Crypto investor saw serious ‘red flags’ with FTX founder Sam Bankman-Fried


Sam Bankman-Fried, founder and chief executive officer of FTX Cryptocurrency Derivatives Exchange, at a hearing before the Senate Agriculture, Food and Forestry Committee in Washington, DC, on Wednesday, February 9, 2022.

Sarah Silbiger | Bloomberg | Getty Images

Serious red flags surrounding Sam Bankman-Fried’s FTX surfaced before the now embattled cryptocurrency exchange even launched, according to an early would-be investor.

Alex Pack, now the managing partner of New York-based venture capital firm Hack VC, said he met Bankman-Fried in 2018. At the time, the entrepreneur had not yet founded FTX and was seeking funding for another company he founded, Alameda. Research.

Bankman-Fried stepped down as CEO of FTX last Friday as the crypto firm filed for Chapter 11 bankruptcy protection. The crypto powerhouse, once valued at $32 billion, collapsed within days amid a liquidity crisis and allegations that it misused client funds. The Securities and Exchange Commission and the Justice Department are investigating what happened, according to The Wall Street Journal.

And on Thursday, newly appointed FTX CEO John Ray III declared in a US bankruptcy court that “in his 40 years of legal and restructuring experience” he had never seen “such a complete failure of corporate controls and such a complete absence of reliable financial information as here.” has happened.”

In 2018, Bankman-Fried was a relatively unknown founder looking for a deal in the emerging crypto market.

Pack said Bankman-Fried was hunting “single-digit millions” worth of shares of Pack’s former crypto company DragonFly Capital, which he co-founded. Dragonfly is a startup technology company that invests in blockchain technology and at the time was a $100 million fund that aimed to help crypto startups. Pack, who has nine years of experience in the space, was previously director of network investments at Bain Capital Ventures, partner at AngelList and worked at Arbor Ventures in Hong Kong.

At first, Pack said, everything seemed fine.

“I was fascinated by him for the first month until he showed us everything”, describing him as “incredibly smart and charismatic”.

Over a period of about five to six months, Pack said, he and his team met Bankman-Fried more than a dozen times. But after extensive due diligence, Pack said everyone came to the same conclusion.

“After months spent with him, we realized that taking risks was catastrophic,” Pack told CNBC. “We looked at it and saw red flags — too much risk.”

Pack provided CNBC with copies of a WeChat history he had with Bankman-Fried in 2018 and 2019, which shows the two discussing a possible deal. But when Pack’s team did its due diligence, he said alarm bells were ringing. Alameda’s balance sheet showed “an unusually huge loss of more than $10 million very quickly,” according to Pack.

Pack said it appeared to be a trading error or series of trading errors. And there was uncertainty about the losses.

“We never found out: was it fraud, was it taking huge risks, was it a bunch of honest mistakes?”

‘money bleeding’

Another red flag, according to Pack, was that Bankman-Friend allegedly hid the existence of the cryptocurrency exchange FTX around that time. He said his team found Alameda was “bleeding money to pay FTX”.

“We asked him ‘what’s going on here?’ pretty casual,” Pack said. He said, “I don’t remember if I told you I had this idea for an exchange.” That’s why I spent most of my time on it, so we neglected the core business.'”

“There was a lot he did or didn’t want to share. There was a clear pattern of hidden huge risks,” Pack said. “He never really showed the Alameda books to a prospective investor — that’s where all the bad stuff happened.”

In a series of tweets in August 2020, Bankman-Fried seems to have told a different version of events, without naming the parties involved. Pack said the tweets referenced the DragonFly deal.

“They showed interest in Alameda and wanted to help it grow,” said a tweet from Bankman-Fried. “They understood the business. Alameda has never taken on an outside investor, but this seemed like a good opportunity.”

Bankman-Fried tweeted that it was actually his team that turned down the offer, which was about a third of Alameda’s valuation.

“They didn’t react well when we said no, and we were surprised. Like, of course, we said no! They only offered 1/3 of our offer,” the tweet read. After more discussions to salvage the deal, “we finally said no to them. They said no to us by saying no, and we weren’t really sure how anyone reacted to that, so we just stopped responding.”

A Bankman-Fried spokesperson did not respond to CNBC’s request for comment.

Pack said the rejection haunted him. He would later learn that he was barred from future deals involving Bankman-Fried. While telling other venture capital firms about what happened, he said he was not disclosing anything.

Pack said he didn’t let the experience slow him down.

Earlier this year, Hack VC announced a $200 million “Crypto Seed Fund” for investments in crypto, Web3 and blockchain startups.

Looking back on his dealings with Bankman-Fried today, Pack sees what happened as a foreshadowing of FTX’s collapse.

“It was like clearly four years ago, this guy was hiding serious stuff and taking incredible risks with other people’s money,” Pack said. “And now he appears to have done exactly the same thing on a larger catastrophic scale.”

The Valley Voice
The Valley Voice
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.


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