FTX used $200 million in client funds for two venture investments

FTX founder Sam Bankman-Fried will leave the company following his arraignment in New York City on December 22, 2022.

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Of the trillions of dollars in customer deposits that vanished from FTX in a flash, $200 million was used to fund investments in two companies, according to the Securities and Exchange Commission, which accused founder Sam Bankman-Fried of “facilitating an equity fraud scheme.” stage investors.”

The crypto company invested $100 million in March through its FTX Ventures unit David, a fintech company that went public through a special purpose vehicle two months earlier. At the time, the companies said they would “collaborate to expand the digital asset ecosystem.”

The other deal the SEC appears to have referenced was a $100 million investment round in September for Mysten Labs, a Web3 company. It was a total of $300 million in funding, valuing Mysten at $2 billion and including participation from coin base Ventures, Binance Labs and Andreessen Horowitz’s crypto fund.

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While FTX Ventures has completed dozens of transactions, according to PitchBook, Mysten Labs and Dave’s investments were the only two disclosed $100 million investments, based on documents released by the Financial Times that detailed how the company 5, Invested $2 billion. FTX Ventures was described in its press release with Dave as a $2 billion venture fund.

Bankman-Fried, 30, is accused of widespread fraud after FTX, which was valued at $32 billion by retail investors earlier this year, filed for bankruptcy in November. A central theme in the indictments is how Bankman-Fried diverted funds from FTX to his hedge fund Alameda Research, which then used that money for risky trades and loans. FTX Ventures was reportedly part of this program.

Neither Mysten nor Dave have been linked to any alleged wrongdoing within the Bankman Fried empire. But the investments seem to be the first identified examples of client money being used for risk funding by FTX and Bankman-Fried. As investigators and FTX attorneys attempt to trace the outflow of FTX funds, these identified investments and others in the $5 billion venture pool will come under scrutiny.

By explicitly linking the two $100 million investments to client funds, the SEC raised the possibility that they will be prospects for recovery. If FTX’s liquidators can show that client funds funded Bankman-Fried’s investments, they could pursue recovery of those funds as part of efforts to recover client assets.

A spokesman for the SEC declined to comment.

Dave CEO Jason Wilk told CNBC that FTX’s investment in Dave is expected to be repaid with interest as early as 2026. FTX’s $100 million investment was made through a convertible bond, a short-term cash loan that FTX could convert into shares at a later date. That conversion never happened, leaving Dave with a liability of $101.6 million, including interest, to FTX and any successor companies, according to the company’s most recent SEC filings.

Jason Wilk

Source: Jason Wilk

“The debenture issued to FTX is due for repayment in March 2026,” the company said in a statement. “None of the terms of the debenture create a present obligation on the part of Dave to make repayment prior to the Maturity Date.”

Wilk added, “It is important to note that we were not aware of FTX or Alameda using client assets for investments.”

Bankman-Fried’s investment in Mysten Labs was an equity deal. Because Mysten is a private company, there is no clearly defined process under US bankruptcy law for recovering these funds.

Mysten declined to comment. Attorneys for Sullivan & Cromwell, which represents FTX, did not respond to requests for comment.

An SEC complaint filed against two of Bankman-Fried’s lieutenants, Caroline Ellison and Gary Wang, specified that “two $100 million investments made by FTX Ventures Ltd., FTX’s affiliated investment vehicle, were funded with FTX client funds that had been diverted to Alameda. “

Regardless of what money was used, FTX’s investments came at a bad time.

Dave shares are down over 97% since the company’s IPO, reflecting the performance of the broader basket of SPACs. In July, Nasdaq warned Dave that it was at risk of being delisted if its share price didn’t improve. The stock currently trades for 28 cents and the market cap is around $100 million.

Alameda Research previously made a $15 million investment in Dave in August 2021, prior to the Nasdaq listing. Established in 2016, Dave offers clients a free cash advance on their future income as part of a range of banking products. Mark Cuban led a $3 million seed round in 2017.

The investment could have been lucrative for FTX if Dave’s stock price had improved to over $10 per share, allowing FTX to trade for a profit.

FTX’s investment in Mysten came in the midst of a crypto meltdown. Bitcoin Spirit ether had fallen by more than half for the year and scores of hedge funds and lenders had gone bankrupt.

The funds were to be used for Mysten’s efforts to “build a blockchain that grows with demand and incentivizes growth,” Mysten CEO Evan Cheng said at the time.

Representatives for Ellison and Wang did not respond to requests for comment. A representative for Bankman-Fried declined to comment.

Ellison, 28, and Wang, 29, pleaded guilty in New York last week to federal charges of illegally using client funds for trade and venture investments allegedly directed by Bankman-Fried. Both are cooperating with federal investigations into Bankman-Fried and the collapse of FTX.

SEE: The terms of the $250 million bail agreement for FTX founder Sam Bankman-Fried

The terms of the $250 million bail agreement for FTX founder Sam Bankman-Fried

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