Community support given FTX situation

At least one person has gotten word from them that these payouts are on hold for now. This seems very worrisome and suggests the legal structure of the fund is not as robust or isolated as you might have thought.

If it turns out that committed funds were not liquid, that the legal structure wasn't robust, and that grants promised won't be honoured, that won't just be 'really bad' - it will be egregious. 

Expecting a non-profit to be so "robust" or "isolated" as to be invulnerable to potential clawback claims that all of its funding was the proceeds of recent fraudulent activity by insiders isn't realistic. Maybe the FTX Foundation's setup is more fragile than advertised in other ways, but I can't imagine that any lawyer advising the Foundation would tell them it was OK to keep paying out on grants at the moment. If their in-house or outside counsel had researched in advance what should happen to this specific foundation if all the donations appeared to be linked to fraudulent activity  . . .  that attorney's licensing authority would have some pointed questions about what the attorney knew and when! So the pause on payouts doesn't really tell me anything useful.

As for the donor advised funds mentioned in the linked post, the monies legally belong to the DAFs and any potential clawback liability would be against the DAFs (not just against the FTX-aligned person's account at the DAF). If I'm running a DAF in which an FTX-aligned person has an account, I am not releasing any money until I am absolutely sure I don't have any clawback exposure. The admin fee on a large DAF account is a very low percentage of assets, and one cannot reasonably expect a DAF to justify running even a small risk of clawback.

I wouldn't conclude much from the future fund withholding funds for now. Even if they are likely in the clear, freezing payments until they have made absolutely sure strikes me as a very reasonable thing to do.

Update that I don't think I'm going to be able to meet the timeline I set myself and have a product I think is worth sharing. Given that this is a holiday weekend it might be hard to find good advisors who are willing to work on this before Monday, but I'm going to try. 

Hello, if you plan on making further interactions on the forum, you might consider it useful to add your role to your profile, this would make your interactions more clear to a wider audience.

The link is probably here: https://forum.effectivealtruism.org/profile/molly/edit (this only works for you obviously).

Post is now up here: https://forum.effectivealtruism.org/posts/o8B9kCkwteSqZg9zc/thoughts-on-legal-concerns-surrounding-the-ftx-situation 

(links to more resources including the explainer in the post)

Do you know how likely it is that United States law applies? I haven't thought about this properly, but it seems like the main entity that is insolvent is a Antigua and Barbuda company doing business in the Bahamas? And I'm also uncertain which FTX entities were actually distributing the grants.

"Fraudulent transfer" under 11 USC 548 is a bit of a misnomer. Subsection (a)(1) explains what makes a transfer "fraudulent." One option, subparagraph (A), requires intent to mess over creditors. But subparagraph (B) does not require any ill intent at all -- it only requires that the debtor "received less than a reasonably equivalent value in exchange" for the transfer (check), and that one of four criteria concerning the debtor's financial condition is met (e.g.,  that the debtor "was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital"). The underlying idea is that if a company that is insolvent, on the brink of insolvency, etc. has no business handing out money to favored entities or persons in preference to the claims of its creditors.

For the curious, the shorter "preference" period is more about favoring creditors close to the bankruptcy filing date.  So, e.g., if I owe my friend and the bank 100K each, I can't make a big payment to my friend and then file for bankruptcy, because that violates the bankruptcy norm of treating like creditors alike.

A trustee can also seek clawbacks under 11 USC 544(b) if allowed under applicable state law, which can sometimes look back up to six years.

Of course, the relevance of this discussion is dependent on whether a US bankruptcy court would apply US law if an FTX debtor filed in US bankruptcy court (for which the standards are low -- https://www.skadden.com/insights/publications/2021/06/quarterly-insights/international-companies-turn-to-us-restructurings) or sought ancillary proceedings under Chapter 15 (which I know very little about). If the target of a clawback isn't in the US, there is also a question of whether the target is effectively beyond the reach of a US court order.

Complicated stuff, and I'm not qualified to offer an opinion beyond "consult with your lawyer if you think you have exposure."

Edit: I threw the below together pretty quickly and now think it was wrong (because i hadn't reviewed the whole statute closely). Sorry about that...

"For what it’s worth (and I haven’t been licensed/practiced as an attorney in a while) , My intuition is the charitable exception here seems pretty solid (for the grants that took the form of charitable donations to 501c3s/other charitable entitities. The key question to me doesn’t seem like if granting entity was a 501c3/foundation but whether the recipient was a charity/purpose of the donation was charitable. (The money given to individuals may be dicier but 1. I think it’s still fine and 2. It’s not that much in absolute terms such that I can’t imagine a bankruptcy trustee going hard after it). "

Edit: see Cate Hall's comment for a better summary of the position under US law, and Molly's comment re further information OP intends to share from its external counsel shortly.

Epistemic status: I am not a lawyer in either the United States, or in Antigua and Barbuda (where FTX Trading Ltd  was registered). I'm also not an insolvency expert. Take all this with a grain of salt. This comment is not legal advice.

There are lots of things that might make answering this question in theory tricky, including identifying:

• which FTX entity paid your grant;
• which jurisdiction's insolvency law applies;
• whether that FTX entity was insolvent at the time it paid you;
• whether the relevant insolvency law allows for clawing back payments made prior to filing for bankruptcy/liquidation/etc.

There are also practical questions - if there is a multibillion dollar hole arising from illegitimate payments from FTX entities to Alameda, then would the liquidator/US trustee (etc) bother coming after small amounts (e.g. a $25,000 grant)? This isn't me suggesting that they wouldn't - I genuinely do not know.

It looks as though the law in Antigua and Barbuda differs quite a bit from the United States law. This article suggests that Antigua and Barbuda law is that losses lie where they fall once the music stops.

I received a grant in March 2022, and I don't feel especially worried right now. Even if it turns out that some FTX entities were insolvent then, my rough sense is that either Antigua and Barbuda law applies and losses lie where they fall or that if US law applies then the transfer won't be considered a preferential transfer subject to clawback because it occurred more than 90 days before any filing for bankruptcy. (I don't know if I am understanding the 90 day rule correctly, so please seek advice or look for yourself before making any decisions - this comment isn't legal advice.)

If I had received a grant more recently, then I would feel less confident. I might avoid spending the grant until learning more.

If any insolvency lawyers read this, consider commenting (even if not under your actual name) - or PM me to suggest any corrections/clarifications.

It's worth noting that in the Bernie Madoff Ponzi scheme, victims were compensated largely by clawing back money previously withdrawn by people with no knowledge that Madoff was operating a Ponzi.

Hopefully, someone with more legal knowledge about this situation can comment, but given that fact, I wouldn't consider clawbacks out of the question.

I don't know how the criminal law works. But if it turns out that the money in the FTX Future Fund was obtained fraudulently, would it be ethical to keep spending it, rather than giving it back to the victims of the fraud?

I can't say the actions of Bankman-Fried and his friends make me question my involvement in EA. But I was troubled by the governance of EA before this, and I'm somewhat more troubled now, especially after reading this comment. On the other hand, I'm also more optimistic of change given the many discussions now happening.

Hey KenC, CEA's groups team has created this document with some information and guidance. 
There is no official stance, but the info might help a bit. Feel free to reach out with more questions. 

My understanding is that FTX US was unaffected. It's only investors from other jurisdictions potentially at risk. (I don't know how the law works if a US citizen invests from a foreign jurisdiction.)