she said.

“I just think that the trust has been harmed, and I think that the claimant has been harmed, and I think that the Court has been harmed with this,” Owens said, according to a transcript.

One important model of FTX is that, before November 2022, it was a way to funnel money from crypto traders to EA charities, but after November 2022 it has become a way to funnel money to lawyers.

It seems like it would be fairly easy to sell private credit to a pension fund. The pitch is something like this:

1. Private credit, generically, offers higher returns than “public credit” (bonds, etc.), as compensation for offering less liquidity. If you invest in bonds, you can sell them whenever you want; if you invest in private credit, your money is locked up for years. But in exchange you get a higher interest rate.
2. You are a pension fund: You don’t need your money back for years! You have a quite predictable schedule of liabilities; you know that some of your beneficiaries will retire in 10 years, and you will need to start paying them benefits then. They won’t all suddenly retire tomorrow; you can safely make long-term plans.
3. If you don’t need your money back soon anyway, private credit also offers other benefits: Because it doesn’t trade much, it is not marked to market as rigorously as public bonds are, so you get to tell everyone that you have pleasingly consistent returns without much volatility.

Great pitch. But a problem with it is that most US workers do not have defined-benefit pensions, so there is not all that much pension money to put into private credit.

What do US workers have? Well, one way to replace a pension is with an annuity: You save some money, you buy an annuity from an insurance company, and the annuity pays you a fixed amount every month in your retirement, much like a pension would. The pitch to pension funds that I wrote above works, without any adjustment, for annuities: Same basic dynamic of “you want high returns and can wait.” So private credit firms should pitch their product to insurance companies. And they do, very much so, to the point that I sometimes write that “private credit” is a fancy way to say “insurance companies,” and to the point that many private credit managers own and manage annuity companies themselves.

Even that, though, is not the main prize. The main US replacements for pensions — the main ways that US workers save for retirement — are 401(k) plans and other defined-contribution plans. That is, the main way that US workers save for retirement is that they put some money aside for themselves, and hopefully by the time they retire it’s enough money to fund their lifestyles.

And so you’d expect private credit to make the same pitch to individual investors, their financial advisers and their 401(k) plans:

1. Private credit should offer high returns at the cost of bad liquidity.
2. You’re not going to retire for 20 years so you don’t need liquidity.
3. Also, if you check your account every day, it won’t go down much (it’s not marked to market), so you’ll sleep better.

This is a pretty good pitch (though it leaves some stuff out, like high fees [6] ), and private credit is all-in on making it. 

An important problem, though, is the second point. In theory “you’re not going to retire for 20 years so you don’t need liquidity” is a good argument to individuals, just as good as it is to pension funds or annuities. In practice, the individuals want liquidity. Bloomberg’s Ellen DiMauro reports on what private credit managers are actually doing:

Private credit firms are preparing to reach everyday investors in the US by launching new vehicles that are more compatible with 401(k)s and other retirement accounts.

Managers last year launched 41 evergreen funds dedicated to private credit, according to data from Preqin. These vehicles offer investors options to cash out periodically, in contrast with closed-end vehicles that typically lock up capital for a set amount of time, a drawback for individual investors. ...

“You have many managers working on new ways for retail investors to access the market, and there’s a focus on delivering vehicles which can provide enough liquidity for 401(k) access,” said Jennifer Daly, chair of private credit and special situations at Paul Hastings.

“Enough liquidity for 401(k) access” makes no real sense in theory, but it really is what’s required. You can’t sell retail investors a private credit product like “give us your money and forget about it until you retire,” even if that would be optimal for both you and them.

Meanwhile, private credit’s pitch to regulators is that it has a safer funding model than bank lending. “Instead of being funded with deposits,” as I have put it, private credit firms “lend using long-term locked-up investor capital”: Private credit funds have much less debt than banks do, and their money is locked up for longer. This is basically true of private credit funds whose investors are pensions or endowments or insurance companies. But when you get individual investors and let them withdraw their money, it’s less true. The Wall Street Journal reports:

For the first time since the start of the private-credit boom, large numbers of individual investors are trying to get their money out.

Several of the biggest funds eligible to wealthy individuals received requests from about 5% of shareholders to cash out at the end of last year, well above the normal volume, according to Securities and Exchange Commission filings. One, managed by Blue Owl, got redemptions for about 15% of its shares, primarily from Asian clients, a person familiar with the matter said.

The rising redemptions come at an awkward time for private-credit fund managers—and for the Trump administration—as they push for new rules that would “democratize” private markets by encouraging their inclusion in 401(k) retirement plans for all Americans.

Private-fund managers, including Apollo Global Management, Blackstone and Blue Owl, blame fearmongering about a recent spate of corporate bankruptcies, like automotive supplier First Brands, for the surge of withdrawals. Analysts say there could be a simpler explanation: Individual investors are falling into a familiar pattern of selling out when an asset class underperforms expectations.

If you let individual investors take their money out, they will, at the worst time, and your funding model is not as good as you thought it was.

There are solutions. For instance: What if you borrow the money that they want back? The Journal goes on:

Redemptions have been particularly heavy from a technology-focused BDC that Blue Owl has grown to about $6 billion by relying heavily on UBS’s wealth-management platform to sell it to individuals in Asia. By December, Blue Owl had received redemptions well in excess of 5% but rather than capping payouts there, the firm announced it would raise the threshold to 17%, borrowing money to retire the shares.

The idea was to flush all shareholders who wanted out in one fell swoop, avoiding the cycle of redemptions that weighed down Blackstone’s real-estate fund for years when it fell from favor. About 15% of the technology BDC’s investors took Blue Owl up on its offer and redeemed, the person familiar with the matter said.

The usual story about private credit is that it is systemically safe because it has long-term funding and low leverage, but once you open it up to retail the funding gets more flighty and the leverage gets higher.

Chief executive officers of public companies often have material nonpublic information about their companies, and they also often have college tuition bills. Much of a CEO’s wealth will be tied up in her company’s stock, and she will sometimes need to sell stock to pay tuition or buy a house or whatever. If she knows bad news about the company, though, she can’t sell stock, which is hard when the tuition bill is due.

How do you address this? Well, there are some times when the CEO doesn’t have inside information, at least in theory. When the company releases earnings and does an earnings call and answers analysts’ questions and gives guidance for the year, the CEO can at least argue that the market knows as much as she does about the company. (This is rarely true, but it’s a reasonable polite fiction.) Therefore, she is free to sell stock. The company is in an “open window” for insider selling. 

These windows are often short, so often CEOs will use them to set up “10b5-1 plans,” named after the US Securities and Exchange Commission rule allowing them. Basically the rule is that you can set up a mechanical plan — “sell 10,000 shares every month,” “sell 100,000 shares if the price goes above $100,” whatever — during an open window, and then that plan can execute, mechanically, when the window closes. If you set up a plan when you have no material nonpublic information, and then later you get material nonpublic information, you can keep selling shares under the plan: You are not making decisions to sell shares using material nonpublic information; your broker is just mechanically doing what the plan says.

There are complicated ways to manipulate this, which we sometimes discuss. But the simple bad thing you can do is set up the plan while you have material nonpublic information. You know your company is going to get acquired, so you set up a plan that is like “buy 10,000 shares a day.” You know your company is going to announce disastrous earnings, so you set up a plan that is like “sell 10,000 shares a day.”

This doesn’t seem to happen much. For one thing, it is straightforwardly illegal: Setting up a 10b5-1 plan while you have material nonpublic information doesn’t “work”; it’s insider trading; the whole point of Rule 10b5-1 is that you have to not have inside information when you set up the plan. For another thing, there are prophylactic rules to prevent it: 10b5-1 plans are generally required to have a delayed start, so you can set up a plan like “sell 10,000 shares a day starting in three months” but not “sell 10,000 shares a day starting tomorrow.” [7]  The point of this “cooling-off period” is that, even if you do have nonpublic information when you set up the plan, it will stop being relevant by the time the plan starts trading.

Still, I guess, maybe. If you have some really slow-burn bad news, maybe you could keep it to yourself, set up a 10b5-1 plan to sell all your stock in three months, sit on the news, sell the stock, announce the news, and be like “what? I had a 10b5-1 plan.” Seems sort of far-fetched.

Way back in 2021, we discussed allegations that the CEO of a company called Emergent BioSolutions Inc. insider traded on some bad news. In 2020, Emergent announced that it had a lucrative contract to manufacture some Covid-19 vaccines; in March 2021, it announced that it had messed up those vaccines. The stock went up when it announced the contract and down when it announced the problems. The CEO sold stock before the problems were announced, and so people asked: “Is this insider trading?” And my instinct was no. I wrote:

To be clear, he sold the stock in January and February (under a 10b5-1 plan he put in place in November), and the vaccine mixup happened in March. He didn’t know about the bad thing when he sold stock, because it hadn’t happened yet. But did he know that the bad thing would happen?

Well. Last week the attorney general of New York sued him, and settled with Emergent, claiming that actually it was insider trading:

The lawsuit alleges that Kramer knew about the manufacturing and contamination issues and executed a trading plan before those issues were made public. The OAG’s investigation found that on October 6, 2020, an executive vice president responsible for manufacturing operations provided Kramer with a copy of a PowerPoint presentation that included slides about aborted, contaminated batches of the vaccine. On October 13, 2020, Emergent concluded that multiple batches of vaccines were likely to be lost due to contamination. A day later, Kramer asked his investment advisor to implement a stock trading plan, which would allow him to sell some of his Emergent stock at set dates and prices. …

On November 13, 2020, Emergent approved Kramer’s trading plan, which he then executed, all while the company was amid a manufacturing crisis. Kramer received more than $10.1 million as a result of his sale of stock, which took place in January and February 2021 as outlined in his trading plan. Shortly after Kramer completed his sales on February 8, 2021, the market price of Emergent stock began to decline consistently, and has not recovered since. In April 2021, the U.S. Food and Drug Administration ordered a permanent halt to Emergent’s production of the AstraZeneca vaccine.

Emergent actually found contamination in March 2021, but apparently it was worried about it in October 2020. If you were worried about contamination, and you wanted to sell your stock before the news got out, would you set up a delayed 10b5-1 plan to sell stock in a few months, and then try to keep a lid on the bad news until then? Seems hard, but maybe?

My basic model of modern artificial intelligence labs is that they are like emotionally intense graduate school programs but with unlimited money. You spend all day in the single-minded pursuit of knowledge for its own sake, working late hours, subsisting on pizza and ramen, advancing the frontiers of human understanding with like-minded quirky brilliant colleagues, and sometimes you sleep with them, but also for some reason there’s $2 billion in your bank account. Honestly it sounds nice.

The purest case of this might be Thinking Machines, an AI startup that has historically been somewhat short on product, long on talent and very long on investor interest. I wrote about it once:

If you are a top AI researcher, probably a lot of your friends are also top AI researchers. If you all got together, you could (1) hang out and have fun and (2) also do some top AI research. And then you could go out to investors and say “hey, look, top AI researchers here, give us a billion dollars.” And if the investors said “yes but what are you all doing together,” you could give them a disapproving look and take a step toward the door, and they would say “we’re so sorry, we don’t know what we were thinking, to make it up to you here’s $2 billion.”

And then you’d have $2 billion dollars to hang out with your friends. And do top AI research with them, if you want. You probably do want! That’s how you got to be top AI researchers. But do you need to do boring stuff like have a business plan or pursue revenue? 

Just very pleasing. Anyway the Wall Street Journal has an update on what Thinking Machines is up to:

[Mira] Murati, the chief executive of AI startup Thinking Machines Lab, had shown up for work on Monday last week expecting to have a one-on-one with Barret Zoph, her chief technology officer, according to people familiar with the matter. Last summer, she had learned that Zoph was in a relationship with a colleague; in the months since, she had expressed repeated concerns about his lack of productivity, according to the people.

She was invited instead to an impromptu meeting with Zoph, another co-founder and a third employee. The three told her they disagreed with the direction of the company and that they were considering leaving.

They asked for Zoph to be given charge of all technical decision-making, according to the people. Murati responded that Zoph was already CTO and asked why he hadn’t been doing his job for months, they said.

Two days later, Zoph was fired.

Within hours, all three had signed offers to rejoin OpenAI, the AI lab they had ditched a year ago to join Murati’s fledgling startup.

“A relationship with a colleague” and “lack of productivity” are bad things in traditional corporate America, but if you think of this as a $50 billion grad school it sounds pretty normal.

One theory of mine is what I call the Elon Markets Hypothesis, which says that “the way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk.” Another theory of mine is that bad things are now good: “Scandal, these days, sells. I mean it sells stock, even.”

If you combine these two theories, the result is something like “public companies should make Elon Musk mad at them, because that’s good for the stock price.” Here’s a Wall Street Journal article about how Musk is fighting with Michael O’Leary, the chief executive officer of Ryanair Holdings Plc:

Musk had taken to his social-media platform, X, to call the Ryanair CEO an “insufferable, special needs chimp.” In recent days, Musk has called for O’Leary to be fired and threatened to buy his airline and oust him.

Staring down the barrel of an escalating brawl with one of the world’s richest and most outspoken figures, many executives of a major public company might choose to defuse tensions. Ryanair’s O’Leary leaned into the spat, offering a lesson in how to monetize the online feud. …

“I frankly wouldn’t pay any attention to anything that Elon Musk puts on that cesspit of his called X,” O’Leary told [a radio] host. “He’s an idiot. Very wealthy, but he’s still an idiot.” ...

The company also launched what it dubbed ‘the idiot sale,’ offering 100,000 one-way tickets for $20 a pop. ...

“We want to thank him sincerely for the additional publicity,” the CEO told reporters, adding that bookings in a typically slow postholiday period were up as much as 3% since the tiff started and that the seat sale had been visited as many as four million times. ...

“I do think it’s unfair on chimps, but it is very good for our bookings,” O’Leary said, adding that the spat was likely beneficial for X, too.

“Corporate governance should be more like professional wrestling,” is a thought that I have not really had.

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