FTX diverted $200 million in client money for two venture deals that caught SEC attention – CNBC

DOJ is investigating how $372 million disappeared in a hack after FTX collapsed

FTX founder Sam Bankman-Fried will leave after his New York City arraignment on December 22, 2022.

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From the billions of dollars in customer deposits that disappeared of FTX in a flash, $200 million was used to fund investments in two companies, according to the Securities and Exchange Commission, which charged founder Sam Bankman-Fried with “orchestrating a scheme to defraud stock investors.”

Through its FTX Ventures unit, the crypto company in March invested $100 million in Dave, a fintech company that had gone public two months earlier through a dedicated acquisition company. At the time of the deal, the companies said they would “work together to expand the digital asset ecosystem.”

The other deal that the SEC seems to have been referring to was a $100 million investment round September in front of Myster Labs, a Web3 company. In total, it was about 300 million dollars funding round which valued Mysten at $2 billion and included participation from Coin base Ventures, Binance Labs and Andreessen Horowitz’s crypto fund.

While FTX Ventures has made dozens of transactions, according to PitchBook, Mysten Labs and Dave’s investments were the only two disclosed $100 million investments, based on documents published by the Financial Times, which detailed how the company put $5.2 billion to work. FTX Ventures was described as a $2 billion venture fund, in the press release with Dave.

Bankman-Fried, 30, is charged with commit large-scale fraud after FTX, which was valued at $32 billion by private investors earlier this year, collapsed bankruptcy in November. A central theme in the indictment is how Bankman-Fried diverted money from FTX to his hedge fund, Alameda Research, which then used that money for high-risk transactions and loans. FTX Ventures was reportedly part of that plan.

Neither Mysten nor Dave have been linked to any alleged misconduct within the Bankman-Fried realm. But the investments appears to be the first identified examples of client money being used for venture capital by FTX and Bankman-Fried. As researchers and FTX attorneys attempt to track the outflow of FTX funds, these identified investments and others in the $5 billion investment pool will come under heavy scrutiny.

By explicitly linking the two $100 million investments to clients’ money, the SEC has raised the possibility that they may be eligible for chargebacks. If FTX’s trustees can determine that Bankman-Fried’s investments were funded with client money, they may pursue the recovery of those funds as part of an effort to recover the client’s assets.

An SEC spokesperson declined to comment.

Dave CEO Jason Wilk told CNBC that FTX’s investment in Dave will be paid back with interest as early as 2026. FTX’s $100 million investment was through a convertible bond, a short-term loan of money that FTX could later convert into stock. date. That conversion was never made, leaving Dave $101.6 million in debt, including interest, to FTX and any successors, according to tthe company’s most recent SEC filings.

Jason Wilk

Source: Jason Wilk

“The note issued to FTX is due for repayment in March 2026,” the company said in a statement. “No condition in the note creates a current obligation on Dave’s part to repay before the due date.”

Wilk added that “it is important to mention that we had no knowledge of FTX or Alameda using client assets to make investments.”

Bankman-Fried’s investment in Mysten Labs was an equity transaction. Because Mysten is a private company, there is no clearly defined process in the US bankruptcy code for recovering those funds.

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

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

Regardless of what money was used, FTX’s investments were ill-timed.

Shares of Dave have plummeted more than 97% since the company went public, reflecting the performance of the broader basket of SPACs, which have fallen this year. In July, the Nasdaq listed warned Dave that if the share price did not improve, it risked being delisted. The stock currently trades for 28 cents and its market cap is around $100 million.

Alameda Research had previously made a $15 million investment in Dave in August 2021, before the Nasdaq listing. Founded in 2016, Dave provides customers with a free advance on their future income as part of a range of banking products. Mark Cuban led one $3 million seed round in 2017.

The investment could have been lucrative for FTX had Dave’s stock price improved to more than $10 per share, allowing FTX to convert at a profit.

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

The money would be used in Mysten’s effort to “build a blockchain that scales with demand and drives growth,” said Evan Cheng, Mysten’s CEO at the time.

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

Ellison, 28, and Wang, 29, pleaded guilty in New York last week to federal charges for the unauthorized use of client money for trade and venture investment, reportedly directed by Bankman-Fried. Both work together with federal investigations into Bankman-Fried and the collapse of FTX.

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