Raising capital is the biggest challenge for most start-up hedge funds. Sam Bankman-Fried had an answer to that problem according to civil charges made public on Tuesday by US regulators. These allege that he knowingly siphoned as much as $8bn of account-holder funds for his crypto trading outfit, Alameda Research. Parallel criminal charges from the US Department of Justice include conspiracy to commit wire fraud.
Since the collapse of his crypto platform FTX, Bankman-Fried has maintained in a series of interviews that he was merely guilty of sloppy record-keeping. He added that he exercised little management control of Alameda.
The complaint from the US Securities and Exchange Commission paints a different picture: not of a mad scientist but of a calculating fraudster.
The SEC charges posit that “SBF”, as he is generally known, made victims of some 90 big investors. These included Sequoia, BlackRock and Thoma Bravo. They backed FTX with nearly $2bn of cash.
The charges should bring some comfort to those blue-chip funds. But the tension between fiduciary duties to limited partners and the fear of missing out will continue for capital allocators.
According to the SEC, improperly directing customer cash to his trading firm was not Bankman-Fried’s only lapse. Rules governing collateral and margin calls were not applied to FTX customer accounts. At the same time, the entrepreneur effectively used customer cash for purposes of his own including property purchases and political donations.
Bankman-Fried will have his chance to respond to the SEC’s allegations as well as those of the DoJ.
The authorities allege that Bankman-Fried traded on his reputation as the one straight shooter in the crypto Wild West. That does not make the rest of the cast look good. Binance, which once flirted with rescuing FTX, is temporarily suspending withdrawals of the stablecoin, USDC. The crypto miner, Argo Blockchain, is the latest industry player to approach a bankruptcy filing.
Studies have shown that early stage venture capital firms are more than willing to tolerate a high volume of failed deals simply because the asymmetric returns of making a return of, say 10 times, on a winner more than amply covers losses. But wipeouts typically occur with little publicity and are not the consequence of alleged fraud.
FTX is different because it has devalued a whole speculative sector. If gains on any stellar crypto start-up outweigh investors’ losses on the flops, founders are keeping quieter than SBF ever did.
