I usually reserve "idiot" for those who invest with fools.

I assure you, I wasn't trying to be polite. I genuinely think Patrick was an idiot at the beginning, and gradually shifted to scammer as the amounts got larger and he started to realize how high the risks were.

From the beginning, my argument was essentially this: Either Patrick was making decent profits, or he wasn't. If he was making decent profits, his first order of business, if he's not an idiot, would be to pay down his outrageously usurious debt. Yet he was taking on more and more of it. So either he's an idiot, and only fools invest with idiots, or he's not making decent profits. But if he's not making decent profits, why would he take on all this risk and do all this work? It could be because he's an idiot, but again, who wants to invest with an idiot? The most likely other possibility is that he intends to walk away with everyone's money and it sure as hell means he wouldn't honor the guarantee if he suffered huge losses.

In retrospect, I would have made a better argument (more focused on why he wouldn't honor his guarantee). But anyone can make better arguments in hindsight.

I don't think I ever outright said he was scamming -- only that he was either a scammer or a fool and that either way it was foolish to invest with him. But if he never intended to honor his personal guarantee with his personal funds, maybe he was a scammer all along.

I did think he was a scammer from the beginning. Now I'm not so sure he wasn't just deluded in the beginning, thinking the risk was low. And perhaps even intending to honor his personal guarantee at first and then not realizing that there was no way he could once the amounts started to increase. When things went bad, he sold out his investors to save his own funds.

This is the model games like Guild Wars use. The challenge with this model, for games that require servers, is to make enough money to keep the servers running even after the initial sales of the game drop off. This is very difficult to do right.

I don't think anyone has figured out how to make this model work yet. The theory is supposed to be that the stuff you pay for is no better than the stuff you can get for free, just different. However, if it really was no better, very few people would pay for it and the game would go broke.

In practice, to make the game profitable, you have to offer something that is significantly better for a fee, or people won't pay anything. Just cosmetic changes or "sidegrades" just won't do it. Not when you need to get around $6 per player per month to break even and you don't have the $30-$60 per player buy in to cover your up front costs.

I agree. Post Kraken, a scammer. Pre Kraken, incompetent.

As I said before, it's this simple:

1) There's no way to enforce these loans in any court of law. That means if people have any reason not to repay, they won't repay. Many people won't sacrifice their real-world lifestyle and bank accounts to repay a bitcoin loan that can't be enforced anyway. Walking away is just too easy.

2) Borrowing from Patrick to invest in Pirate seemed like too good a deal, especially since people knew they could just default on Patrick without consequences. No method would prevent this, short of actually tracking what each person did with the bitcoins, which nobody would agree to and everyone knew Patrick wasn't going to do.

Not realizing this makes Patrick incompetent. However, it is important to remember that this should have been equally obvious to those who loaned Patrick money. So they too are incompetent, and their incompetence harmed Patrick just as Patrick's incompetence harmed them.

I think so. In fact, I find it hard to believe that Kraken is playing out any differently than he intended it to from the beginning. I think it's quite likely that he pocketed most of the Kraken fund investments by using them to buy his own Pirate debt at rates well over market. Personally, I see exploiting this conflict of interest as not significantly different from just outright stealing the funds.

I agree. I can't find any mitigating factors here. There's absolutely no rational explanation for why he would borrow other people's money to buy bad Pirate debt other than to sell his own bad Pirate debt at an above-market rate. That is, I believe that he used Kraken to bail out himself, probably knowing all along he'd renege on the guarantee. The evidence strongly suggests that he put those who trusted him with their money, both through Kraken and through the earlier loans, last.

Unfortunately, the scenario that I think is most likely is this one: Patrick put his personal profits from his loan business into Pirate. When Pirate defaulted, he lost a personal fortune and was left holding a pile of bad Pirate debt. To preserve his personal funds, Patrick created Kraken to use other people's money to buy his personal bad Pirate debt at rates well above market. He had to have realized that there was a significant chance that Pirate would never pay a dime and he already knew his own portfolio was shaky. So I can't see his personal guarantee of Kraken as anything but an outright scam for him to take other people's money and make it his money by exploiting this conflict of interest.

I agree. This is not common mistake. This is the bank making one mistake and the borrower making a different mistake.

If this mistake didn't cause the loss of the deposit, what do you think did?!

Patrick didn't loan funds "to the wrong person". Patrick followed his business model. Patrick didn't do anything his investors didn't ask him to do.

There was no other question Patrick could have asked, no other investigation he could have done, no magic word he could have said, no wand he could have waved. If we could learn at least one thing from this fiasco, it's that high returns always come with high risks. The odds that you will be the one person who finds the exception to this tried and true rule are vanishingly small, and thus, it is axiomatically true. His investors recklessly and foolishly accepted that his business model was sensible and said so to him, a statement he is as entitled to rely on as they are to rely on any statements *he* makes.

I agree, that's why I never argued that. The fact that they made precisely the same mistake he did, where that mistake was directly the cause of the loss, and that neither party would have entered into the contract but for the mistake makes them partly responsible. (And, in the specific case of MP, specifically agreed with the mistake.)

No, they made completely different mistakes.

Right, but I reasonably relied on a factual claim by my doctor which turned out to be false. The factual claim Patrick made was true.

Patrick didn't make any kind of promise that wasn't perfectly valid. If you say "X because Y", you are promising Y, not X. Patrick said "X because Y", and Y was correct. However, X did not follow from Y. You can't promise that a conclusion follows from a premise.

And in this case, MP was better situated than PH to catch the mistake in reasoning. MP was specifically looking for indirect Pirate risk, PH was not.

They don't have to make the same claim, they just have to both make the same mistake and that mistake has to be such that neither party would have agreed to the contract but for the mistake. In any event, in this specific case, MP did make the same claim. She said, to Patrick, "well that works".

If it's precisely the same risk misjudgment Patrick himself made, it's a common mistake.

Why would you knowingly choose an inequitable result when you don't have to? Why not choose a result that's fair for Patrick too? What is forcing you to knowingly be unfair? We're not a court of law (or the contract would be void for a dozen reasons, starting with usury) -- we're a pure system of equity and fairness.

Patrick made an apparent logical argument. Patrick said he'd have enough equity to cover his loans in the event of a Pirate default because his coins weren't deposited in BS&T. His only factual claim is that his loan portfolio wasn't in BS&T. That claim was *true*. Both parties made the mistake of concluding that this meant that the portfolio would have sufficient equity to cover a Pirate default. This wasn't due to any false claim but due to an incorrect chain of reasoning on which both parties *agreed*.

One can even argue that MP was in a better position to realize this problem than Patrick was. MP was specifically investigating the risk of indirect Pirate exposure. Patrick was not.

This case is totally different -- Patrick substantially explained the reason he reached the conclusion he did, gave all the information needed to verify it, and she agreed with his reasoning even though it was obviously incorrect. The whole point of the discussion was for MP to protect against indirect Pirate exposure and they agreed that if that Patrick had no direct Pirate exposure, that somehow meant there was no indirect exposure.

There wasn't a common mistake in that case at all. The doctor represented that he had knowledge that I didn't have that led him to conclude that the insurance would pay for it. I had no way to check his reasoning. The point of that example is to see that you can't stop at the contract -- because my prior agreement with the doctor made me responsible for any costs the insurance wouldn't pay, his false representation (one I had no way to check nor any reason to doubt) damaged me.

This case is totally different -- Patrick substantially explained the reason he reached the conclusion he did, gave all the information needed to verify it, and she agreed with his reasoning even though it was obviously incorrect. The whole point of the discussion was to protect against indirect Pirate exposure and they agreed that if that Patrick had no direct Pirate exposure, that somehow meant there was no indirect exposure.

He absolutely did tell Mircea how he makes sure there's no exposure -- by not investing the coins he has on deposit in BS&T. I don't understand how you can quote that transcript and not see that Patrick is saying that he has more than enough assets in his portfolio to repay investors in the event of a BS&T default because his deposits are not invested in BS&T.

Had Mircea not made the same mistake Patrick did, she would have reasoned as follows: "I'm concerned about indirect Pirate exposure. That's why I'm asking Patrick where his funds are. He's not BS&T, yet I'm still worried about Pirate exposure, so obviously not investing in BS&T is not sufficient to protect against Pirate exposure."

Yet, instead, Mircea told Patrick "that works".

50% is kind of the default position when both sides make the same mistake and cause the same loss. However, it may be reasonable to adjust that. For example, if Patrick expected a greater share of the profits without having his own money at risk (remember, investors lose the use of their money while Patrick has it, he doesn't) then it's fair to make him bear a greater share of the loss.

Exactly, which is the same thing that happened here. In a discussion about *indirect* Pirate risk, Patrick said there wasn't any because he had no *direct* Pirate exposure. It is impossible for that argument to be true.

Read the transcript, especially the "because" that I bolded. At no time does Patrick say or imply that he has any special private reason to think there was no Pirate exposure. He argues that he has no Pirate exposure *because* he has no direct Pirate exposure.

What? In the transcript, Patrick tells her how:

Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T

It's right up in the transcript -- Patrick said he would have sufficient assets in his loan portfolio to cover obligations "mainly because the 15,500 coins I hold on deposit are not invest in BS&T".

The difference here is that this "because" is based on incorrect information. Patrick's "because" was based on correct information. Make it "You can withdraw anytime because two plus two is four" and you have something more comparable. That's a true factual claim followed by invalid reasoning based on that claim.

Your example is "X because A and B" where A and B are false but X does follow from A and B. The buyer relies on the seller's representation of A and B which turns out to be false. In this case, it was "X because A and B" where A and B are true but X does not follow from A and B. In that case, there is no factual representation of one party that the other party relies on.

There's a huge difference between these two categories of cases. Patrick didn't make any representation of fact that the other party relied on. The only representation of fact in "X because A" is A, and A was true.

Read the transcript, particularly the "because" that I bolded. Patrick says that he could make repayments in the event of a BS&T default because his deposits are not invested in BS&T and MP agrees that that works. But it doesn't work. That is, they both agreed to something that was logically invalid because it ignored indirect Pirate exposure. Since this conversation was *about* indirect Pirate exposure, that both parties forgot about it is inexcusable.

You're missing the *because* in there, followed by the "well that works".

Yes, he did. He said "well that works", when it clearly doesn't because it ignores indirect Pirate exposure.

The problem is that your claim doesn't include a "because" or a "that works". In your example, one party is saying that they know they don't have Pirate exposure based on secret knowledge not shared and the other party has no way to investigate the validity of the logic. Consider:


Buyer - I want to make a pirate free exposure deposit.
Seller - I am not exposed to pirate because I prayed and God told me I wasn't.
Buyer - I agree with your reasoning and am now willing to make a deposit.

Very different.

You can't analogize "I have secret information that I will not share with you that leads me to believe X", where you have no choice but to rely on the other party, and "X is true because of facts A, B, and C", where you have all the information the other party does and agree with invalid reasoning. Here it's especially inexcusable because MP's whole purpose was to avoid indirect Pirate exposure and yet the possibility of indirect Pirate exposure was ignored! Both sides made precisely the same mistake. It's actually ironic.

Why do you think MP had every right to rely on Patrick's reasoning (that he can repay from loan assets if Pirate defaults because he hasn't invested in BS&T) yet Patrick had no right to rely on MP's reasoning (that this works)? It's precisely the same reasoning in both cases, and each side would not have entered into the agreement but for their agreement with that invalid reasoning.

Of course. The resolution has to be equitable to both parties.

If you don't think the mistake was fundamental enough to constitute common mistake, which is a reasonable position given that the precise terms of the agreement are vague, then Patrick has a counter-claim against those who loaned him money precisely because the contract does obligate him to pay for their mistake.

Read the transcript, particularly the "well that works" part. The parties agreed that Patrick's business model left his loan portfolio free of significant correlated risk.

Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T
Aug 10 08:10:56 <mircea_popescu>   well that works. i'd like to put 500 bitcoins with you

Here Patrick made the mistake of missing the issue of *indirect* Pirate risk. And MP agreed with him. This is inexcusable on both sides since the whole point of this conversation was MP trying to minimize indirect Pirate risk.

I think this really is overly generous. I guess it comes down to whether you think a "scammer" tag is appropriate even if it isn't clear there was any intent to defraud, even if there was reckless conduct that resulted in the person owing money they cannot pay back even close to the amount and rate that would be considered fair.

I guess it comes down to this question: If I borrow money to go on vacation and then when I get back I get hit by a bus, lose my job, and can only pay tiny amounts of money over long periods of time, do I deserve a "scammer" tag? In my opinion, the answer should be "yes". The scammer tag should just indicate a person who can't meet their obligations.

But in any event, it won't matter in this specific case because of Kraken. Certainly if after getting hit by a bus, I borrow more money that I can't pay back, ...

That's the big question.

You have to imagine that instead of "well that works", MP had responded: "Say it turns out that lots of people are borrowing money from you to invest in Pirate and lying about it, and say Pirate shortly defaults and pays not one single bitcoin, and many of the people you loaned money to just refuse to pay you back since you can't sue them and they aren't willing to make lifestyle sacrifices to satisfy a debt that can't be enforced in a court of law. Will you and you wife make the sacrifices to personally ensure I get 100% of my money back, plus interest?"

What do you think Patrick would have said?

No because that doesn't have a common mistake and your bank deposit is insured. Also, you have a reasonable expectation that your bank will make only sound loans and no reason to think your bank's business model isn't sound. So it's totally different. (It would be different if, for example, you knew the bank was going to take all the money it borrowed to Vegas.)

However, prior to deposit insurance, it was actually pretty common for banks to reserve the right to delay withdrawals in the event of a run. Usually they specified a greater than normal interest rate in this case and so long as the bank was still fundamentally sound, this didn't usually cause any harm to their customers. If you wanted to withdraw $100, you would go to the bank and obtain a $100 withdrawal coupon which you could then sell for $100. Since the bank was still fundamentally sound, they could issue you a coupon worth more than $100 easily (against future loan returns). This tends to bankrupt the bank (because the coupons pay a higher interest rate than their loans and everyone runs to get the valuable coupons), but it doesn't significantly harm the customers.

Essentially, a bank has to ensure that they enough of a reserve to cover any liquidity crisis they might experience. So long as their loan portfolio remains basically sound, this isn't difficult. Of course, this fails utterly if the loans suffer massive default. This is what caused many banks to collapse after the mortgage meltdown, forcing the government to cover the losses through the FDIC. This is what it seems happened to Patrick.

Unfortunately, yes. You can find dozens of lawsuits where someone is injured while trespassing with intent to steal and successfully sues the property owner. The most famous, Bodine v. Enterprise High School, involves someone trying to break into a school who fell through a skylight and successfully sued the school. (Successful in the sense that the school ultimately settled for a six-figure amount.) There was a great case in California where a man accidentally ran over the hand of someone trying to steal his hubcap. There was a successful recovery (around $75,000 or so) in that case.

There are two big differences between those cases and this case. In those cases, there isn't the same mistake made by both parties. And those are tort cases, not contract cases.

A reasonable justice system would, I think, prevent criminals from recovering from their intended victims except in very exceptional circumstances. See http://en.wikipedia.org/wiki/Trespasser#Duties_to_trespassers (If there was evidence that Patrick was dishonest in his communications with his investors, this common mistake argument would evaporate. It is predicated on roughly equal fault on both sides.)

If we assume that Patrick is obligated to repay them from his own funds, then Patrick was harmed -- with that assumption, the investment resulted in a loss of Patrick's money. Patrick is a person other than those who loaned him money. You can't use an argument like a bus and get off at your stop -- you have to see if it ends with consistent results and, if not, keep going.

If you start out trying to enforce the contract as agreed and think that means that Patrick is 100% responsible, then Patrick next has a claim against his investors for the harm their mistake caused him. This claim would offset their claim against him for making the same mistake. You end with them needing to split the losses.

However, I think seeing it as common mistake is more sensible because I don't think it's possible to enforce the contract as agreed at all since the agreement was about a loan portfolio that didn't exist in the form the agreement presumed. But you get the same result either way. It depends on how you try to construe the terms of a vague agreement.

In general, yes, but that didn't actually happen in this case. At least, I very much doubt it did. If anyone wants to come forward and say they considered Patrick an expert on risk assessment and took his ratings seriously, I'll reconsider.

If someone did rely on that and can make a case that there reliance was reasonable under the circumstances, that would certainly weigh towards assigning more liability for losses to Patrick. To divide the loss, you have to look at the facts and circumstances of each individual loan. I doubt that was a factor in the loan that started this thread, but who knows.