World's biggest fraud case goes to trial

Welcome to the Level Ups. Modern business news in plain-Jane English.

Today, we cover:

• FTX and Alameda Research’s CEO takes the stand.

• The unbelievable business of OnlyFans.

• Canadian Corner: interest rate holds and what it means.

Let’s get into it.

Estimated reading time: 4 minutes & 35 seconds.

TOP STORY

Sam Bankman-Fried (SBF) defends himself in court.

First, a little context.

In November of 2022, we covered how rumours created the biggest business collapse the world has ever seen involving FTX, the popular cryptocurrency exchange. The loss was $32B (with a B) directly from customers and investors.

The story goes on and has many details, but we’ll keep this short.

SBF played League of Legends (a popular online video game) while pitching one of the world’s biggest investment firms (Sequoia Capital).

They turned around and allegedly said something along the lines of:

“…oh, my God, we love this guy. How do we give him hundreds of millions of more dollars?” After losing that money, the U.S. government confiscated his jets so he wouldn’t run for it (he was a real flight risk).

That’s just the start. There’s more below, but this gives you an idea of what a wild story this is.

Fun fact, at one point, he was named to Forbes 30 under 30 (I bet they regret giving him the award).

Now, the disgraced founder takes the stand. In a surprise move, he’s defending himself to remove the idea that he’s a fraudster relying on high-powered lawyers to save him. He’s going for the innocent, “good guy who made a mistake” angle.

Given the gravity of these charges, we’re not convinced it’s that simple.

How’s the trial going?

Here’s the recap.

• SBF has pleaded not guilty to 7 counts of fraud.

• He’s looking at decades in prison if proven guilty.

• The judge called him out several times for excessively long replies and manipulating definitions.

• He threw Caroline Ellison, the CEO of Alameda Research (a fund built alongside FTX), under the bus. It’s extra awkward because she’s his on-again, off-again girlfriend.

• About a week before his trial, she clearly stated that he committed these crimes.

You can’t make this up.

A $32B fraud case comes down to a former boyfriend and girlfriend pointing fingers at each other (with decades of prison time on the line).

It comes down to the judge and the jury, and we’re in no position to guess what will happen. But as far as opinions go, we’d be shocked if he got out of this without prison time.

Here’s why and a recap:

• FTX employees bought houses with company funds.

• Alameda Research gave SBF a $1B (with a B) personal loan.

• Digital currency deposited by customers was not on a balance sheet. FTX did not know who its biggest creditors (depositors) were.

• Staff discussed decisions via self-deleting messages.

This trial will go down in history, and the result will be a key factor in how future fraudsters will weigh the pros and cons of ripping people off.

Let’s see how it ends.

The unbelievable business of OnlyFans (OF).

For the unfamiliar, OnlyFans is an online platform where creators share content and “fans” can subscribe to that content for free or for a set monthly fee.

The company is mainly known for adult content, and while that’s controversial, few people seem to care.

Since the company is based in the U.K, they must legally publish annual reports with all their details. The information in the latest report published in August and distributed last month was astonishing.

Here is the summary:

• OF added approximately 1 million creator accounts in 2022 alone. There are 3.1M creators on OF now. (47% growth).

• The platform has 238M “fan” (user) accounts. (27% growth). 50M were added in 2022.

• “Fans” have paid a combined $5.5B to these creators, who mostly publish adult content (15% growth). Huge numbers.

• OF takes a 20% cut, meaning the company officially made over $1B.

• The creators earned a total of $4.4B (15% growth). Again, huge numbers.

• The company has only 53 full-time employees.

• Profits were $525M before taxes.

Although it’s controversial because of the adult content, it’s still a billion-dollar-per-year company. In business terms, it’s incredible. I guess the phrase “sex sells” is still valid.

Unlike SBF, the founder Leonid Radvinsky, is not accused of fraud and paid himself an annual bonus of $338M. That’s about $2M per business day, on top of his salary, which was not revealed.

Not all creators make money.

With ~3M creators and $5.5B going to them, the average is “only” ~$1800 per creator in 2022.

But the numbers share details on how uneven these earnings are.

Note: these were published in October 2022 and have likely increased significantly. Here’s the summary:

• The top 10% of OF content creators earn around $1000 monthly ($1150 adjusted for growth).

• The top 1% of OF creators generate over $6000 monthly ($6,900 adjusted for growth).

• The top 0.1% of OF models generate over $100,000 monthly ($115,000 adjusted for growth).

Based on the numbers above, it’s safe to say approximately 31,000 of the 3.1M creators on OnlyFans earn over $6,000/month.

To put the gap in perspective, some creators on the platform earn over $6M per year.

CANADIAN CORNER

Interest rates hold & nobody’s happy

But is this the worst? Not necessarily.

They could have raised rates, so many consider this a sign that things will improve.

In fact, while the Bank of Canada left the door open to raising rates, markets believe this marks the end of rate hikes (ending the streak of 10 consecutive increases). The Bank may have noted increases are a possibility to “cover their ass” just in case they need to raise them again.

Consult your financial professionals for big decisions, and take these statements as a recap of the news, not financial advice.

With the Bank of Canada holding the benchmark interest rate steady at 5%, the “suffocating” mortgage payments will continue. While they won’t get worse, this isn’t very comforting).

Interest rates came down to 3.8% in September, which is only slightly better than the previous 4%. Still, it’s a small step in the right direction.

Remember the general idea behind raising interest rates:

• It makes borrowing money more expensive so that people won’t borrow.

• Instead, the hope is that people will save money.

• To save money, they’ll spend less.

• Less spending means less demand.

• Less demand means lower prices.

This helps bring the cost of living back down to a reasonable level.

The situation has reached the point where politicians are asking the Bank of Canada to slow down on interest rate increases.

So rates are still high, and getting a mortgage is still harder in Canada than in the USA, but signs suggest it won’t worsen. Hope for the best, but don’t hold your breath.

Final Words:

Thoughts and prayers to the family, friends, and fans of Matthew Perry. I grew up watching Friends, and his iconic portrayal of the hilarious Chandler Bing will remain a core memory. May he rest in peace.

With love.