By: Toh Han Shih
The implosion of FTX and the November 18 sacking of Caroline Ellison as chief executive officer of crypto trading firm Alameda Research, which was co-founded by Samuel Bankman-Fried, former CEO of FTX, has inflicted losses on Singapore’s top sovereign wealth fund Temasek regardless Temasek calls “comprehensive due diligence”.
There seem to have been several warning signs. In now-deleted social media posts, Ellison said she’s attracted to men who “control most of the world’s major governments” and that she’s indulged in polyamory, or having romantic or sexual relationships with multiple partners at the same time, the Daily reported Mail. Alameda, while Ellison was its CEO, made a $1 billion loan to Bankman-Fried, her ex-boyfriend, according to a statement filed Nov. 17 in the U.S. Bankruptcy Court for Delaware.
How could Temasek and Sequoia Capital, one of the most respected venture capital firms, invest in a company like FTX that had the likes of Bankman-Fried and Ellison in it? In a statement Nov. 17, Singapore’s sovereign wealth fund said it would write off its entire $275 million investment in FTX, once the world’s third-largest crypto exchange, which filed for US bankruptcy protection on Nov. 11 . Sequoia Capital said It also wrote off its $150 million investment in FTX.
“Similar to all investments, we undertook an extensive due diligence process at FTX that lasted about eight months from February to October 2021,” Temasek said in his defense. “During this time we have reviewed FTX’s audited financial statements, which have proven to be profitable. Additionally, our due diligence efforts have focused on the regulatory risk associated with crypto financial market service providers, specifically licensing and regulatory compliance (i.e., financial regulations, licensing, anti-money laundering (AML)/know your customer (KYC), sanctions) and internet Security. Advice was obtained from external legal and cybersecurity specialists in key jurisdictions and the investments were subject to legal and regulatory scrutiny.”
“A thorough and proper due diligence? Or yes, but with the wrong focus or oversight given what was overlooked but now emerging: lack of funds through “backdoors”, inaccurate accounting of the value of FTX’s crypto assets, unacceptable management practices, use of company funds to buy Homes, employee names, etc.,” said Vanson Soo, a Singaporean who runs Hong Kong-based due diligence firm Vanuscript Consulting, in his Nov. 18 blog article.
Some of the balance sheets of FTX-affiliated companies were unaudited and did not include some liabilities, although they were under Bankman-Fried’s control, the disclosed statement said. A summary filing filed Nov. 17 in the US Bankruptcy Court for Delaware cited “the almost total lack of reliable corporate records” at FTX and its affiliates.
FTX Group did not maintain centralized control over its cash, and its cash management failures included a lack of an accurate list of bank accounts and account signers, and insufficient attention to the creditworthiness of banking partners around the world, the statement said.
“As far as I know, FTX Group corporate funds have been used in the Bahamas to purchase houses and other personal items for employees and consultants. As far as I know, certain of these transactions do not appear to have documentation as loans and certain properties have been entered in the records of the Bahamas in the personal names of these employees and consultants,” said John Ray, who took over as CEO and Chief Restructuring Officer of FTX in the statement.
FTX is based in the Bahamas and Bankman-Fried is currently based.
According to media reports, FTX attorney James Bromley said of FTX during a Nov. 22 hearing in the US Bankruptcy Court for Delaware, “What we have here is a worldwide, international organization, but it was run as the personal fiefdom of Sam Bankman -Fried .”
FTX, Bromley said, “was under the control of inexperienced and inexperienced individuals, and some or all of them were compromised individuals.”
Temasek said, “We also collected qualitative feedback about the company and the management team based on interviews with people familiar with the company, including employees, industry participants and other investors.”
Did Sequoia Capital and Temasek know about loans used by FTX employees and advisors to purchase homes in the Bahamas, and did Temasek learn that FTX was controlled by “inexperienced and uneducated individuals”? Have venture capital and sovereign wealth funds discovered Ellison’s penchant for men bent on “controlling governments” and Bankman-Frieda’s practice of running FTX as his personal empire?
In a lawsuit filed August 11, 2019 in the U.S. District Court for Northern California in Oakland, a Puerto Rican company, Bitcoin Manipulation Abatement LLC, sued several defendants, including Alameda Research, Bankman-Fried, and Ellison, alleging this was since November 20 2017 Case As of August 2019, the defendants violated US law by operating an unlicensed money-transmission business, money laundering, wire fraud and manipulating the prices of certain cryptocurrency derivatives, the complaint said.
These allegations could not be conclusively proven true as the defendants were not convicted of such crimes. Nonetheless, the complaint was filed on August 11, 2019, before Temasek began due diligence in February 2021. Was Temasek aware of this complaint? If so, Temasek’s due diligence team should have reviewed the compelling claims of that complaint, even if they turned out to be false when they didn’t.
Others sensed trouble at FTX
There is no reason to doubt Temasek’s statement that it conducted extensive due diligence on FTX, but the fact remains that the sovereign wealth fund missed some tremendous risks in FTX. Other potential investors sensed trouble at FTX and shyed away from the company.
In a forum on Twitter on November 12, Elon Musk said of Bankman-Fried: “But then a lot of people told me [that] he has huge sums of money he wants to invest in the Twitter deal. And I talked to him for about half an hour. And I know my bulls**t meter was redlining. It was like, this guy is bulls**t – that was my impression.
“Then I thought, man, everyone, including the big investment banks – everyone was talking about him like he was walking on water and he had a million dollars. And that (was) not my impression … this guy is just — something’s wrong, and he has no capital and he’s not going to get by,” said Musk, who bought Twitter for $44 billion in October.
Another potential investor, Alex Pack, was concerned about the apparent lack of barriers between Alameda and FTX, The Wall Street Journal reported. In December 2018, Pack, then managing partner of Dragonfly Capital, a crypto-focused venture firm, met Bankman-Fried at the Upper House, a fancy Hong Kong hotel. The talks collapsed when Bankman-Fried revealed that Alameda was working on the crypto exchange that would become FTX, but only wanted Dragonfly’s money for Alameda, not FTX.
“Alameda and FTX were tied at the waist. The suggestion that if we were going to invest, use our money to fund his new business at the expense of the business we were investing in – that left a pretty sour taste in our mouths,” Pack told The Wall Street Journal.
At the Saudi Future Investment Initiative in October, Bankman-Fried met officials at Saudi Arabia’s Public Investment Fund, one of the world’s largest sovereign wealth funds, and proposed FTX to them. He then flew to Abu Dhabi to seek investment from the emirate’s wealth funds, the Wall Street Journal said. He came home empty-handed, the Journal added.
If Musk, Pack and Middle East sovereign wealth funds decided not to invest in FTX, why did Temasek and Sequoia Capital do so?
“We recognize that while our due diligence processes can mitigate certain risks, it is not practical to eliminate all risks,” Temasek said.
In a call, Sequoia Capital apologized to its investors for losing $150 million to FTX, The Wall Street Journal reported. The US firm’s partners said Sequoia Capital will improve its due diligence process on future investments.
Likewise, Temasek will need to conduct more rigorous due diligence on future potential investments in crypto companies.
Toh Han Shih is Principal Analyst at Headland Intelligence, a Hong Kong-based risk consulting firm.