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BFD Expert Voices - Private Credit

BFD Expert Voices

In his scathing review of FTX's business, John Ray III, the company's new CEO and the person in charge of its restructuring, said founder Sam Bankman-Fried ran the business as his "personal fiefdom." In an interview with Axios, Bankman-Fried didn't disagree.

Why it matters: The interview that Bankman-Fried gave shed light on the failings that led to the company's implosion.

Of note: Bankman-Fried is the founder of FTX, a company worth $40 billion not so long ago. He now faces allegations of fraud and mismanagement and says he wishes he had put in place a third party between his trading firm, Alameda Research, and FTX. 

"There's certainly an extent to which that I wish there had been someone who wasn't me who was in charge of managing conflicts of interest," he said over the phone. "I wish that I had more reporting and transparency to outside parties."

He said that he was responsible for not putting someone in that position.

The intrigue: Bankman-Fried said he has not been in contact with Ray, though he has reached out to people managing the bankruptcy process. Ray notably has also sought to distance FTX from Bankman-Fried. 

“I offered up my services, my help, to any of the global regulators, administrators who are working to try and do what they can," Bankman-Fried said. "As of now, there has not been much contact coming from the U.S. team.”

Details: While FTX did have audits, the legitimacy of the work done by those external firms has been called into question as leaked FTX figures have been shown to be unreliable.

Bankman-Fried's heavy risk-taking and conflicts of interest had also come into question very early on, even among his co-workers. Alameda's co-founder, Tara MacAulay, said this month on Twitter that she quit in April 2018 in part due to concerns over "risk management and business ethics."

The overarching company did not give any of its investors a board seat, nor did it hire a CFO, a lack of corporate governance that investors overlooked when the company was booming.

“In terms of boards? I think it's a little more complicated than that. we actually had a lot of boards," he said. "There's a board of directors of FTX Japan, there's a board of directors of FTX Australia, board of directors of, you know, in Europe. A board of directors of U.S. derivatives. We had dozens.”

1. SBF on failure

Illustration of the silhouette of Sam Bankman-Fried crumbling and falling. 

The lack of barriers between Bankman-Fried's various companies and equity stakes magnified the damage to the crypto economy earlier this year — something the fallen CEO says he regrets.

Why it matters: When FTX failed, it also meant that assets associated with FTX, like the Solana ecosystem, suffered more than ethereum or bitcoin.

"I was frequently building and running reports around the volume distribution on FTX. I should have been doing the same thing around distribution, position distribution, assets balances," he said. "I screwed it up in underestimating what happens in a hyper-correlated market premise." 

Of note: Bankman-Fried's parents are the named owners of a $16.4 million vacation home in the Bahamas, according to Reuters, raising the question of self-dealing. 

"I don't know the details of how they became listed there. But those are always intended to be company properties," he said, regarding his parents and the Bahamas real estate.

Zoom in: Bankman-Fried says he knows nothing of an alleged backdoor that allowed Alameda to bypass FTX's liquidation protocols, for example. 

This matters, because prosecutors must prove beyond a reasonable doubt that Bankman-Fried had knowledge of or intent to commit fraud, Axios' Matt Phillips reports, may well be a legal strategy.

Zoom out: Lucinda pointed out to SBF his saga's parallels to Elizabeth Holmes', the former CEO of Theranos who was sentenced to 11 years in jail. Both were media darlings who, at their height, graced the covers of business magazines and were lauded as young — though quirky — geniuses. 

And, like Holmes, Bankman-Fried is now facing potential criminal fraud charges and innumerable lawsuits. No charges have been brought against FTX or Bankman-Fried yet, though many speculate he may also face jail time.

"I have not, no," he said, when asked if he had followed the Holmes trial. 

When asked if he's considered the possibility that he may one day be facing jail time, he answered: "I have conversations with legal. But I'm trying to focus on what I can do now. There's a time and a place for I thinking more about my own personal future."

2. SBF on his future

Photo Illustration of Elizabeth Holmes and Sam Bankman-Fried with eyes and rectangles behind them

Photo Illustration: Natalie Peeples/Axios. Photos: Taylor Hill and Bloomberg/Getty Images

Sam Bankman-Fried says he had only $100,000 left in his bank account last time he checked. In an interview, the former FTX CEO pointed to both personal failures and regulatory gaps to help explain the implosion of his company.

Why it matters: Bankman-Fried's late Monday phone interview comes as FTX is working through a messy bankruptcy process, and the company's creditors remain in the dark about what, if anything, they will be able to recoup.

What he's saying: "Am I allowed to say a negative number?" he said, when asked about his personal finances. "I mean, I have no idea. I don't know. I had $100,000 in my bank account last I checked."

"It's complicated. Basically everything I had was just tied up in the company," he added.

His personal wealth at one point reached $26.5 billion.

3. SBF's personal finances

Photo illustration of Sam Bankman-Fried with downward arrows and abstract shapes.

Photo illustration: Gabriella Turrisi/Axios. Photo: Lam Yik/Bloomberg via Getty Images

Bankman-Fried also said that he always intended to roll over at least a portion of his former firm's $100 million Twitter stake into the new, privately held entity led by Elon Musk.

But the former FTX CEO said in an interview on Monday night that he's not sure that ever happened with the Alameda Research-controlled stake.

Why it matters: It's the first time Bankman-Fried has addressed the question about his Twitter stake since Musk said last week that neither SBF nor FTX ever held a position in the privatized Twitter, a statement that contradicted a Semafor news report.

Alameda Research, the entity that Bankman-Fried said owned the Twitter stake, is the trading firm that he controlled and is the entity at the center of FTX's implosion. A text message seen by Axios that Bankman-Fried sent to Musk said the Twitter stake Alameda owned was worth around $100 million.

Details: "I believe that that it was intended for Alameda to roll over at least $20 million or more," Bankman-Fried told Axios. "I don't know for sure whether that ultimately happened."

Bankman-Fried noted that at least some of the Twitter stake may have been sold before Twitter went private, but he could not confirm.

4. Alameda's Twitter stake

Photo illustration of Sam Bankman-Fried with hair made out of Twitter logos. 

Photo illustration: Brendan Lynch/Axios. Photo: Jeenah Moon/Bloomberg via Getty Images

Crypto’s fallen stars pile on Sam Bankman-Fried (Bloomberg)

The founders of Terra, Celsius and Three Arrows Capital, hounded into months of near-total silence by traders angry at the damage wrought to their savings when those platforms failed over summer, have become more talkative in the shadow of Bankman-Fried. 

FTX’s lavish spending highlights lack of controls (FT)

A lack of internal controls that are typical of large financial companies meant FTX’s spending went largely unchecked, according to former employees and filings in the group’s Delaware bankruptcy case. 

FTX's LedgerX will put millions in bankruptcy pot (Bloomberg)

LedgerX is preparing to make available $175 million for use in FTX’s bankruptcy proceedings, according to people with knowledge of the matter. The money comes from a $250 million fund it had set aside for a bid to get regulatory approval to clear crypto derivatives trades. 

BlockFi has $355M in crypto frozen on FTX (CoinDesk)

The crypto lender has about $355 million in cryptocurrencies currently frozen on crypto exchange FTX, attorney Joshua Sussberg told a U.S. bankruptcy court on Tuesday. 

Bitcoin ‘rarely’ used for legal transactions, say European Central Bank officials (TechCrunch)

European Central Bank officials alleged that bitcoin is fueled by speculation and the recent erosion in its value indicates it is on the “road to irrelevance,” as they urged regulators not to lend legitimacy to digital tokens in the name of innovation.

5. Credit score

Illustration of positive and negative trend lines coming out of center point.

• Keyrock, a digital asset market maker, raised $72m in Series B funding led by Ripple, with participation from Six Fintech Ventures and Middlegame Ventures. https://axios.link/3VzSbSt

• TreeCard, a climate-conscious digital money app, raised $23m in a new funding round led by Valar Ventures, with participation from EQT, Seedcamp and World Fund. https://axios.link/3EPaQlV

• Finery Markets, an institutional crypto trading platform, raised $5.5m in seed funding led by G1 Ventures, gumi Cryptos and Shima Capital. Communitas Capital, DV Chain, GravityX, Unlimint, Daedalus Angels, oneAlpha and Floating Point Group also participated. https://axios.link/3EPQGZ9

• Binance, the largest global crypto exchange by volume, acquired locally licensed Japanese exchange Sakura Exchange BitCoin (SEBC). Terms were not disclosed. https://axios.link/3GViwpt

• CrossTower, a global cryptocurrency trading platform, has agreed to acquire BEQUANT, a prime brokerage and digital asset exchange. crosstower.com

6. Deals of the day

Situational awareness: Lucinda was able to speak on the phone with Sam Bankman-Fried. Buckle up, and see below for what she gathered. 

Thanks to Michael Flaherty for editing and Carlos Cunha for copy editing this newsletter.

🙏🏿 you for reading! FYI, SBF is speaking (virtually) at the New York Times Dealbook event today at 4:55 pm EST. The title of the interview session: What Happened?

November 30, 2022

1. SBF on failure