FTX Seeks Claw Back of Charitable Donations

I know pretty much next to nothing about bankruptcy.  My general impression is that most cases are resolved without much fuss and that most creditors don’t even bother showing up.  I suppose that’s more often the case with individuals than corporations or LLCs.  The FTX bankruptcy, for example, involves a whole lot of money and a whole bunch of burned investors.  So even knowing nothing about bankruptcy, I wouldn’t be surprised if that case lasts for a decade. 

I am not sure what there is to be learned by it relating to nonprofits.  That fraudulently obtained or received donations can be clawed back doesn’t seem so remarkable.  That is apparently what the FTX Trustee is seeking at the moment.  The Center for Applied Rationality, a nonprofit AI weirdo kinda think tank, is the main defendant. I mean weirdo in a good way, incidentally. CFAR has responded with a 12(b)(6) motion asserting that FTX can’t claw back money if it can’t prove the money was ever FTX’s in the first place. It argues that FTX and FTX Foundation were two different entities and that the nonprofits received donations from the Foundation not FTX.  And that the FTX Trustee can’t prove that the Foundation got its money from fraudulent transfers.  Honestly, I can’t make heads or tails out of it.  But the Trustee’s complaint contains some brief but interesting editorializing about effective altruism and fiscal sponsors, among other things.  I am posting excerpts from the FTX complaint without really knowing what is the lesson to be learned:  

5. FTX Foundation was the philanthropic arm of the FTX Group of companies. Its funding was provided by Alameda and other Debtor entities. Together, FTX Foundation directed not less than $4,904,999.61 of commingled funds from Alameda and FTX accounts to make donations to the CFAR Defendants.

. . . 

25. The Insiders used their control over the FTX Group’s systems to perpetrate a massive fraud—squandering the FTX Group’s assets on, among other things, luxury homes, political and “charitable” contributions, and various investments that would inure to the benefit of the Insiders rather than the corporate entities that had paid for them.  

26. The Insiders funded much of this spending through Alameda, which, at the Insiders’ direction, unlawfully diverted assets belonging to FTX.com, the principal international cryptocurrency exchange operated by the FTX Group, to the Insiders’ pet projects.  In doing so, the Insiders defrauded FTX.com’s customers, creditors, and shareholders, and violated their fiduciary duties and numerous laws.

. . . 

II. FTX Foundation and Its Transfers to CFAR and Lightcone

A. FTX Foundation

38. FTX Foundation was funded primarily by assets belonging to Alameda and other Debtor entities in the FTX Group. When Bankman-Fried set up FTX Foundation in February 2021, he announced that FTX Group would contribute at least 1% of its fees to the foundation. But FTX Foundation’s primary source of funds was Alameda monies that had been commingled with FTX customer deposits, contrary to FTX’s public representations that it maintained strict separation of customer and corporate funds.

FTX Foundation claimed on its website that it “works to save lives, prevent suffering and help build a flourishing future.” In reality, very few of FTX Foundation’s donations directly benefitted the needy. Its largest donations went to associates of FTX Insiders in the “effective altruism” movement, which claims to use “evidence and reason to figure out how to benefit others as much as possible,” according to one effective altruism website. Another significant portion of FTX Foundation’s giving went toward think tanks or groups researching artificial intelligence or advocating public policy positions.

39. FTX Foundation donations of $2 million or more required approval by Bankman-Fried. Its donations burnished Bankman-Fried’s public image as a do-gooder even as he orchestrated one of the largest fraudulent schemes in U.S. history. FTX Foundation ceased operations when FTX collapsed in November 2022.

B. Connections Between CFAR and Lightcone

40. CFAR was founded in 2012 as a 501(c)(3) non-profit organization. Its purported mission is to promote the concept of applied rationality which, according to CFAR’s website, is the “domain of understanding how human cognition already works, in practice, such that we can then start the process of making useful changes, such that we will be better positioned to solve the problems that really matter.” In tax filings, CFAR further described its mission as “perform literature reviews in psychology, cognitive science, and related fields, develop tools based on these reviews that help individuals and groups in a practical way with clear thinking and decision-making and teach these tools to individuals and groups that show promise in using these tools to philanthropic ends.”

41. According to its website, CFAR reviews individual case studies, advances in cognitive science research, and data from participants in its workshops to “build[] a robust set of tools for truth-seeking, introspection, self-improvement, and navigating intellectual disagreement . . . .” CFAR’s workshops, which are four-and-half-day off-site retreats in which participants receive instruction in applied rationality, cost $3,900. The price includes room and board, a 200-page handbook, and “four free follow-up coaching calls with a CFAR staff member.” CFAR also runs “coaching and mentorship programs for [its] alumni network, helping individuals improve themselves and find their way toward fulfilling, high-impact work.” CFAR further puts on regular small events for the rationality and “effective altruist” communities at its offices in Berkeley, California.

42. Lightcone was formed in 2017 by Oliver Habryka—a former intern at CFAR. A June 30, 2023 blog post by Habryka claims that Lightcone is a “fiscally sponsored project” of CFAR. Lightcone’s website represents that Lightcone is a “project by the Center for Applied Rationality.” According to Lightcone’s statement of information filed in California on April 14, 2023, Habryka is the only listed officer for the corporation.

43. Lightcone shares the same registered agent address—2740 Telegraph Avenue, Berkeley, California 94705—as CFAR. This address is the location of the Rose Garden Inn, a hotel purchased by Lightcone RG in the fall of 2022, in part using funds received from FTX Foundation.

darryll k. jones