The crypto investor saw serious “red flags” with FTX founder Sam Bankman-Fried

Sam Bankman-Fried, founder and CEO of FTX Cryptocurrency Derivatives Exchange, during a Senate Agriculture, Food and Forestry Committee hearing on Wednesday, February 9, 2022, in Washington.

Sarah Silbiger | Bloomberg | Getty Images

According to one early investor, serious red flags surrounding Sam Bankman-Fried’s FTX were raised before the now-struggling cryptocurrency exchange took off.

Alex Pack, now managing partner at New York-based venture capital firm Hack VC, said he met Bankman-Fried in 2018. At that time, the entrepreneur had not yet established FTX and was looking for funding for another company he had started, Alameda. Research.

Bankman-Fried resigned as CEO of FTX last Friday as the cryptocurrency company filed for Chapter 11 bankruptcy protection. The cryptocurrency, once worth $32 billion, collapsed within days amid a liquidity crisis and allegations of misappropriation of customer funds. “The Wall Street Journal” reports that the Securities and Exchange Commission and the Department of Justice are investigating what happened.

On Thursday, newly appointed FTX CEO John Ray III filed in U.S. Bankruptcy Court, declaring that in “40 years of legal and restructuring experience” he had never “seen such a complete failure of corporate control and complete absence of fiduciaries.” financial information as it happens here.”

In 2018, Bankman-Fried was a relatively unknown founder looking for a deal in the emerging cryptocurrency market.

Pack said Bankman-Fried is seeking “single-digit millions” in capital from DragonFly Capital, Pack’s previous cryptocurrency firm, which it co-founded. Dragonfly is an early-stage technology company that invests in blockchain technology, and at the time it was a $100 million fund looking to help crypto startups. Pack, who has nine years of experience in the space, was previously director of network investments at Bain Capital Ventures, an AngelList partner, and worked at Arbor Ventures in Hong Kong.

At first, Pak said, everything seemed fine.

Describing him as “incredibly intelligent and charismatic,” he added, “I was captivated by him for the first month until he showed us everything.”

Over the course of about five to six months, Pack said, he and his team met with Bankman-Fried more than a dozen times. But after extensive research, Pack said everyone came to the same conclusion.

“After spending months with him, we realized that his risk-taking was disastrous,” Pack told CNBC. “We looked at it and saw red flags – too big a risk.”

Pack provided CNBC with copies of WeChat history with Bankman-Fried from 2018 and 2019, indicating the two discussed a potential deal. But as Pack’s team did its due diligence, he said alarm bells rang. According to Pack, Alameda’s balance sheet showed “an uncharacteristically massive loss of more than $10 million very quickly.”

Pack said it was a trading error, or a series of trading errors. And there was uncertainty around the losses.

“We could never figure out: was it a scam, was it a huge risk-taking, was it a bunch of honest mistakes?”

“Money without blood”

Another red flag, according to Pack, was Bankman-Friend’s concealment of the existence of cryptocurrency exchange FTX at the time. He said his team discovered Alameda was “hemorrhaging money to pay for FTX.”

“We asked him what is happening here?” quite recklessly,” Pack said. “He said, ‘I don’t remember telling you I had this idea for the exchange. That’s why I’ve been spending most of my time on it, so we’re neglecting the main business.’

“There was a lot that he would share or not share. There was a clear pattern of hidden mass risk,” Pack said. “He never showed Alameda’s books to any prospective investors—that’s where all the bad stuff happened.”

One series of tweets In August 2020, Bankman-Fried gave a different version of events without naming the parties involved. Pack said the tweets referred to the DragonFly deal.

“They expressed their interest in Alameda and want to help it grow,” Bankman-Fried said in a tweet. “They understood the business. Alameda had never taken on an outside investor, but this seemed like a good opportunity.”

Bankman-Fried tweeted that his team actually rejected the offer, which was about a third of Alameda’s valuation.

“They didn’t react well to us saying no and we were surprised. Of course we said no! They only offered 1/3 of our offer,” he tweeted. After more discussions to save the deal, “we finally told them no. They told us no, and we weren’t sure how to respond to that, so we stopped responding.”

A spokeswoman for Bankman-Fried did not respond to CNBC’s request for comment.

Pack said the rejection came back to haunt him. He would later learn that he was left out of future deals involving Bankman-Fried. He said he told other venture capital firms about what happened, but did not disclose anything publicly.

Pack said he hasn’t let the experience slow him down.

Earlier this year, Hack VC announced a $200 million “Crypto Seed Fund” for investments in cryptocurrency, Web3 and blockchain startups.

Today, looking back on his relationship with Bankman-Fried, Pack sees what happened as a harbinger of FTX’s demise.

“It was like four years ago, this guy was hiding serious things and taking incredible risks with other people’s money,” Pak said. “And now it appears to be doing the same thing on an even bigger catastrophic scale.”

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