The curious case of Avraham Eisenberg – criminal or genius?

When are the rules not really the rules?

(photo Twitter/Stickpng)

A long time ago I lost a great deal of money overnight on a A-rated stock, Swissair, which unexpectedly filed for bankruptcy in the dark of night. I swore that would never happen to me again and embarked on multi-decade attempt to study the mathematics of the market and to make my money back by devising hitherto unknown clever and wildly profitable trading strategies.

I failed.

But there are many others who do find an edge and exploit it to the moon. Then they put their profits in the piggy bank and move on when the window of opportunity finally closes, which is inevitably does. Sam Bankman-Fried was one of the people who found an edge. He spotted a pricing difference in the price of Bitcoin between the US and Japan markets in 2017 and legally and cleverly made a couple of billion very quickly in the that hidden corner of arbitrage.

Then he did some bad stuff which will likely land him in jail, but the first couple of billion was entirely kosher.

Avi Eisenberg is a different case entirely. Avi and his small team of trading geniuses had long been busy poking around the Rube Goldbergian innards of crypto projects and their enabling smart contracts, looking for trading opportunities. They found plenty and were happily stacking away their profits without falling afoul of the law. Just like any other smart trader throughout history who was able to see something before everyone else.

At some point in late August 2022, Avi nosed around a Defi project called Mango Markets, then flying high in the bull market of that year. Without slipping down the rabbit hole too far, Mango operated in the world of the crypto futures markets, and its operating manual was complex and newly fangled. Depositors had arrived in droves, handing over money for tokens and futures and liquidity whatnots and swimming happily in the novel new money machine, getting handsome returns at seemingly low risk.

Avi took a look at the rules of engagement and (being super smart), said – Hey!! Wait a minute. Wait a darn minute! If I do this, and then I do that, and then I do the other thing, I can essentially take all this money, quickly, simply, easily. Without any hacking or mischief. Just by following the operating manual published by Mango. Their rules, you see. I just have to play cleverly..

It did not go as planned. Here is what happened:

He drained $116 million (R1.9bn) from Mango in a matter of minutes on October 12. The Mango project immediately collapsed, having insufficient funds left to service their obligations, and many depositors lost everything.

Avi, on viewing the carnage said – oops. He quickly posted – er, this was me, Avi Eisenberg. I did it. Spotted a profitable trading strategy. Didn’t break the law. Just followed the rules. Did not expect to kill the company. Sorry. Happy to give some of the money back to ease the pain.

Here is the full text of his statement –

‘I was involved with a team that operated a highly profitable trading strategy last week.

I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.

Unfortunately, the exchange this took place on, Mango Markets, became insolvent as a result, with the insurance fund being insufficient to cover all liquidations. This led to other users being unable to access their funds.

To remedy the situation, I helped negotiate a settlement agreement with the insurance fund with the goal of making all users whole as soon as possible as well as recapitalizing the exchange. ‘

He offered to return $67 million. The governance voters of Mango agreed. Deal done and dusted?

Nope.

Avi got arrested by US authorities this January and now sits in Puerto Rican jail facing all manner of scary charges.

So is Avi Eisenberg a criminal or genius? The answer is not so simple.

My favourite columnist, Bloomberg’s Matt Levine, points out that trading is zero-sum affair. If you make money, someone else loses money. There is always someone on the hurting side of a clever trade. But winners don’t generally get into legal trouble if they play by the rules. Especially in a well-regulated market, which does not describe crypto.

Well, mostly. Levine reminds us of a case which happened in the electricity market about a decade ago and concerned JP Morgan. He writes -

‘JPMorgan read the rules carefully and greedily, and exploited the rules. It did this openly and honestly, in ways that were ridiculous but explicitly allowed by the rules. The Federal Energy Regulatory Commission fined it $410 million for doing this, and JPMorgan meekly paid up. What JPMorgan did was explicitly allowed by the rules, but that doesn't mean that it was allowed. Just because rules are dumb and you are smart, that doesn't always mean that you get to take advantage of them.’

Meaning this – is not only the rules that one needs to follow in order to stay out of trouble. It is also the need to abide by ‘fairness norms’. Which are another set of rules, less clear, a little more opaque. And just because you can manipulate a market by playing by the rules, does not mean you can get away with it. The men in blue will come for you and fine you or put you in jail (like in Avi’s case) if they decide you violated these fairness norms.

Which of course raises the question - when is manipulation fair (as in everyday arbitrage or high frequency trading) and when is it not?

Which is the difficult-to-spot dividing line between criminality and genius.

Steven Boykey Sidley is Professor of Practice at JBS, University of Johannesburg. This article was first printed in Daily Maverick