Temasek, Sequoia Capital missed large dangers in FTX

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 “in depth 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 Every 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 Court docket for Delaware filed on November 17.

How might Temasek and Sequoia Capital, one of the crucial revered enterprise capital companies, have invested in an organization like FTX which concerned individuals like Bankman-Fried and Ellison? In a assertion on November 17, the Singapore sovereign wealth fund mentioned it will write off its complete US$275 million funding in FTX, as soon as the world’s third largest crypto alternate 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 intensive 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 centered on the related regulatory threat with crypto monetary market service suppliers, significantly 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 assessment executed for the investments.”

“An intensive and correct due diligence? Or sure however with the unsuitable focus, or oversight, contemplating what have been missed however now emerged: lacking funds via “again doorways,” imprecise accounting of the worth of FTX’s crypto property, unacceptable administration practices, utilizing company funds to purchase houses 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 stability sheets of firms associated to FTX weren’t audited and didn’t embrace some liabilities, whereas they have been beneath the management of Bankman-Fried, the declaration disclosed. An emergency movement filed within the US Chapter Court docket for Delaware on November 17 cited “the just about full lack of reliable company information” at FTX and its associated firms.

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

“Within the Bahamas, I perceive that company funds of the FTX Group have been used to buy houses and different private objects 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 information 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 the moment is positioned.

Based on media studies, throughout a listening to within the US Chapter Court docket 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 based mostly on interviews with individuals acquainted with the corporate, together with workers, trade contributors, and different buyers.”

Did Sequoia Capital and Temasek know of loans utilized by workers and advisors of FTX to purchase houses 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 Court docket 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 regarded into the intense allegations of this grievance, even when they change into false, in the event that they didn’t achieve this. 

Others smelt bother at FTX

There isn’t a cause to doubt Temasek’s assertion that it performed in depth due diligence on FTX, however the truth stays that the sovereign wealth fund missed some monumental 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, you recognize, 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 unsuitable, and he doesn’t have capital, and he is not going to come via,” mentioned Musk, who purchased Twitter for US$44 billion in October.

One other potential investor, Alex Pack, was involved in regards to the seeming lack of boundaries between Alameda and FTX, reported the Wall Road Journal. In December 2018, Pack, then a managing associate of Dragonfly Capital, a crypto-focused enterprise agency, met Bankman-Fried within the Higher Home, a swanky resort in Hong Kong. The talks fell aside when Bankman-Fried revealed that Alameda was engaged on the crypto alternate that will develop into 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 take a position, to finance his new enterprise to the detriment of the enterprise we have been investing in—that left a fairly 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 residence empty-handed, the Journal added.

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

“We acknowledge that whereas our due diligence processes might mitigate sure dangers, it isn’t practicable to get rid of 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 must 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 threat consulting agency.