Sam Bankman-Fried, founder and chief executive officer of FTX Cryptocurrency Derivatives Exchange, during a Senate Agriculture, Nutrition and Forestry Committee hearing in Washington, D.C., on Wednesday, Feb. 9, 2022.
Sarah Silbiger | Bloomberg | Getty Images
Serious red flags around Sam Bankman-Fried’s FTX emerged before the now-embattled cryptocurrency exchange even launched, according to an early would-be investor.
Alex Pack, now the managing partner of New York-based venture capital firm Hack VC, said he met Bankman-Fried in 2018. At the time, the entrepreneur hadn’t yet founded FTX and was seeking funding for another company he started, Alameda Research.
Bankman-Fried stepped down as CEO of FTX last Friday as the crypto company filed for Chapter 11 bankruptcy protection. The crypto powerhouse, once valued at $32 billion, collapsed in a matter of days amid a liquidity crunch and allegations that it was misusing customer funds. The Securities and Exchange Commission and the Department of Justice are investigating what happened, according to The Wall Street Journal.
And on Thursday, newly appointed FTX CEO John Ray III declared in a U.S. Bankruptcy Court filing that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
In 2018, Bankman-Fried was a relatively unknown founder seeking a deal in the emerging crypto market.
Pack said Bankman-Fried was hunting for “single-digit millions” in equity from Pack’s prior crypto firm Dragonfly Capital, which he co-founded. Dragonfly is an early stage technology company investing in blockchain technology and at the time was a $100 million fund seeking to help crypto startups. Pack, who has nine years of experience in the space, had previously been director of network investing at Bain Capital Ventures, a partner at AngelList and worked at Arbor Ventures in Hong Kong.
At first, Pack said, everything seemed fine.
“I was captivated by him for the first month until he showed us everything,” describing him as “incredibly smart and charismatic.”
Over a period of about five to six months, Pack said, he and his team met with Bankman-Fried more than a dozen times. But after extensive due diligence, Pack said everyone came to the same conclusion.
“After spending months with him, we realized his risk-taking was catastrophic,” Pack told CNBC. “We looked at it and saw red flags – too much risk.”
Pack provided CNBC with copies of a WeChat history he had with Bankman-Fried in 2018 and 2019 that show the two discussing a potential deal. But as Pack’s team did its due diligence, he said alarm bells went off. Alameda’s balance sheet showed “an uncharacteristic massive loss of more than $10 million, very quickly,” according to Pack.
Pack said it appeared to be a trade error or a series of trade errors. And there was ambiguity around the losses.
“We could never figure out: Was it fraud, was it massive risk-taking, was it a bunch of honest mistakes?”
‘Hemorrhaging money’
Another red flag, according to Pack, was that Bankman-Friend allegedly hid the existence of the cryptocurrency exchange FTX around that time. He said his team discovered that Alameda was “hemorrhaging money to pay for FTX.”
“We asked him ‘what’s going on here?'” Pack said. “Pretty nonchalantly, he said, ‘I can’t remember if I told you I had this idea for an exchange. For that reason, I’ve been spending most of my time on it so we have been neglecting the core business.'”
“There was a lot he would or wouldn’t share. There was a clear pattern of hidden massive risk,” Pack said. “He never really showed Alameda’s books to any future investor – that’s where all the bad stuff was happening.”
In a series of tweets in August 2020, Bankman-Fried appears to have told a different version of events, without naming the parties involved. Pack said the tweets were referencing the Dragonfly deal.
“They expressed interest in Alameda, and desire to help it grow,” one tweet from Bankman-Fried said. “They understood the business. Alameda has never taken an external investor, but this seemed like a good opportunity.”
Bankman-Fried tweeted that it was actually his team that rejected the offer, which was roughly one-third of Alameda’s valuation.
“They did not react well to us saying no, and we were surprised. Like, of course, we said no! They only bid 1/3 of our offer,” according to the tweet. After more discussions to salvage the deal, “eventually we said no to them. They said no to us saying no, and we weren’t really sure how one responds to that, so we just stopped responding.”
A spokesperson for Bankman-Fried did not respond to CNBC’s request for comment.
Pack said the rejection came back to haunt him. He would learn later that he was cut out of future deals in which Bankman-Fried was involved. While he told other venture capital firms about what happened, he said he didn’t disclose anything publicly.
Pack said he did not let the experience slow him down.
Earlier this year, Hack VC announced a $200 million “Crypto Seed Fund” for investments in crypto, Web3 and blockchain startups.
Today, when he looks back on his dealings with Bankman-Fried, Pack sees what happened as foreshadowing the collapse of FTX.
“It was like clearly four years ago, this guy hid serious things and took incredible risks with other peoples’ money,” Pack said. “And now he appears to have done the exact same thing on a grander catastrophic scale.”
