Not long before FTX collapsed in November, its founder, Sam Bankman-Fried, sent $400 million to an obscure cryptocurrency trading firm called Modulo Capital.
The fledgling firm, which was founded in March and operated out of the identical Bahamian compound where Mr. Bankman-Fried lived, had no track record or public profile. One in every of the founders, Duncan Rheingans-Yoo, was only two years out of faculty. His business partner, Xiaoyun Zhang, often known as Lily, was a former Wall Street trader who had previously been romantically involved with Mr. Bankman-Fried, in line with 4 individuals with knowledge of their relationship.
Now, Modulo is emerging as an important a part of the investigation by federal prosecutors into Mr. Bankman-Fried and his once giant cryptocurrency exchange. They’re examining whether he used FTX’s customer funds to speculate within the little-known firm when his existing hedge fund, Alameda Research, was struggling amid a wider crypto industry downturn. The $400 million outlay was one in all Mr. Bankman-Fried’s single largest investments.
At the identical time, lawyers for FTX’s recent leadership are eyeing Modulo’s assets as they scramble to get well the billions of dollars that customers, lenders and investors lost when the exchange imploded.
It’s unclear how much of FTX’s $400 million investment stays or where it’s. However the authorities have been aware of the trading firm for months; the day after Mr. Bankman-Fried was arrested within the Bahamas in mid-December, he was denied bail at a court hearing where an area prosecutor argued that he was a flight risk and suggested he might have the opportunity to tap the funds sitting with Modulo.
Before starting Modulo, Ms. Zhang and Mr. Rheingans-Yoo worked at Jane Street, the Wall Street firm where Mr. Bankman-Fried, 30, began his profession and met most of the people, of their 20s and 30s, who would later help him construct his crypto empire.
It’s unclear how much money Modulo had aside from Mr. Bankman-Fried’s investment. However it began trading crypto before FTX failed, and it has now largely shut down, in line with an individual conversant in its operations.
Mr. Bankman-Fried’s decision to offer a lot funding to a start-up trading firm at the identical time that Alameda was losing money raised suspicions for investigators.
On the bail hearing in Nassau, the local prosecutor cited an affidavit compiled by one other Bahamian law enforcement official that has been under seal in court within the Bahamas. Federal prosecutors in Manhattan investigating Mr. Bankman-Fried consider the Modulo investment was made using criminal proceeds — misappropriated money that FTX customers had deposited with the exchange, said an individual briefed on the investigation.
Neither of Modulo’s two founders has been accused of wrongdoing, but they recently hired Aitan Goelman, a criminal defense lawyer who’s a former director of enforcement for the Commodity Futures Trading Commission. Mr. Goelman said he had no comment.
What to Know About the Collapse of FTX
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What’s FTX? FTX is a now bankrupt company that was one in all the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency often known as FTT. The corporate, based within the Bahamas, built its business on dangerous trading options that should not legal in america.
Who’s Sam Bankman-Fried? He’s the 30-year-old founding father of FTX and the previous chief executive of FTX. Once a golden boy of the crypto industry, he was a significant donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to present away their wealth in efficient and logical ways.
How did FTX’s troubles begin? Last 12 months, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a lot of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the value of FTT, spooked investors.
What led to FTX’s collapse? Mr. Zhao’s announcement drove down the value and spooked investors. Traders rushed to withdraw from FTX, causing the corporate to have a $8 billion shortfall. Binance, FTX’s major rival, offered a loan to save lots of the corporate but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.
Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested within the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.
Representatives for FTX, Mr. Bankman-Fried and the U.S. attorney for the Southern District of Recent York in Manhattan all declined to comment.
The flow of cash to Modulo has also caught the eye of the lawyers representing FTX in the corporate’s bankruptcy proceeding in Delaware. In a slide presentation to the exchange’s creditors that was filed in court last Tuesday, FTX’s lawyers flagged the transaction with Modulo as one in all its prime targets for reclaiming money.
The presentation said Modulo received funds in installments within the third and fourth quarters of last 12 months. Around $300 million of that total was transferred shortly before FTX’s implosion, in line with the Bahamian prosecutor.
The payments occurred during a period when transfers of cash might be challenged and potentially clawed back within the bankruptcy process. Clawback lawsuits are a robust tool in bankruptcies to get well assets, they usually played an important role in helping the victims of Bernard Madoff’s Ponzi scheme recoup much of the $19 billion that was invested in that decades-long fraud.
“Specializing in large, questionable transactions to a fund, company or an individual with close connections to the debtor before the bankruptcy filing is essentially the low-hanging fruit in a bankruptcy case,” said Lindsey Simon, a company law and bankruptcy professor on the University of Georgia School of Law.
Last week, FTX’s lawyers said they’d found $5.5 billion in money, securities and digital assets held in customer accounts or tucked away in other parts of the corporate. However the actual value of most of the cryptocurrencies owned by FTX is tough to find out, and the lawyers said the corporate still had a significant shortfall in assets.
On Friday, federal prosecutors disclosed that they’d seized greater than $600 million in assets belonging to Mr. Bankman-Fried, including a mixture of money and stocks kept in bank and brokerage accounts.
Any legal motion to reclaim the Modulo funds could provide a template for broader efforts to get well money that Mr. Bankman-Fried invested in smaller firms. At the peak of his wealth and power, he funneled an estimated $4.6 billion into greater than 300 firms, including a man-made intelligence start-up called Anthropic and the crypto company Yuga Labs.
Even amid that spending spree, the Modulo deal stands out due to sum of money involved and Mr. Bankman-Fried’s close ties to the firm’s founders. Ms. Zhang and Mr. Rheingans-Yoo were also Modulo’s only directors, in line with incorporation papers filed within the Bahamas.
Each left Jane Street last January, in line with brokerage industry records, about three months before Modulo was incorporated. (Modulo has no reference to a similarly named investment firm in Brazil.)
A 2012 graduate of Amherst College, Ms. Zhang worked at Jane Street for a decade, overlapping with Mr. Bankman-Fried, who spent about three years there after graduating from the Massachusetts Institute of Technology in 2014. Mr. Rheingans-Yoo was a trader at Jane Street from 2020 to 2022, joining shortly after he graduated from Harvard, where he was captain of the fencing team. The crypto publication CoinDesk previously reported that Modulo’s founders had worked at Jane Street but didn’t discover them.
The Aftermath of FTX’s Downfall
The spectacular collapse of the crypto exchange in November has left the industry stunned.
Before Modulo received the $400 million, the investment was the topic of debate inside Mr. Bankman-Fried’s tight circle of top advisers, in line with two people conversant in the discussions.
Ultimately, Mr. Bankman-Fried moved forward despite reservations voiced by Caroline Ellison, the 28-year-old chief executive of Alameda, other people conversant in the matter said. Ms. Ellison has since pleaded guilty to fraud charges for her role in FTX’s collapse and is cooperating with prosecutors within the criminal case against Mr. Bankman-Fried.
Further complicating the Modulo investment were the romantic ties among the many executives involved within the deal. Ms. Ellison and Mr. Bankman-Fried had dated up to now, they usually lived along with eight other roommates in a luxury penthouse at Albany, an oceanside resort on the Bahamian island of Recent Windfall.
Mr. Bankman-Fried had also had a temporary romantic relationship with Ms. Zhang after they worked together at Jane Street, one in all the individuals with knowledge of the connection said. By the point of the investment in Modulo, Mr. Bankman-Fried was not dating either woman, this person said.
Last spring, Modulo arrange an office in the identical Albany resort where Mr. Bankman-Fried and Ms. Ellison lived. Ms. Zhang and Mr. Bankman-Fried were still friends, and they’d sometimes travel together on charter flights to Recent York from the Bahamas, in line with two people conversant in the arrangements.
Mr. Bankman-Fried began to pour money into Modulo at a time when Alameda was struggling. After the crypto market crashed in May, a lot of crypto lenders recalled their loans to Alameda, prompting the trading firm to drag money from FTX customer accounts to make up for the shortfall, in line with federal prosecutors, regulators and former Alameda employees.
Sometime around September, Mr. Bankman-Fried was seriously considering shutting down Alameda, in line with public charging documents, in addition to private government records obtained by The Recent York Times. On the time, Alameda had lost $5 billion, which Mr. Bankman-Fried acknowledged to colleagues was greater than the corporate had ever made or was more likely to make in the long run, the federal government records said. But he also expressed concerns about how FTX would function without Alameda trading on it.
The connections between FTX and the Modulo founders went beyond Mr. Bankman-Fried’s relationship with Ms. Zhang. Last 12 months, FTX also hired Mr. Rheingans-Yoo’s older brother, Ross Rheingans-Yoo, from Jane Street to take a top job on the FTX Foundation, a charitable group funded by Mr. Bankman-Fried.
Ross Rheingans-Yoo, who graduated from Harvard in 2016, worked on the muse’s pandemic preparedness efforts, in line with a page on his personal website that isn’t any longer energetic. There isn’t any indication that he had anything to do with Modulo, and he didn’t reply to a request for comment.
But his charitable work aligned closely with the priorities of Mr. Bankman-Fried’s younger brother, Gabe Bankman-Fried, who ran Guarding Against Pandemics, an advocacy group that FTX helped bankroll. Each Rheingans-Yoo brothers, in line with archived versions of their personal biography pages, were supporters of the principles of effective altruism, a philanthropic movement that urges adherents to donate the majority of their income to charity and use data-driven evaluation to maximise the impact of the contributions.
Mr. Bankman-Fried had also aligned himself with the movement. For years, he invoked his commitment to effective altruism as he cultivated a world brand, claiming that he got into crypto trading to make billions of dollars for worthy causes.
Kitty Bennett and Alain Delaquérière contributed research.