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FTX used $200 million of customer funds for 2 enterprise investments

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FTX founder Sam Bankman-Fried leaves following his arraignment in Latest York City on December 22, 2022.

Ed Jones | AFP | Getty Images

Of the billions of dollars in customer deposits that disappeared from FTX in a flash, $200 million was used to fund investments in two corporations, based on the Securities and Exchange Commission, which charged founder Sam Bankman-Fried with “orchestrating a scheme to defraud equity investors.”

Through its FTX Ventures unit, the crypto firm in March invested $100 million in Dave, a fintech company that had gone public two months earlier through a special purpose acquisition company. On the time, the businesses said they’d “work together to expand the digital assets ecosystem.”

The opposite deal the SEC appears to have referenced was a $100 million investment round in September for Mysten Labs, a Web3 company. In total, it was a $300 million funding round that valued Mysten at $2 billion and included participation from Coinbase Ventures, Binance Labs and Andreessen Horowitz’s crypto fund.

While FTX Ventures has done dozens of transactions, based on PitchBook, the Mysten Labs and Dave investments were the one two disclosed investments of $100 million, based on documents published by the Financial Times, which broke down how the corporate put $5.2 billion to work. FTX Ventures was described as a $2 billion enterprise fund, in its press release with Dave.

Bankman-Fried, 30, stands accused of committing widespread fraud after FTX, which was valued by private investors at $32 billion earlier this yr, sank out of business in November. A central theme in the costs is how Bankman-Fried diverted funds from FTX to his hedge fund, Alameda Research, which then used that cash for dangerous trades and loans. FTX Ventures was allegedly a part of that scheme.

Neither Mysten nor Dave have been linked to any alleged wrongdoing inside Bankman-Fried’s empire. However the investments seem like the primary identified examples of customer money getting used by FTX and Bankman-Fried for enterprise funding. As investigators and FTX lawyers try and retrace the outflow of FTX funds, these identified investments and others within the $5 billion enterprise pool will attract heavy scrutiny.

In explicitly linking the 2 $100 million investments to customer money, the SEC has raised the likelihood that they will be prospects for clawbacks. If FTX bankruptcy trustees can establish that client money funded Bankman-Fried’s investments, they may pursue recovery of those funds as a part of an effort to retrieve customer assets.

A spokesperson for the SEC declined to comment.

Dave CEO Jason Wilk told CNBC that FTX’s investment in Dave is already scheduled to be repaid, with interest, by 2026. FTX’s $100 million investment was through a convertible note, a short-term loan of money that FTX could convert into shares at a later date. That conversion was never made, leaving Dave with a $101.6 million liability, including interest, to FTX and any successor corporations, based on the corporate’s most up-to-date SEC filings.

Jason Wilk

Source: Jason Wilk

“The note issued to FTX is due for repayment in March 2026,” the corporate said in a press release. “No terms contained within the note trigger any current obligation by Dave to repay prior to the maturity date.”

Wilk added that, “it is necessary to state we had no knowledge of FTX or Alameda using customer assets to make investments.”

Bankman-Fried’s investment in Mysten Labs was an equity deal. Because Mysten is a privately held company, there is not any clearly defined process in U.S. bankruptcy code for clawing back those funds.

Mysten declined to comment. Lawyers at Sullivan & Cromwell, which represents FTX, didn’t reply to requests for comment.

An SEC grievance filed against two of Bankman-Fried’s lieutenants, Caroline Ellison and Gary Wang, specified that “two $100 million investments made by FTX’s affiliated investment vehicle, FTX Ventures Ltd., were funded with FTX customer funds that had been diverted to Alameda.”

No matter what money was getting used, FTX’s investments were ill-timed.

Dave shares have plummeted over 97% for the reason that company went public, mirroring the performance of the broader basket of SPACs. In July, the Nasdaq warned Dave that if its share price didn’t improve, it was vulnerable to being delisted. The stock currently trades for 28 cents and the market cap sits at around $100 million.

Alameda Research had previously made a $15 million investment in Dave in August 2021, before the Nasdaq listing. Dave was founded in 2016 and offers customers a free money advance on their future income as a part of a collection of banking products. Mark Cuban led a $3 million seed round in 2017.

The investment might have been lucrative for FTX if Dave’s share price had improved beyond $10 a share, allowing FTX to convert at a profit.

FTX’s investment in Mysten got here within the midst of a crypto meltdown. Bitcoin and ether were down by greater than half for the yr and various hedge funds and lenders had gone bankrupt.

The funds were to be utilized in Mysten’s effort to “construct a blockchain that scales with demand and incentivizes growth,” Mysten CEO Evan Cheng said on the time.

Representatives for Ellison and Wang didn’t reply to requests for comment. A representative for Bankman-Fried declined to comment.

Ellison, 28, and Wang, 29, pleaded guilty in Latest York last week to federal charges over the illicit use of customer funds for trading and enterprise investments, allegedly directed by Bankman-Fried. Each are cooperating with federal investigations into Bankman-Fried and the collapse of FTX.

WATCH: The terms of the $250 million bail agreement for FTX founder Sam Bankman-Fried

The terms of the $250 million bail agreement for FTX founder Sam Bankman-Fried

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