Sam Bankman-Fried, Founder and CEO of FTX Cryptocurrency Derivatives Exchange, during a Senate Agriculture, Food and Forestry Committee hearing in Washington, DC on Wednesday, February 9, 2022.
Sara Silbiger | Bloomberg | Getty Images
According to one of the first potential investors, there were serious concerns around FTX, Sam Bankman-Fried, even before the current cryptocurrency exchange was launched.
Alex Pak, now a managing partner at 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 work.
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Bankman-Fried stepped down as CEO of FTX last Friday as the cryptocurrency company filed for Chapter 11 bankruptcy protection. use of customer funds. The Securities and Exchange Commission and the Department of Justice are investigating the incident, according to The Wall Street Journal.
And on Thursday, newly appointed FTX CEO John Ray III said in a US bankruptcy filing that “in his 40 years of legal work and restructuring” he has never seen “such a complete failure of corporate control and such a complete absence of deserving confidence in financial information, as it happened here.”
In 2018, Bankman-Fried was a relatively unknown founder looking for a deal in the emerging cryptocurrency market.
Park said that Bankman-Fried was after “single-digit millions” in the capital of Park’s previous cryptocurrency firm, DragonFly Capital, which he co-founded. Dragonfly is an early stage tech company investing in blockchain technology and at the time it was a $100 million fund looking to help crypto startups. Park, who has nine years of experience in the industry, was previously Director of Network Investments at Bain Capital Ventures, Partner at AngelList and worked at Arbor Ventures in Hong Kong.
At first, according to Pak, everything looked normal.
“I was fascinated by him for the first month until he showed us everything”, describing him as “incredibly smart and charismatic”.
Within five to six months, Park said he and his team met with Bankman-Freed more than a dozen times. But after careful scrutiny, Park said everyone came to the same conclusion.
“After spending months with him, we realized that his risk was catastrophic,” Park told CNBC. “We looked at it and saw red flags – too big of a risk.”
Park provided CNBC with a copy of a WeChat story he had with Bankman-Freed in 2018 and 2019 that shows them discussing a potential deal. But when Park’s team did their due diligence, he said a wake-up call had sounded. According to Park, Alameda’s balance sheet showed “an uncharacteristically huge loss of more than $10 million, very quickly.”
Park said it was a trading mistake or a series of trading mistakes. And there was ambiguity around the losses.
“We could never figure out: was it a scam, was it a massive risk, was it a bunch of honest mistakes?”
Another red flag, Park said, was that Bankman-Friend was allegedly hiding the existence of the FTX cryptocurrency exchange at the time. He said his team found that Alameda was “spending money to pay for FTX.”
“We asked him, ‘What’s going on here?’ pretty casually,” Park said. “He said, ‘I can’t remember if I told you that I have an idea for an exchange. For this reason, I spent most of my time on this, so we neglected the main business.”
“There were a lot of things he wanted or didn’t want to do. There was a clear pattern of hidden huge risk,” Park said. “In fact, he never showed the Alameda books to any future investor – that’s where all the bad things happened.”
AT series of tweets in August 2020, Bankman-Fried appeared to give a different version of events, without naming the parties involved. Park said the tweets were referring to a deal with DragonFly.
“They have shown interest in the Alameda and a desire to help it grow,” says one tweet from Bankman-Fried. “They were business savvy. Alameda never attracted an outside investor, but it seemed like a good opportunity.”
Bankman-Fried tweeted that his team had, in fact, rejected the offer, which was roughly a third of the Alameda’s estimate.
“They reacted badly to us saying no and we were surprised. How, of course, we said no! They only offered 1/3 of our offer,” the tweet read. After more discussions to save the deal, “in the end we told them no. They told us no by saying no, and we weren’t sure how they would react to that, so we just stopped responding.”
A spokesperson for Bankman-Fried did not respond to a CNBC request for comment.
Park said the rejection came back to haunt him. He later learned that he had been excluded from future deals involving Bankman-Freed. Although he told other VCs about what happened, he said he did not disclose anything publicly.
Park said he didn’t let the experience slow him down.
Earlier this year, Hack VC announced the creation of a $200 million “Crypto Seed Fund” to invest in crypto, Web3 and blockchain startups.
Today, as he looks back on his relationship with Bankman-Fried, Park sees what happened as an omen of FTX’s downfall.
“Four years ago, this guy was hiding serious things and taking incredible risks with other people’s money,” Park said. “And now he seems to have done the same on a grander catastrophic scale.”