FTX used $200 million in customer funds for two venture investments

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

Through its FTX Ventures unit, the crypto firm invested $100 million in March Dave, a fintech company that had gone public two months earlier through a special purpose vehicle. At the time, the companies said they would “work together to expand the digital asset ecosystem.”

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

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

Bankman-Fried, 30, is accused of committing extensive fraud after FTX, which was valued by private investors at $32 billion earlier this year, filed for bankruptcy in November. A central theme of the charges is how Bankman-Fried directed funds from FTX to his hedge fund, Alameda Research, which then used the money for risky trades and loans. FTX Ventures was allegedly part of that scheme.

Neither Mysten nor Dave have been linked to any alleged wrongdoing within the Bankman-Fried empire. But the investments appears to be the first identified examples of customer money being used by FTX and Bankman-Fried for risk financing. As investigators and FTX lawyers attempt to trace the outflow of FTX funds, these identified investments and others in the $5 billion venture pool will attract significant scrutiny.

By explicitly linking the two $100 million investments to customer money, the SEC has raised the possibility that they will be prospects for repayments. If FTX trustees can determine that client money funded Bankman-Fried’s investments, they may pursue repayment of those funds as part of an effort to recover client funds.

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 cash that FTX could convert into stock at a later date . Date. That conversion was never made, leaving Dave with a $101.6 million liability, including interest, to FTX and any successor companies, according to the company’s most recent SEC filings.

“The note issued to FTX is due for repayment in March 2026,” the company said in a statement. “No term in the note triggers any present obligation on the part of Dave to repay before the due date.”

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

Bankman-Fried’s investment in Mysten Labs was a share deal. Because Mysten is a privately held company, there is no clearly defined process in the US bankruptcy code to recover these funds.

Mysten declined to comment. Attorneys at Sullivan & Cromwell, which represents FTX, did not respond to requests for comment.

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

Regardless of the money used, FTX’s investments were ill-timed.

Dave shares have fallen over 97% since the company went public, mirroring the performance of the broader basket of SPACs. In July, Nasdaq warned Dave that if the share price did not improve, it was in danger of being delisted. The stock currently trades for 28 cents and the market capitalization is around $100 million.

Alameda Research had previously made a $15 million investment in Dave in August 2021, prior to the Nasdaq listing. Founded in 2016, Dave offers customers a free cash advance on their future income as part of a suite of banking products. Mark Cuban led a $3 million seed round in 2017.

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

FTX’s investment in Mysten came in the middle of a crypto meltdown. Bitcoin and ether was down by more than half for the year, and many hedge funds and lenders had gone bankrupt.

The funds were to be used in Mysten’s efforts to “build a blockchain that scales with demand and spurs growth,” Mysten CEO Evan Cheng said at the time.

Representatives for Ellison and Wang did not respond to requests for comment. A representative for Bankman-Fried declined to comment.

Ellison, 28, and Wang, 29, pleaded guilty in New York last week to federal charges of illegally using client funds for trading and venture investments allegedly directed by Bankman-Fried. Both are cooperating with federal investigations into Bankman-Fried and the collapse of FTX.

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