The US Commissioner for Commodity Futures Trading Commission (CFTC), Christy Goldsmith Romero, questioned the due diligence work done by venture capitalists (VCs) and money managers who funded the ill-fated Sam Bankman-Fried’s FTX.
In an interview with Bloomberg last Friday (20 Jan 2023), Romero said the failure of Sam Bankman-Fried’s FTX crypto empire raises “serious questions” about how well VCs and money managers scrutinized his operations before investing client funds.
“What kind of due diligence did they conduct?” Romero asked. “Why did they turn a blind eye to what should have been really flashing red lights?” If a fund entrusts millions of dollars and then a year later has to write it off completely, it raises such questions, the US regulator said.
The lack of recordkeeping coupled with “an auditor no one’s ever heard of” forced the CFTC to ask questions about the mindset of the institutional investors. In this regard, Romero asked a series of questions, “How is that possible? So do they turn a blind eye to it? Were they just distracted by this promise of innovation?”
It’s worth considering, Romero added, whether those FTX backers may have had potential conflicts of interest, given the interconnectedness of the crypto industry. “Were there some conflicts that prevented them from really paying attention to the due diligence and the facts that they were uncovering?” she asked.
Temasek said to have taken eight months to do due diligence
In the case of Temasek Holdings, which was one of the avid investors backing Sam Bankman-Fried’s FTX, it was reported that Temasek took eight months, from February to October 2021, to do its “thorough due diligence” before investing in FTX.
When FTX went bankrupt, Temasek quickly issued a statement blaming FTX CEO Sam Bankman-Fried instead, “It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced.”
In a filing to Delaware bankruptcy court, John J. Ray III, the new FTX CEO who replaced Bankman-Fried to oversee the bankruptcy process, issued a scathing assessment of “unprecedented” poor management practices by his predecessor and listed a series of questionable and fraudulent financial activities in his filing.
In fact, Ray also revealed that FTX had no in-house accounting department and failed to take even the most basic measures, such as segregating duties and establishing a system to keep track of accounts. Corporate funds were used to purchase homes and other personal items for employees and advisors and FTX used software to conceal the misuse of customer funds.
Prior to the collapse of FTX, Bankman-Fried snapped up 19 properties worth US$121M before his crypto empire fell, including a US$16M vacation home for his Stanford University law professor parents.
Ray only took one week to discover the various problems in FTX when Temasek’s team could not in eight months. Temasek was later forced to write down US$275 million of investment in FTX.
Ho Ching: Temasek can afford to be contrarian
On 26 Nov 2022, Mdm Ho Ching, wife of PM Lee, broke her silence over Temasek’s involvement with FTX. She posted on her Facebook page saying, “A loss is a loss, and always painful”.
“A loss in what may turn out to be a badly managed company without adult supervision is egg on our face,” she added. “I am glad that Temasek has made a clear decision to write down this investment to zero. This helps clear the head on what to do as a next step, without being blinkered by wishful thinking.”
Mdm Ho noted that some of Temasek’s best investments were made by being contrarian, although she did not name examples of such investments. She went on to state, “And Temasek can afford to be contrarian bcos it has its own balance sheet and can think long term.”
