A word about SBF, FTX, scams and privilege

Ethics is all a game to a generation of young privileged entrepreneurs who only exhibit remorse when they get caught.

It only took a jury three hours to see through Sam Bankman-Fried’s obfuscations and lies. Prosecutors made the case simple, CNBC reported.

“The key at trial, aside from the multiple cooperators, was the way in which prosecutors simplified the case and tried it as a garden-variety fraud instead of as a complex crypto scheme,” Renato Mariotti, a former prosecutor in the U.S. Justice Department’s Securities and Commodities Fraud Section, told CNBC.

In truth, it wasn’t complex at all. Bankman-Fried could have plugged in any scheme and committed the same kind of fraud he pulled off with FTX and Alameda. In fact, the entire enterprise wasn’t about cryptocurrency at all. I also genuinely don’t believe Bankman-Fried really believed he was doing anything criminal, that is until he got caught doing it.

Let’s talk about morality. To Bankman-Fried, it wasn’t about people, it was about numbers. Bankman-Fried was son to two Stanford Law professors, and steeped in overachievement. He liked math, so they send him to the prestigious Canada/USA Mathcamp. The tuition for that program is $5,000 for those who can afford it (or $0 for many who can’t but qualify). The 2024 tuition for San Francisco’s elite Crystal Springs Upland School, where Bankman-Fried attended high school, is $60,850 (that’s per year).

Money, to Bankman-Fried, was a near-meaningless concept, because he never, for a single day of his life, had to worry about it. Money was just numbers on a spreadsheet. So, sending a cooked books version of a spreadsheet to a bank was no different than finding the solution to a video game problem, to get to the next level. Money was a game like any other game, and Bankman-Fried could not conceive of the fact that people could get hurt by money. This, despite the fact that in the news every day were stories of people getting hurt by money.

Actually, Bankman-Fried took that game-solution attitude into his business, by proclaiming “effective altruism,” meaning using money to help others. All the lies, all the schemes, in his mind, were in service of a higher cause, to help people. All he had to do was get to the next level, by any means possible, and then it would work out, because money was simply math, not for paying bills.

Of course, this kind of disconnected view of money and business leads to an amoral approach to dealing with what we call ethics. Representing business deals, financial statements, and projections based on facts in evidence, reasonable predictions, and accepted practices, doesn’t win any games or get to the next level fast enough for someone like Bankman-Fried. He was taught this his whole life, that he was special, and destined for greatness—or at least carefree comfort—no matter what kind of work he did.

I don’t know where Bankman-Fried’s parents went wrong, or what mental processes in his mind broke, versus, say, Mark Zuckerberg. Zuckerberg grew up with all the same advantages as Bankman-Fried. Zuck attended the elite Philips Exeter Academy. Zuck went to Harvard (and didn’t finish), while SBF did graduate from MIT, down the road in Cambridge, Mass., in 2014.

Perhaps, Bankman-Fried’s parents didn’t go wrong. Maybe the only difference between Zuck and SBF is that a business based on social media can game the system and not have to steal people’s money to do it. If Bankman-Fried had graduated a decade or so earlier, and started a social media company versus a crypto broker, maybe we’d be reading about him ducking cage fights with Elon Musk instead of Zuckerberg.

I do know that when privileged people get a leg up through their privilege, in education, opportunity, and doors magically opening, their disconnect with money and harm tends to lead to a lapse of ethics. Didier Javice worked for Goldman Sachs for 11 years of his 35 year career on Wall Street. He and his wife, Natalie Rosen, sent their daughter to an exclusive private school in Westchester County, N.Y. Charlie Javice spent summers volunteering in places like Myanmar, on the border of Thailand.

Charlie Javice founded a microfinance organization while she attended the University of Pennsylvania’s Wharton School in 2011. She claims she needed financial aid, and had trouble completing the FAFSA form—which the New York Times found risible and could not verify when Didier and Natalie refused to comment.

“The whole thing never made sense to me or my parents, who both have master’s degrees,” Ms. Javice told the publication. And according to an article in The Daily Pennsylvanian, the family’s appeals for more aid would take the entire semester to settle, repeatedly. (A Penn spokesman, Ron Ozio, said it would be “highly unusual” for appeals to take an entire semester and that they normally take four to six weeks.)

Charlie Javice founded a company called TAPD, to help come up with a “better way” to determine creditworthiness of young people. It seems to me that someone like Javice wouldn’t struggle with this, but to someone with her pedigree, it’s just another spreadsheet to game. She ended up firing everyone at TAPD, and starting over as “frankfafsa.com.”

From all of this struggle, another start-up was born. In 2016, a message appeared on frankfafsa.com promising “Maximum financial aid, guaranteed,” and adding: “If we don’t save you at least $1,000 of tuition, we’ll refund you. Go Premium for $10/month. Cancel anytime.” At the bottom was an invitation to join a wait list.

The real FAFSA is a registered trademark of the Department of Education, which acted to enforce its rights, forcing Javice to hand the domain over to the government. This led to her cofounder Adi Omesy, to sue her, and somehow, she paid. Also somehow, Javice got the New York Times to publish an op-ed “The 8 Most Confusing Things about FAFSA” in 2017. It’s nice when you have those doors open.

Javice’s student loan application assistance business, Frank, should have been seen as a scam from the beginning, and in fact it was by many in the industry. Pay $19.90 a month for the ability to get a 60-day advance on financial aid (to be paid back whether the student gets their aid or not), and a form letter containing mostly-useless information, that was the business plan. Frank also offered classes online taught by “accredited universities” but those schools had never heard of Frank. Javice claimed a subscriber list of five million unique addresses, which seemed impossible to those in the business.

None of that mattered, because the investor deck was the game, and it found its mark in JPMorgan, which paid $175 million in 2021 to own nothing at all.

Soon after the merger closed, the bank took its shot and sprayed a portion of Frank’s customer list with solicitations. Of 400,000 outbound emails, only 28 percent arrived successfully in an inbox, compared with the usual 99 percent delivery rate. Moreover, just 103 recipients clicked a link to Frank’s website. It was, as the bank put it in its legal filing, “disastrous.”

Now Javice is facing a trial for fraud. Like Bankman-Fried, Javice is relying on some good lawyers to delay and provide a defense. But my guess is that a jury is not going to believe Javice, just like they didn’t believe Bankman-Fried. And I also think Javice doesn’t think she did anything wrong. She only hired a data scientist to craft a subscriber list that would pass muster with JP Morgan’s starry-eyed sham of due diligence, and it worked. If she believe she’s guilty, it’s only of getting to the next level of the game of money. What’s $175 million to a bank with $3.7 trillion in assets and $303 billion in shareholder equity?

Young, privileged, elite entrepreneurs with the right pedigree and the right doors to open is not a new thing. William Clay Ford, Jr. is the executive chair of Ford Motor Company. His father was William Clay Ford, Sr, son of Edsel Ford, grandson of Henry Ford, and owner of the Detroit Lions. The Ford dynasty is part of an exclusive, but not uncommon, club, including the Waltons (Walmart), the Kochs, and Mars (of candy fame as in M&Ms), the Lauders (Estee Lauder), the (S.C.) Johnsons, and the Cox family, owner of the Atlanta Journal Constitution and until recently, WSB radio where Erick Erickson works. There’s also the Hearsts, Hiltons, Duponts, the Cathy (Chick-fil-A) family, the Kohlers (toilets), Marriotts, Rockefellers, and Scripps.

But that’s old money, that comes with strings, trust funds, stockholders, and boards of directors. It’s a lot harder for a Rockefeller to get doors open and commit a giant fraud than it is for a Bankman-Fried or a Javice, because the well-knowns have a reputation and legacy to protect, which means lawyers, CPAs and all kinds of professionals vetting their activities.

The new privileged youth have none of those constraints, and therefore they’re free to game the system in new ways. They are free to be completely untethered from ethical concerns. They are free to steal and fake it until they either make it or they get caught.

I put some of the blame on the schools that fail to teach professional standards and the reasons for best practices. I put a large part of the blame on venture capitalists and corporate dealmakers who value pedigree and relationships (who you know) more than competence and evidence-based projections.

Sometimes evidence-free or evidence-light projections (like Elon Musk’s evergreen “this year” full self-driving cars, which he finally abandoned) help a company, as long as the venture is making real progress (as Tesla, though likely overvalued, clearly is). Sometimes we have Trevor Milton, who founded EV truck maker Nikola.

Milton was convicted of a single count of securities fraud and two counts of wire fraud by a jury in October 2022, and will be sentenced on November 28, 2023 after losing his appeal.

Nikola faked demonstrations, and Milton lied about “nearly all aspects of the business” according to prosecutors, to pump up Nikola’s stock value after its merger with a SPAC took it public. For a brief time in 2020, Nikola, with $0 in revenue, was more valuable than Ford Motor Company. Nikola Motors is still in business—for now—promising battery and hydrogen fuel cell EV trucks.

If Nikola succeeds in selling trucks and staying in business, it will be one of the rare examples of where a corrupt CEO didn’t sink his scam-based business. It is also one more example of a run-of-the-mill scammer who didn’t benefit from the privileges Bankman-Fried and Javice enjoyed. Milton’s pedigree was decidedly blue-collar, and his education was limited to a single semester at Utah Valley University. Additionally, Milton’s cousin accused him of sexually abusing her in 1999, when he was 18 and she was 15, which, if true, would make him a garden variety scumbag.

The world has enough garden variety scumbags, who don’t deserve our money, and consume a great deal of public money in prosecuting them.

As the adults running things (we who are 50 and over) have a responsibility to teach due diligence to the young, privileged among us, and that’s best done by applying it to them assiduously. This is why I won’t get involved with cryptocurrency, because it’s wide open for criminals and cyberthugs to use. It’s why I am skeptical of many of the “wonder drugs” coming out of big pharma, because many of them were purchased from small labs designed for the purpose of gaming the system to get bought up by an Eli Lilly or Novartis.

It used to be the fad to start a small company in some aspect of cloud computing or scaling, or some interesting UI development, or some social media angle, and position it to get bought up by Google or Facebook. Now it’s the fad to do that with cryptocurrency and designer drugs. I want nothing to do with any of that.

It could easily have been Bankman-Fried running Nikola and lying about it, or helming a new Theranos instead of Elizabeth Holmes. It could easily have been a Charlie Javice running FTX and Alameda. The people are almost interchangeable, except for their elite credentials and ability to open doors to investor money for dubious, even on-its-face scammy, enterprises.

I am glad these liars and scammers are not getting away with their crimes. I am not glad that the only remorse I am seeing is that they got caught. The ethical rule of thumb in criminal justice was laid down in 1769 by William Blackstone: “the law holds that it is better that 10 guilty persons escape, than that 1 innocent suffer.” The problem here is that for every Sam Bankman-Fried and Charlie Javice who go to jail, there’s probably 10 who are out there faking it until they make it, over and over again.

The solution is not legal, it’s cultural. Stop teaching that life can be gamed. Teach ethics, model it, and demand it in practice.