Charges made public yesterday by regulators and prosecutors against Sam Bankman-Fried reveal that the founder of FTX allegedly used customer deposits to make venture investments—leaving the fate of those stakes an open question as bankruptcy lawyers try to salvage the remains from the global crypto exchange and make customers whole.
The Securities and Exchange Commission, which charged SBF with defrauding FTX investors Tuesday morning, not long after he was arrested in the Bahamas, alleged that SBF had used customer funds for “lavish real estate purchases” and “large political donations”—but also for some of the venture investments made in crypto startups (the CFTC has accused SBF and FTX entities of fraud and making material misrepresentations and the Southern District of New York charged him with eight counts of fraud). The SEC complaint alleges that SBF specifically made two $100 million investments through FTX’s affiliated VC arm, FTX Ventures, using customer funds that had been diverted to Alameda Research. John Ray III, the bankruptcy attorney who swooped in last month to oversee the liquidation process, echoed some of these allegations in yesterday’s House Committee on Financial Services meeting when he said that an ongoing investigation indicated that investments made from FTX Ventures, “were most likely made with either Alameda money or money that originally came from FTX.com.”
Bankman-Fried’s crypto empire is a disorganized jumbling of dozens of legal entities, as was evidenced by an org chart brought to light during the House hearing. SBF and select other employees including Ramnik Arora, FTX’s head of product who was reportedly heavily involved in FTX’s fundraising efforts, and Amy Wu, the former head of FTX Ventures, made VC investments for FTX or Bankman-Fried. As was previously reported by Fortune, investments were made across a few entities, including FTX Ventures, Alameda Research, and directly through FTX’s global operation, and the exchange had a far reach across the crypto market. FTX’s venture arm made investments in at least 21 startups that Fortune was able to identify, and Alameda had invested in nearly three dozen companies, though the exact size of the portfolio and number of companies is not publicly known.
The SEC complaint does not specify particular portfolio companies, and it’s unclear exactly how many of FTX’s venture investments may have been funded with customer deposits, nor which ones. That may be in part due to Ray’s claims that there is a lack of complete documentation for approximately 500 FTX investments. SBF is currently in custody in the Bahamas after he was arrested on Monday. A representative for Bankman-Fried’s attorney, Mark S. Cohen, provided a statement in response to all the charges unsealed against him this week: “Mr. Bankman-Fried is reviewing the charges with his legal team and considering all of his legal options.” Arora did not respond to a request for comment, and Wu declined to comment.
Ray has made it clear that his team will sell off assets and tokens held by FTX in his effort to return as much money as possible to FTX customers. That will surely include holdings at FTX Ventures as well as the $5 billion in investments made by Alameda Research, which Ray says included “a myriad of businesses and investments” and are now probably worth “a fraction of what was paid for them.” Ray specifically said at yesterday’s hearing that Alameda’s $5 billion in investments will be a “recovery pool” for customers, and expressed concern about how selling some of those assets may take a toll on the broader crypto industry.
“It’s a very trying time for the crypto sector,” Ray said. “What I worry about is the impairment to that portfolio of $5 billion, because obviously, that’s a recovery pool for our customers.”
It’s unclear whether lawyers or prosecutors will try to—or would even be able to—claw back venture investments allegedly made with consumer funds from crypto founders. What may be more likely is that FTX’s current management team will sell FTX’s or Alameda’s stakes in portfolio companies to try to return those funds to consumers. While Ray didn’t specify which investments he was referring to, he said that investment bankers at Perella Weinberg Partners were trying to better understand FTX investments and that they would start putting them up for sale as early as this week.
Fortune reached out to more than two dozen portfolio companies that had been funded by FTX Ventures or Alameda Research. One founder, Colin Armstrong of Paragraph, said he didn’t have information regarding what would happen to FTX’s investment in his company (FTX Ventures had participated in Paragraph’s $1.7 million pre-seed round in October). “I have not been contacted by any investigators, and I don’t have any indication that I may have to return the investment I received from FTX Ventures,” he said in an emailed statement to Fortune.
At least one of FTX’s portfolio companies, LayerZero said in early November that it had purchased its stake back from FTX, in advance of the bankruptcy proceedings.
Bankman-Fried was denied bail yesterday by a Bahamian judge after it was decided he was at high risk of flight. His parents, the Stanford Law School professors Joe Bankman and Barbara Fried, were reportedly present at the bail hearing.
Bankman-Fried’s arrest occurred just a day before he was scheduled to testify under oath at the House Committee on Financial Services meeting, leaving Ray as the only witness for what ended up being a nearly four-hour hearing. Bankman-Fried’s planned testimony was leaked online by Forbes ahead of the hearing, and several lawmakers queried Ray about claims from SBF that the movement of funds from FTX to Alameda was done by mistake.
“I don’t find any such statements to be credible,” Ray said, adding later on during the hearing: “Obviously, there’s been failure here of a massive proportion. Ultimately, others will judge him by his actions.”
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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VENTURE DEALS
- Nerdio, a Chicago-based virtual desktop optimization platform in Microsoft Azure, raised $117 million in Series B funding led by Updata Partners.
- MessageGears, an Atlanta-based customer engagement platform for consumer brands, raised $62 million in funding. Long Ridge Equity Partners led the round and was joined by investors including Argentum Group and Atlanta Ventures.
- ngrok, a San Francisco-based ingress-as-a-service platform, raised $50 million in Series A funding. Lightspeed Venture Partners led the round and was joined by Coatue.
- Fashion Cloud, an Amsterdam and Hamburg-based content and data exchange solution for the fashion wholesale industry, raised €25 million ($26.62 million) in funding. Verdane led the round and was joined by HEARTLAND.
- LexCheck, a New York-based contract negotiations optimization platform, raised $17 million in Series A funding led by Mayfield Fund.
- Bondaval, a London-based B2B receivables security company, raised $15 million in Series A funding. Talis Capital led the round and was joined by investors including Octopus Ventures, Insurtech Gateway, TrueSight, Expa, FJ Labs, and Broadhaven Ventures.
- Heyday, a New York-based skincare company, raised $12 million in Series B extension funding led by Level 5 Capital Partners.
- TransVoyant, an Alexandria, Va.-based supply chain execution platform, raised $12 million in funding co-led by Merck Global Health Innovation Fund and P74 Ventures.
- Nilus, a New York-based financial operations platform, raised $8.6 million in seed funding. Bessemer Venture Partners led the round and was joined by investors including Better Tomorrow Ventures, Symbol, and other angels.
- Arketa, a Los Angeles-based hybrid fitness studios growth platform, raised $7.6 million in seed funding. First Round Capital led the round and was joined by investors including Amity Ventures, Fitt Capital, Y Combinator, and others.
- Beni, a Santa Barbara, Calif.-based browser extension company for resale listings, raised $4 million in seed funding led by Buoyant Ventures.
- Oyster, a New York-based insurance technology company, raised $3.6 million in seed funding. New Stack Ventures and Cambrian Ventures invested in the round.
PRIVATE EQUITY
- Vector Capital acquired a minority stake in Malwarebytes, a Santa Clara, Calif.-based cyber security company, for $100 million.
- Comvest acquired Duke’s Root Control, an Elgin, Ill.-based wastewater-focused inspection, diagnostics, and remediation services provider to municipal customers. Financial terms were not disclosed.
- Pfingsten acquired a majority stake in Tempest Telecom Solutions, a Santa Barbara, Calif.-based network telecommunications equipment and related repair services provider. Financial terms were not disclosed.
EXITS
- Management of Furniture Village, an Abingdon, U.K.-based furniture retailer, acquired BGF’s stake in the company. Financial terms were not disclosed.
- Trimble agreed to acquire Transporeon, an Ulm, Germany-based transportation management software platform, from Hg. The deal is valued at €1.88 billion ($2 billion).
IPOS
- Freehold Properties, a Franklin, Tenn.-based cannabis real estate investment company, withdrew its plans for an initial public offering.
PEOPLE
- Clayton, Dubilier & Rice, a London and New York-based private equity firm, promoted Harsh Agarwal, Romain Dutartre, and Rob Volpe to partner.
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