Temasek, Sequoia Capital missed large dangers in FTX

By: Toh Han Shih

The implosion of FTX and the November 18 firing of Caroline Ellison as chief govt officer of the crypto buying and selling agency Alameda Analysis, co-founded by Samuel Bankman-Fried, the previous FTX CEO, has inflicted losses on Singapore’s premier sovereign wealth fund Temasek, regardless of what Temasek calls “intensive due diligence.”

There appear to have been a number of warning indicators. In now-deleted posts on social media, Ellison mentioned she was drawn to males “controlling most main world governments” and that she has indulged in polyamory, or simultaneous romantic or sexual relationships with a number of companions, reported the Day by day Mail. Alameda, whereas Ellison was its CEO, prolonged a US$1 billion mortgage to Bankman-Fried, her ex-boyfriend, in keeping with a declaration to the US Chapter Courtroom for Delaware filed on November 17.

How may Temasek and Sequoia Capital, one of the vital revered enterprise capital companies, have invested in an organization like FTX which concerned folks like Bankman-Fried and Ellison? In a assertion on November 17, the Singapore sovereign wealth fund mentioned it will write off its total US$275 million funding in FTX, as soon as the world’s third largest crypto change which filed for chapter safety within the US on November 11. Sequoia Capital mentioned it was additionally writing off its US$150 million funding in FTX.

“Just like all investments, we performed an in depth due diligence course of on FTX, which took roughly eight months from February to October 2021,” mentioned Temasek in its protection. “Throughout this time, we reviewed FTX’s audited monetary assertion, which confirmed it to be worthwhile. As well as, our due diligence efforts targeted on the related regulatory danger with crypto monetary market service suppliers, notably licensing and regulatory compliance (i.e. monetary rules, licensing, anti-money laundering (AML)/ Know Your Buyer (KYC), sanctions) and cybersecurity. Recommendation from exterior authorized and cybersecurity specialists in key jurisdictions was sought, with authorized and regulatory evaluation achieved for the investments.”

“A radical and correct due diligence? Or sure however with the improper focus, or oversight, contemplating what have been missed however now emerged: lacking funds by means of “again doorways,” imprecise accounting of the worth of FTX’s crypto property, unacceptable administration practices, utilizing company funds to purchase properties within the private title of workers, and many others,” mentioned Vanson Soo, a Singaporean who runs the due diligence agency Vanuscript Consulting in Hong Kong, in his weblog article on November 18.

A number of the steadiness sheets of firms associated to FTX weren’t audited and didn’t embrace some liabilities, whereas they have been underneath the management of Bankman-Fried, the declaration disclosed. An emergency movement filed within the US Chapter Courtroom for Delaware on November 17 cited “the just about full lack of reliable company data” at FTX and its associated firms.

The FTX Group didn’t keep centralized management of its money and its money administration failures included the absence of an correct checklist of financial institution accounts and account signatories, in addition to inadequate consideration to the creditworthiness of banking companions all over the world, mentioned the declaration.

“Within the Bahamas, I perceive that company funds of the FTX Group have been used to buy properties and different private gadgets for workers and advisors. I perceive that there doesn’t look like documentation for sure of those transactions as loans, and that sure actual property was recorded within the private title of those workers and advisors on the data of the Bahamas,” mentioned John Ray, who took over as FTX CEO and chief restructuring officer, within the declaration.

The Bahamas is the place FTX is domiciled and the place Bankman-Fried at present is positioned.

In keeping with media reviews, throughout a listening to within the US Chapter Courtroom for Delaware on November 22, FTX lawyer James Bromley mentioned of FTX, “What we have now here’s a worldwide, worldwide group, however which was run as a private fiefdom of Sam Bankman-Fried.”

FTX, Bromley mentioned, “was within the management of inexperienced and unsophisticated people, and a few or all of them have been compromised people.”

Temasek mentioned, “We additionally gathered qualitative suggestions on the corporate and administration crew primarily based on interviews with folks acquainted with the corporate, together with workers, business individuals, and different buyers.”

Did Sequoia Capital and Temasek know of loans utilized by workers and advisors of FTX to purchase properties within the Bahamas and did Temasek study that FTX was managed by “inexperienced and unsophisticated people”? Did the enterprise capital agency and sovereign wealth fund uncover Ellison’s proclivity for males bent on “controlling governments” and Bankman-Frieda’s observe of operating FTX as his private kingdom?

In a grievance filed on August 11, 2019 on the US District Courtroom for Northern California in Oakland, a Puerto Rican firm, Bitcoin Manipulation Abatement LLC, sued a number of defendants together with Alameda Analysis, Bankman-Fried and Ellison, alleging that from November 20, 2017 till August 2019, the defendants violated US regulation by working an unlicensed cash transmitting enterprise, laundering cash, wire fraud and manipulating the costs of sure cryptocurrency derivatives, alleged the grievance.

These allegations haven’t been confirmed conclusively as true, because the defendants haven’t been convicted of such offenses. Nonetheless, the grievance was filed on August 11, 2019, earlier than Temasek began its due diligence in February 2021. Was Temasek conscious of this grievance? If it was, Temasek’s due diligence crew ought to have appeared into the intense allegations of this grievance, even when they grow to be false, in the event that they didn’t accomplish that. 

Others smelt bother at FTX

There is no such thing as a purpose to doubt Temasek’s assertion that it performed intensive due diligence on FTX, however the truth stays that the sovereign wealth fund missed some huge dangers in FTX. Different potential buyers smelt bother at FTX and shied away from the corporate.

In a discussion board on Twitter on November 12, Elon Musk mentioned of Bankman-Fried, “However then I received a ton of individuals telling me [that] he’s received, , large quantities of cash that he needs to put money into the Twitter deal. And I talked to him for about half an hour. And I do know my bulls**t meter was redlining. It was like, this dude is bulls**t – that was my impression.”

“Then I used to be like, man, everybody together with main funding banks – everybody was speaking about him like he’s strolling on water and has a zillion {dollars}. And that (was) not my impression…that dude is simply – there’s one thing improper, and he doesn’t have capital, and he won’t come by means of,” mentioned Musk, who purchased Twitter for US$44 billion in October.

One other potential investor, Alex Pack, was involved concerning the seeming lack of obstacles between Alameda and FTX, reported the Wall Road Journal. In December 2018, Pack, then a managing accomplice of Dragonfly Capital, a crypto-focused enterprise agency, met Bankman-Fried within the Higher Home, a swanky lodge in Hong Kong. The talks fell aside when Bankman-Fried revealed that Alameda was engaged on the crypto change that might turn out to be FTX, however solely needed Dragonfly’s cash for Alameda, not FTX.

“Alameda and FTX have been tied on the hip. Proposing to make use of our cash, if we have been to speculate, to finance his new enterprise to the detriment of the enterprise we have been investing in—that left a reasonably bitter style in our mouths,” Pack instructed the Wall Road Journal.

On the Saudi Future Funding Initiative in October, Bankman-Fried met officers from the Public Funding Fund of Saudi Arabia, one of many world’s largest sovereign wealth funds, and pitched FTX to them, then flew to Abu Dhabi to hunt funding from the emirate’s wealth funds, mentioned the Wall Road Journal. He got here house empty-handed, the Journal added.

If Musk, Pack, and Center Jap sovereign wealth funds determined to not put money into FTX, why did Temasek and Sequoia Capital?

“We acknowledge that whereas our due diligence processes could mitigate sure dangers, it isn’t practicable to remove all dangers,” Temasek mentioned.

In a name, Sequoia Capital apologized to its buyers for dropping US$150 million on FTX, reported the Wall Road Journal. The US agency’s companions mentioned Sequoia Capital would enhance its due diligence course of in future investments.

Likewise, Temasek should conduct extra rigorous due diligence checks in future potential investments in crypto-businesses.

Toh Han Shih is chief analyst of Headland Intelligence, a Hong Kong danger consulting agency.