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The CEO Was a Tumblrina? How Did Somebody Overlook This Gigantic Red Flag in the FTX Catastrophe?

Posted on | November 17, 2022 | Comments Off on The CEO Was a Tumblrina? How Did Somebody Overlook This Gigantic Red Flag in the FTX Catastrophe?

Caroline Ellison, CEO of Alameda Research

“This is worse than Theranos, this is worse than Madoff, if what I’m reading is true.”
— John Reed Stark, former SEC official

Suppose that you’re a major Silicon Valley venture capitalist, someone entrusted to invest vast sums of other people’s money in new enterprises. Don’t you have an obligation, as due diligence, to research the people running the companies you’re funding? Because now I’m imagining a courtroom trial in a lawsuit brought by people who entrusted their savings to whatever VC funders decided that investing money in a company run by Sam Bankman-Fried‘s girlfriend was a good idea.

*** (Spoiler alert: It was not a good idea.) ***

The story of how Caroline Ellison ended up as CEO of Alameda Research, the company from which Bankman-Fried (known as “SBF”) spun off the cryptocurrency exchange FTX, is eventually going to be a major motion picture, the “happy ending” of which is going to be these people going to prison (if they don’t conveniently commit suicide, as sometimes happens to people who become “problematic” to the Democratic Party). Meanwhile, investors around the world — including many who had no idea their money had been invested in this blatant Ponzi scheme run by a clique of Gen Z geeks — are certain to become plaintiffs in a class-action suit against investment firms like Sequoia Capital, who ignored so many red flags about SBF’s operation. Just two months ago, Sequoia “published a long, meandering profile of Sam Bankman-Fried, a.k.a. SBF, the now-disgraced founder of the bankrupt cryptocurrency exchange FTX. The article, ‘Sam Bankman-Fried Has a Savior Complex — And Maybe You Should Too,’ ran to an eye-glazing 14,000 words and featured flowery prose that looked especially ridiculous after FTX’s spectacular collapse.”

Sequoia deleted that article from their website, but not before somebody archived it, so you can get the full taste of enthusiastic gushing over SBF’s “epiphany” about pursuing “effective altruism,” which inspired him to quit his job as a trader at Jane Street Capital and eventually launch Alameda Research in 2017, before creating FTX in 2019. This is where Caroline Ellison enters the story. Whereas SBF is the son of two Stanford Law professors and attended MIT, Ellison is the daughter of an MIT professor and attended Stanford. (See “Assortative Mating” in The Bell Curve, pp. 110-113. Certainly Charles Murray would have something interesting to say about this.) Ellison worked at Jane Street Capital with Bankman-Fried and, like her boyfriend, Ellison became a devotee of “effective altruism.” From the 14,000-word article:

Caroline Ellison, a friend and colleague who was trading on the equities desk at Jane Street during that time, remembers the moment well. “It was unusual,” she says, “because he decided to quit — not to do anything in particular, but just under the premise that there were a lot of other options out there.” . . .
Ellison is a freckle-faced redhead with a personality that splits the difference between bubbly and nerd-ball. She’s partial to a pair of designer frames that make her look a bit like Edna Mode, the superhero stylist in The Incredibles.
About six months after SBF dropped out, Jane Street sent Ellison on a recruiting trip to California, so she decided to call on her old friend. They’d been office buddies at Jane, but they’d also occasionally socialized outside of work, too, being fellow EA acolytes.

(And by “occasionally socialized outside of work,” of course they mean, MAKING THE BEAST WITH TWO BACKS, but continue . . .)

Ellison wanted to catch up, but from the get-go, SBF was acting uncharacteristically shifty. There were several canceled coffee dates, and when the two finally did get together — at Jumpin’ Java, an old-school Berkeley coffeehouse with hand-painted murals on the wall and whimsical art in the windows—SBF evaded even the most innocuous of questions.
“So,” Ellison asked after joining SBF at a table, “what have you been up to in the last few months?” Ellison, it should be noted, was dressed as a sultry wood nymph — she was on her way to a LARP (Live Action Role Play) party. . . .

(Permit me to interrupt: She was “DRESSED AS A SULTRY WOOD NYMPH”? The future CEO of a multi-billion-dollar company was LARPing? As a WOOD NYMPH? Words fail . . .)

The story was pretty remarkable. After SBF quit Jane Street, he moved back home to the Bay Area, where Will MacAskill had offered him a job as director of business development at the Centre for Effective Altruism. He rented a modest apartment near CEA HQ in Berkeley, he still had a couple of weeks to just explore before his job started. This was his first vacation in, well, ever. In the years working at Jane, SBF had never taken any significant time off.
He spent his vacation just soaking everything in: It was his first time in the Bay Area as an adult, and he found his home turf unexpectedly thrilling. It was where all the new technology was. It was where all the startups were. It was where the bulk of the EA community was starting to congregate. SBF ended up hanging out a lot with his younger brother Gabe, who was living in an EA commune on nearby Stuart Street.
At that time, everyone in the tech world was talking about crypto. In the Bay Area, you couldn’t escape the chatter. . . .

To cut a long story short, SBF discovered that Asian markets were selling crypto at significantly higher prices than in the U.S., figured out how to take advantage of that spread, invested $50,000 of his own money into this project, quickly increased that, then secured $50 million in funding to start Alameda Research:

With a goosed-up capital account, the money started piling up so fast that SBF placed what he refers to as “a market order for employees” to tend to the Rube Goldberg operation that kept the capital spinning. There were constant blowups with banks, which are wary of anything crypto. Crypto was so new that regulators in South Korea and elsewhere were constantly changing their mind about regulations—then making those changes retroactive. It was a swirling mess. Pulled into the vortex was Nishad Singh, a friend of SBF’s brother Gabe, and a fellow EA member. Singh is a bespectacled and baby-faced young man with an earnest mien. He often wears a T-shirt with the words “compassionate to the core” printed, in a diminutive all-lowercase font, over his heart. After just one conversation with SBF, Singh decided to leave Facebook to take on the more meaningful work of building FTX. Caroline Ellison came, too, quitting Jane Street and moving to California only weeks after SBF described the operation to her over tea. The first 15 people SBF hired, all from the EA pool, were packed together in a shabby, 600-square-foot walk-up, working around the clock. The kitchen was given over to stand-up desks, the closet was reserved for sleeping, and the entire space overrun with half-eaten take-out containers. It was a royal mess. But it was also the good old days, when Alameda was just kids on a high-stakes, big-money, earn-to-give commando operation. Fifty percent of Alameda’s profits were going to EA-approved charities. . . .

Or so we are expected to believe. Turns out that there are people in the “effective altrusm” community who have heard tales of abusive behavior by Bankman-Fried during the 2017-2019 early years of Alameda Research, which led several employees to quit. So the assertion that SBF was donating 50% of his profits to “EA-approved charities” is something for which I’ll have to see the receipts before I’ll believe it.

Sam Bankman-Fried Promised
Millions To Nonprofits. Some Say
They Didn’t Get The Money.

Going from obscure nerd to Fortune magazine cover boy in just five years was, it must be admitted, a remarkable feat. His “effective altruism” shtick was a major factor in SBF’s celebrity, as was the fact that he became the second-largest contributor of campaign cash to the Democratic Party. Nobody seems to have thought this was suspicious and, similarly, the connection between the currency exchange FTX and the trading firm Alameda Research also failed to raise concerns. Is putting your girlfriend in charge of a multibillion enterprise really a good idea? What ultimately crashed SBF’s empire was the fact — which both Bankman-Fried and Ellison have admitted — that SBF “loaned” funds from FTX customers to Alameda, to the tune of $10 billion. But if Alameda was successful, why would it need such a “loan”?

When asked about the blurred lines between his companies in August, Bankman-Fried denied any conflict of interest and said FTX was a “neutral piece of market infrastructure.”
“I put a lot of work over the last few years into trying to eliminate conflicts of interest there,” 30-year-old Bankman-Fried told CNBC in an interview. “I don’t run Alameda anymore. I don’t work for it, none of FTX does. We have separate staffs — we don’t want to have preferential treatment. We want as best as we can, to treat everyone fairly.” . . .
Three sources familiar with the company told CNBC that [employees] were blindsided by the company’s actions and that, to their knowledge, only a small cohort knew that customer deposits were being misused. Employees said in some cases, their life savings are tied up on FTX.
“We’re just shocked and devastated,” a current FTX employee said. “I feel like I’m in a movie that’s playing out in real time. No one saw this coming.”
As a result of the public backlash FTX has faced over these missing funds, employees who say they were just as devastated as customers are now facing financial hardship, harassment surrounding their involvement with the company, and tarnished future employment prospects.
“We could not believe how we were being betrayed,” a former employee said.
— CNBC, Nov. 13

Did I mention that FTX had an in-house psychotherapist and employees were reportedly doing a lot of prescription stimulants?

This operation had more red flags than a May Day parade in Beijing, but nobody seemed to notice any problems with FTX/Alameda when Bankman-Fried’s empire was the hottest firm in the hottest “emerging” sector of the economy. What we can now call The Crypto Bubble never really made sense from an economic perspective. It was mainly popular because it was unregulated, a sort of anarchist pirate kingdom based on a theory of implied value that appealed to the kind of people who talk a lot about “fiat currency” and “Jekyll Island” (nudge, nudge). I mean, I get it — in an ideal world, I’d be a goldbug fanatic, but we’re not living in an ideal world, and I am skeptical of the promise that cryptocurrency is the road to Utopia. Meanwhile, in the real world, the crypto king SBF was living in a $40-million penthouse in the Bahamas with 10 of his dorky minions in some kind of polyamorous cult situation.

Of all the revelations in the wake of the FTX meltdown, none is more shocking than this: Caroline Ellison had a Tumblr blog.

The handle of her blog was “worldoptimization” — a reference to her goal as a devotee of “effective altruism” — and someone has archived the whole thing back to 2014, when Ellison was still a college student, and interested in a lot of right-wing ideas, including “human biodiversity” (abbreviated HBD, popularized by Steve Sailer). Ellison had been raised Catholic, but turned atheist as a teenager, and considered herself part of the “trad” (traditionalist) movement of women who rejected feminist promises of “sexual liberation.” There has been a lot of ignorant and biased commentary about Ellison’s blog, accusing her of endorsing pseudoscientific “race science,” etc., but after skimming over it pretty heavily, I think these critiques are missing the main point: What kind of adult has a Tumblr blog? Answer: Not the healthy kind.

As crazy as Twitter can be, at least there are verifiably sane people who use Twitter, which cannot be said for Tumblr, the Internet’s Quasi-Official Lunatic Asylum. And when you read what Ellison was posting there, you discover that she was, for example, a fan of The Bachelor series. Do you really want someone like that running a multibillion-dollar trading company? No, you don’t. Her Tumblr blog reveals Caroline Ellison to be a fundamentally silly person, obsessed with trivial nonsense.

Some regular readers may be saying, “Wait a minute, Stacy. Aren’t you kind of ‘fundamentally silly’ yourself?” Yes, of course, but I am a mere journalist. I’m not running a gigantic financial company — and thank God for that, because I’d probably botch it at least as badly as Caroline Ellison has botched it. However, I’d botch it in a more traditional way — a scandal involving strippers, cocaine, Lamborghinis, etc. — not wasting my time blabbing about The Bachelor on a Tumblr blog.

In a sane world, the venture capitalists who gave investors’ money to Sam Bankman-Fried and Caroline Ellison would be ritually humiliated — lashed and pilloried — if not indeed hanged in the public square. But we don’t live in a sane world, so they’ll escape the brutal justice they deserve.




 

Category: Crime

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