FTX Diverted $200 Million Of Customer Money For Two Venture Deals That Caught The SEC’s Attention

Key Takeaways:

• According to the SEC, FTX and former CEO Sam Bankman-Fried made two $100 million venture investments utilising client monies through an FTX subsidiary.
• FTX Ventures' sole announced $100 million investments were in Mysten Labs and the financial startup Dave.
• For FTX bankruptcy practitioners and individual clients, the transactions raise concerns about potential clawbacks or conveyance difficulties.

According to the Securities and Exchange Commission, of the billions of dollars in client deposits that vanished from FTX in an instant, $200 million was used to fund investments in two firms. Founder Sam Bankman-Fried was charged with "orchestrating a conspiracy to defraud equity investors." 

The crypto business invested $100 million in Dave, a fintech startup that had gone public two months earlier through a special purpose acquisition company, through its FTX Ventures unit in March. The corporations stated at the time that they will "collaborate to build the digital assets ecosystem."

The SEC also appears to have mentioned a $100 million financing round for Mysten Labs, a Web3 firm, in September. It was a $300 million fundraising round that valued Mysten at $2 billion, with Coinbase Ventures, Binance Labs, and Andreessen Horowitz's crypto fund participating. 

According to PitchBook, the Mysten Labs and Dave investments were the only two declared investments exceeding $100 million, based on records revealed by the Financial Times that detailed how the corporation put $5.2 billion to work. In its news release with Dave, FTX Ventures was billed as a $2 billion venture fund.

Bankman-Fried, 30, is suspected of extensive fraud after FTX, which was valued at $32 billion by private investors earlier this year, declared bankruptcy in November. The accusations centre on how Bankman-Fried moved cash from FTX to his hedge fund, Alameda Research, which subsequently utilised the funds for dangerous trades and loans. FTX Ventures was reportedly involved in the fraud.

Mysten and Dave have not been implicated in any suspected misconduct inside Bankman-enterprise. Fried's However, the transactions appear to be the first documented instances of FTX and Bankman-Fried using client funds for venture capital. As investigators and FTX attorneys seek to track the departure of FTX assets, these identified investments, as well as others in the $5 billion venture pool, will be scrutinised. 

By clearly tying the two $100 million investments to client funds, the SEC has elevated the likelihood of clawbacks. If FTX bankruptcy trustees can prove that client funds financed Bankman-investments, Fried's they may be able to recover those monies as part of an effort to reclaim customer assets.

The SEC's spokeswoman declined to comment.

According to Dave CEO Jason Wilk, FTX's investment in Dave is already slated to be returned, with interest, by 2026. FTX's $100 million investment was made through a convertible note, which is a short-term cash loan that can be converted into shares at a later date. According to the company's most current SEC filings, the conversion was never completed, leaving Dave with a $101.6 million debt, including interest, to FTX and any successor firms.

"The debt given to FTX is scheduled for repayment in March 2026," according to a statement from the business. "No clauses of the note impose any present responsibility on Dave to repay before the maturity date."

"It is critical to stress that we had no awareness of FTX or Alameda utilising client assets to make investments," Wilk stated.

Bankman-Fried made an equity investment in Mysten Labs. Since Mysten is a privately held corporation, there is no clear route in the United States bankruptcy legislation for recouping those payments.

Mysten did not respond. FTX's lawyers, Sullivan & Cromwell, did not reply to calls for comment. 

According to an SEC lawsuit filed against two of Bankman-lieutenants, Fried's Caroline Ellison and Gary Wang, "two $100 million investments made by FTX's associated investment vehicle, FTX Ventures Ltd., were financed using FTX client cash routed to Alameda."

FTX's investments were ill-timed regardless of the funds employed.

Since the firm went public, Dave shares have fallen by more than 97%, matching the performance of the larger basket of SPACs. The Nasdaq warned Dave in July that if its share price did not increase, it would be delisted. The stock is now trading at 28 cents a share, with a market capitalization of around $100 million. 

Alameda Research has already invested $15 million in Dave before to its Nasdaq debut in August 2021. Dave, which was formed in 2016, provides users with a free cash advance on future earnings as part of a range of banking products. In 2017, Mark Cuban led a $3 million seed round.

If Dave's share price had risen over $10 per share, allowing FTX to convert at a profit, the investment may have been profitable for FTX. 

FTX's investment in Mysten occurred during a crypto crisis. Bitcoin and ether had fallen by more than half this year, and a number of hedge firms and lenders had gone bankrupt.

The cash would be used to help Mysten "create a blockchain that grows with demand and incentivizes development," according to Mysten CEO Evan Cheng at the time.

Ellison and Wang's representatives did not reply to calls for comment. Bankman-spokesman Fried's declined to comment.

Ellison, 28, and Wang, 29, pled guilty last week in New York to federal charges stemming from the alleged use of client cash for trading and venture investments by Bankman-Fried. Both are collaborating with federal investigators looking into Bankman-Fried and the FTX demise.

An FTX fraud case will be entered by Sam Bankman-Fried

Sam Bankman-Fried is likely to enter a plea to criminal accusations that he misled investors and stole billions of dollars in client monies at his bankrupt FTX cryptocurrency exchange next week.

According to court documents, the 30-year-old is scheduled to be arraigned before U.S. District Judge Lewis Kaplan in Manhattan federal court on the afternoon of January 3, 2023.

On Tuesday, Kaplan was assigned to the case after the original judge recused herself because her husband's law business counselled FTX before to its collapse. 

Prosecutors accuse Bankman-Fried of committing a "fraud of epic proportions" by utilising client deposits to maintain his Alameda Research hedge fund company, acquire real estate, and make political contributions over a period of years.

Bankman-Fried is charged with two charges of wire fraud and six counts of conspiracy, including conspiracy to launder money and commit campaign finance crimes, and may face decades in prison if convicted.

Prior to his arrest on December 12, Bankman-Fried admitted to risk-management breaches at FTX but claimed he did not feel he was criminally culpable.

Two of his collaborators, former Alameda CEO Caroline Ellison and former FTX CTO Gary Wang, have pled guilty to their roles in FTX's demise and agreed to assist with authorities.

Bankman-lawyer Fried's did not immediately reply to calls for comment.

Bankman-Fried was freed on a $250 million bail on December 22 and ordered to live with his parents in Palo Alto, California, where they both teach at Stanford Law School. He is being monitored electronically.

On November 11, FTX filed for bankruptcy. On December 13, its new CEO, John Ray, told Congress that the exchange had lost $8 billion in client funds while being operated by "grossly incompetent, unsophisticated employees."

An armed guard, daily jogs, and gawkers surround Sam Bankman-Fried on bail

In comparison to his jail quarters in the Bahamas, the former millionaire seemed to be leading a very normal existence while under house arrest.

Sam Bankman-Fried apparently had a normal life while under house arrest in his parent's Palo Alto home, including regular jogs, a security detail, and a few of in-home visits.

However, it is far from a life of limitless luxury. Among other things, the former FTX CEO is apparently compelled to wear an ankle monitor and is only permitted to leave the house under specified conditions.

According to real estate sources, the aforementioned Palo Alto home, located on the outskirts of Stanford University's campus, is a $4 million residence with five bedrooms, three baths, and a pool.

However, the house has had to be blocked on both ends since Bankman-Fried has allegedly received death threats, and his home has become something of a tourist attraction for interested spectators.

In accordance with a December 27 New York Post report, his family is paying $10,000 a week for a private security service.

Bankman-Fried is obliged to wear an ankle bracelet, forfeit his passport, and get clearance for any transactions over $1,000 as part of the Dec. 22 bail deal. He is also not permitted to own a firearm, any other weapon or "destructive device".

He is only allowed to leave the property for exercise, substance addiction treatment, or mental health therapy, which he is said to have started. Various reports say he has been going for regular jogs with his security detail.

While this is still a far cry from the Bahamas penthouse he was previously residing in, it looks to be significantly superior to the circumstances of his cell at Fox Hill Prison in the Bahamas. 

Having said that, some in the cryptocurrency world have been vociferous about Bankman-release Fried's on bail, especially given that he was able to do so without any advance payment.

Nevertheless, his parents' home has been put up as collateral for the record $250 million bond, after Bankman-Fried claimed to have only $100,000 in his bank account following FTX's demise.

He's already been visited by writer Michael Lewis, author of the popular trading novels The Big Short, Liar's Poker, and Flash Boys, who has apparently been embedded with SBF for months as part of a book project.

Tiffany Fong, a cryptocurrency YouTuber, reported on Twitter on December 28 that she had visited Bankman-Fried in his parent's home for a "chat" the night before.

Fong was among the first to interview Bankman-Fried after the exchange collapsed in November, and she plans to write about the encounter after her vacation.

Bankman-Fried has repeatedly rejected criminal culpability since FTX's demise. He is scheduled to appear in federal court in New York on January 3 to be arraigned on wire fraud and conspiracy charges.