Temasek, other institutions sued for ‘aiding and abetting’ FTX fraud
SINGAPORE – Investment company Temasek was named in a class action lawsuit filed in Miami, Florida, on Wednesday as one of 18 defendants that allegedly conspired with troubled cryptocurrency exchange FTX to defraud customers.
The complaint was filed by one of the exchange’s customers, Mr Connor O’Keefe, a Mississippi resident, on behalf of himself and “all others similarly situated”.
The suit claimed that “defendant venture capital firms wielded their power, influence and deep pockets to launch FTX’s house of cards to its multi-billion dollar scale”. The class members are seeking compensatory and punitive damages, among other reliefs.
These firms named include the New York-based Signature Bank, as well as venture capital firms such as Sequoia Capital Operations and Softbank Vision Fund.
The 83-page document seen by The Straits Times alleges that the firms had been aware of fraud being committed by FTX, by virtue of conducting due diligence checks prior to their investments.
It cited a Nov 17, 2022, statement on Temasek’s website days after FTX filed for bankruptcy protection in the US, which said: “We conducted an extensive due diligence process on FTX, which took approximately eight months from February to October 2021.”
This included looking into the associated regulatory risk with crypto financial market service providers, as well as combing through the exchange’s audited financial statement.
As part of its process, Temasek had also sought the advice of external legal and cybersecurity specialists, and interviewed people familiar with the company, namely employees, industry participants and other investors.
The statement said: “Throughout the multiple rounds of due diligence, FTX demonstrated a clear willingness to discuss and engage with us, which indicated that they were willing to do business in the right way.
“During this process, we enquired about the relationship, preferential treatment, and separation between Alameda and FTX, and were given appropriate confirmations that were contractually binding.”
Due diligence? Temasek invested in FTX which had no accounting dept within the company
Bloomberg published an opinion piece on Wednesday (14 Dec) stating that the lack of a serious accounting system or even basic internal controls had contributed to the downfall of cryptocurrency exchange FTX.
The article was written by two accounting professors, Michelle Hanlon and Nemit Shroff, from the MIT Sloan School of Management.
“As professors of accounting, it’s a continual challenge convincing students that our courses are important when they’re tempted by sexier-sounding classes with titles that include words like ‘innovation’, ‘artificial intelligence’ or ‘fintech’. ‘Introduction to Financial Accounting’ doesn’t pique the interest of the typical 20-year-old,” Hanlon and Shroff wrote.
“The FTX debacle has given us our best argument yet. It enshrines all the reasons a solid accounting system and well-structured internal controls are critical to a business and its investors, creditors, customers, suppliers and other stakeholders.”
Apparently, FTX didn’t even implement any internal controls at all, which are needed, especially for financial institutions that maintain custody of customer assets.
“If FTX had implemented such controls even at a minimal level, many of the company’s deficiencies would have become known sooner and the large-scale meltdown might have been prevented,” the professors said.
FTX’s bankruptcy filing indicated that it had no in-house accounting department and failed to take even the most basic measures, such as segregating duties and establishing a system to keep track of accounts.
The filing also stated that corporate funds were used to purchase homes and other personal items for employees and advisors and that FTX used software to conceal the misuse of customer funds.
Due diligence failure
The professors wondered how it was possible for FTX to raise a total of US$1.8 billion in funding over seven rounds, and be valued at US$32 billion, given that there was a complete failure of corporate controls without even an accounting department in the company.
“It’s true that FTX’s investors should have demanded greater accountability, such as attestations of internal controls by both management and a reputable independent auditor,” the professors continued.
“That they didn’t doesn’t mean that they’re responsible for FTX’s failure; it simply means they failed at their own due diligence,” said the professors.
“One can only speculate why sophisticated investors didn’t do more to protect their investment. Perhaps the potential for large gains outweighed the risk of loss on a few investment decisions. Even so, investors would certainly have reduced their exposure by demanding some visibility into accounting safeguards.”
Indeed, Temasek Holdings, one of the prominent investors in the company, was said to have spent eight months, from February to October last year, doing its supposedly thorough due diligence before investing US$275 million in FTX over three rounds of funding.
Yet, Temasek couldn’t even detect that there was no accounting department in the company or whether the absence of one mattered in its decision to invest in the company.
And when FTX collapsed, Temasek quickly issued a statement blaming former FTX CEO Sam Bankman-Fried, “It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced.”
Ho Ching, the wife of PM Lee, also commented about the FTX losses on her Facebook page, saying that Temasek can afford to be contrarian.
“Temasek can afford to be contrarian because it has its own balance sheet and can think long term,” she wrote.
“With a long term stance, and all the pros and cons that come with that stance, Temasek is not fazed by the twiddles and sentiments of the market.”
A review will be conducted by Temasek on its decision to invest in FTX. However, it will be conducted by an internal team on its investment team, which made the decision.
Director of crypto investment team, a top FinTech influencer in Singapore
It’s not known who in Temasek was responsible for overseeing the due diligence of FTX investment, but according to LinkedIn, Antony Lewis, who joined Temasek in 2020, is the Director of the crypto and blockchain venture investment team.
On his LinkedIn, Lewis wrote, “I work in Temasek’s blockchain venture building and investment team. We are focused on building game-changing commercial businesses using decentralised technologies, and invest in these technologies too.”
“Previously I worked at enterprise blockchain firm R3 as Director of Digital Assets, and Director of Research. I was regarded as the firm’s subject matter expert in tokenised money and central bank digital currencies,” he added.
Bankrupted FTX and FTX US, first direct investment handled by crypto investment team in Temasek
Speaking at the fifth Ethereum Community Conference on 19 July this year, Lewis shared his involvement in the sovereign wealth fund’s investment into the crypto business before the fall of FTX.
“So the ones that we’ve disclosed FTX and FTX US and Immutable from Australia, Consensus and Amber. So we continue to invest in single names, we continue to invest in funds through the cycle,” said Mr Lewis.
He added, “In fact, there’s never been more activity. We are pretty active now. The team is scaled up. We have the investing team. We also work with other teams in the organisation.”
“So it’s been it’s been a pretty interesting journey convincing the organization, and convincing management and everyone around that coins aren’t just a massive Ponzi and scam, although many of them maybe. And then, of course, the selection of like what you invest in is, is the core of what we do as an investment team.”
Answering a question from the audience about consideration for investment into crypto, Lewis said, “So our first direct investment was FTX and FTX US, and you know, when we first started the legal and we were like, oh, this is all illegal, they’re doing all of this unregulated legal stuff.”
“Well, if an activity is unregulated, you don’t need a license, you can just go and do that. Doesn’t mean you’re doing anything illegal. It just means it’s not a licensed activity.” said Lewis.
“So, you know, they’re playing in these spaces where you don’t need a license, you’re not going to get a whole bunch of licenses. As so these companies are all skilling up and all becoming more compliant as it becomes kind of business-critical.”
He added, “I think in that process, a whole bunch of people in different departments learned more about crypto and I think when you first come into it doesn’t for certain types of people, especially more conservative folks, there’s immediate like, no, everything is bad.”
“But as you learn more, you’ll actually know that’s not the case. It’s also you have a much more nuanced view. I think as the view becomes more nuanced or educated and at the same time, regulations are changing and in some cases becoming more crypto friendly, if not crypto aware, right?”
“The words they’re using in regulation are becoming more like crypto words. The word, Stablecoin wasn’t anything like five years ago. So as the regulatory landscape changes as we upskill all our stuff, I think you can be a lot more nuanced about saying yes to investments as opposed to no.”
If Lewis was involved in doing due diligence for FTX, it’s not known if he knew that the company had no accounting department set up.
In any case, the whole FTX saga led the 2 MIT professors to conclude, “Accounting classes may never sound thrilling to most young students and entrepreneurs, but FTX’s collapse proves the necessity of learning the principles of sound accounting for any business.”
Meanwhile, Bankman-Fried was arrestedon Monday (12 Dec) in the Bahamas and charged with eight criminal counts in the US.
The internal review will be done by an independent team and is intended "to study and improve its processes, and to draw lessons for the future".
Mr Wong, who is also Minister for Finance, was responding to questions by several Members of Parliament (MPs) on the impact of FTX's collapse.
Earlier this month, Temasek said it would write down its investment in FTX, irrespective of the outcome of the cryptocurrency exchange's bankruptcy protection filing.
Mr Wong noted that one of the areas that the private equity arms of Temasek and GIC operate in is new technology and early-stage companies.
"As long-term investors, our investment entities have to operate in this space. They do their best due diligence based on the information available," said Mr Wong.
"Having made the investments, they monitor the investee companies closely, but no amount of due diligence and monitoring can eliminate the risks altogether."
Mr Wong said it is disappointing when there is a loss by Singapore's state investment entities, as in the case of Temasek's investment in FTX.
"Even more so, because the loss arose from what turned out to be a very badly managed company and from possible fraud and mishandling of customer funds," said the Deputy Prime Minister.
The fact that other leading global institutional investors like BlackRock and Sequoia Capital also invested in FTX did not mitigate this, he added.
"What happened with FTX therefore has not only caused financial loss to Temasek, but also reputational damage," said Mr Wong.
"Temasek recognises this and has issued a comprehensive statement to explain its due diligence process and the circumstances leading to its investment in FTX."
After Leader of the Opposition MP Pritam Singh (WP-Aljunied) sought clarification, Mr Wong said the internal review would be "led by people who are separate from the investment team that made this decision".
"So they will be separate, they will not be clouded by what steps were taken, and they will report directly to the board," he said.
He added that this review was a "step up" from Temasek's usual review process. Temasek has conducted reviews in the past when there were "similar instances" – for example, a write-off in an investment project where there is permanent impairment – but it does not happen very often, he said.
Mr Wong added that the Government would not rule out calling in external auditors, but that would mean it was not just a matter of an investment loss.
"It would be something that we feel has gone wrong within the organisation, possibly, there might be negligence, there might be fraud, there might be misconduct," he said.
“There is therefore no need for additional audit requirements or parliamentary committees. Instead, we should insulate the boards from political pressures,” said Mr Wong, who is also Finance Minister.
Lawless Wong wants to further padlock Temasick's skeleton of closets, Sinkies song boh?
The next time you are tasked by superiors to find project vendors, simply settle for your friend's company and state that you made an informed judgement based on "my interactions with him and views expressed in my discussions with others". If you get chided, feel free to let them know you were merely taking a leaf out of Ho Ching's playbook. ;)
News analysis: What does FTX's crash mean for Temasek Holdings, and should such entities invest in the crypto industry?
SINGAPORE — Thefall of crypto exchange FTX last week should be seen as an isolated incident, not as a systemic failure of the industry, and should not deter institutional firms from investing in such outfits, said analysts.
Instead, FTX's demise, which was shocking to many, should underline how important it is for investors to study the risks they take when they park their money in a lightly regulated industry, they added.
FTX's collapse has led to a further tumbling in crypto assets such as bitcoin and ethereum, which had already taken a battering earlier in the year.
Noting that an exchange this large has never failed in this manner, Blockchain Association Singapore co-chairman Chia Hock Lai said: “I think it’s an isolated incident and there’s an element of fraud involved.”
Mr Chia added that FTX was one of the largest crypto exchanges in the world, with a high trading volume and institutional investors such as venture capital firm Sequoia Capital and state investment firm Temasek Holdings.
According to Forbes, Temasek has a 1 per cent stake in FTX and the value of its investment at its peak last January was US$320 million (S$439 million).
In response to TODAY's queries, Temasek said that it had no further comment. It had previously told Reutersthat it was aware of the developments between FTX and Binance and was engaging FTX in its capacity as a shareholder.
TODAY takes a look at what the crash of FTX means for Temasek and if it is prudent for such institutional investors to invest in the industry.
WHAT HAPPENED TO FTX?
FTX, which is headquartered in the Bahamas but managed from the United States, is a cryptocurrency exchange, which means it helps people to buy and sell crypto assets.
FTX had valued its assets at between US$10 billion and US$50 billion, and listed more than 130 affiliated companies around the world, according to its bankruptcy filing.
Last week, FTX sought bankruptcy protection after a rapid series of events that unfolded largely on Twitter which involved FTX attempting to sell a large part of its operating business to rival Binance after customers fled the exchange over fears that the firm may have had insufficient capital.
But just as quickly as Binance offered its rescue package in the form of an acquisition, the company backed out of the deal.
And within only a few days, the multibillion-dollar crypto exchange went from crypto leader to bankrupt. Its chief executive officer and founder also resigned.
Hours later, the trading firm said there had been “unauthorised access” and that funds had disappeared. Analysts say hundreds of millions of dollars may have vanished.
Social media users also debated whether the exchange was hacked or a company insider had stolen funds — a possibility that analysts did not rule out.
The Monetary Authority of Singapore (MAS) said earlier this week that FTX is neither licensed nor exempted from licensing here amid reports that many Singaporeans had invested in the beleaguered firm and are now at risk of losing their money.
Among the questions that have been raised since the FTX collapse is why MAS had not made a move to stop the company from collecting funds from Singapore-based investors, when it had done so against Binance.
WHAT DOES THIS MEAN FOR TEMASEK?
Maybank economist Chua Hak Bin said that while the loss to Temasek is painful, it represents less than 0.1 per cent of Temasek’s total assets, which are estimated to be about S$403 billion in 2022.
Mr Chia agreed, saying that such losses are part and parcel of investing and that it is common for institutional investors such as Temasek to diversify their portfolios to include all sorts of asset classes.
“As an investor you have to take risks to get returns, and historically Temasek has been able to generate good returns,” he said.
The analysts noted that while it seemed as though Temasek has invested in an asset that is considered speculative, such as cryptocurrency, institutional investors typically do not invest in the digital currency itself but the ecosystem and the technology behind it.
Cryptocurrencies are all based on the same basic structure: A publicly available “blockchain” that records ownership without having any central authority in control.
CIMB economist Song Seng Wun said: “It is less so about putting money in the asset but the operation of the system and the dominant players in the industry.
“So they’re not investing in the cryptocurrency — that can go up and down — but the companies that make money from the trading, such as FTX.”
IS IT WISE TO STILL INVEST IN CRYPTO?
Analysts said that there are many institutional investors here that park their money in firms that offer promise in the area of blockchain technology and should continue to do so.
Singapore sovereign wealth fund GIC, for example, invested about S$230 million in blockchain data platform Chainalysis earlier this year. The firm also invested in digital currency exchange Coinbase and digital asset bank Anchorage, among others.
In response to TODAY’s queries on the amount it has invested on such firms and whether it will keep its investments given the FTX situation, GIC said: “GIC does not comment on individual investments. Our focus is on the development of blockchain technology and business models over the long term. In the short term, we expect volatility to remain high.”
The collapse of FTX also reveals very little about the technological shortcomings of blockchain technology or design of cryptocurrencies, said analysts.
Rather, it underlined the need for a more comprehensive regulatory framework in the space.
Dr Julian Hosp, chief executive officer and co-founder of crypto technology company Cake DeFi, said: “This will push exchanges and other players in this space to be more accountable and transparent, which has the potential to protect long-term investors from fraud and other risks."
When investing in blockchain, institutional investors such as Temasek should also put a lot of value on companies that value transparency, he said, adding that this is perhaps a “strong reflection point” that the firm will have to make following the loss it suffered with FTX.
Mr Chia said the blockchain space is very promising, likening it to the next internet.
“When the internet started, no one expected an entire digital economy to be running on it. Now, companies are depending on it, the whole world is depending on it,” he said. “And blockchain will be next.”
The Monetary Authority of Singapore (MAS) has ordered Binance to stop providing payment services in Singapore and to cease soliciting business from Singapore residents.
The regulator has reviewed Binance.com's operations and is of the view that the website's operator Binance "may be in breach of the Payment Services Act for carrying on the business of providing payment services to, and soliciting such business from Singapore residents without an appropriate licence", said a spokesman in response to media queries.
When it comes to cryptocurrency investment, Temasek (and GIC) leads the pack of punters, according to a July 28 SWF article this year:
"Despite the fall from grace of crypto currencies in recent months, sovereign investors are still looking at exposure to the sector …, with Singaporean state-owned investors GIC and Temasek leading the charge." https://globalswf.com/news/focus-sovereign-investors-and-the-crypto-crisis (Funds inflow into GIC – comprising reserves and CPF monies – is estimated to be at least $40 billion annually.)
Of the US$1.82 bil raised by FTX in the Series B, Series B extension andSeries C funding round, Temasek must have invested hundreds of millions. Loose change to former CEO Ho ‘Buffet’ Ching who is estimated to be earning around $100 mil annually/$300,000 per day.
The crypto market has lost over US$2 trillion in market value since reaching its height in last year.
Assuming Temasek’s share of the loss is a mere 0.5%, our reserves would have been reduced by $10 bil. This is entirely possible because Temasek was still bullish on crypto just a few months ago.
Yesterday, Bitcoin experienced a 15% fall, one of the biggest in percentage terms. A lot more pain ahead.
I won't be surprised if the head honchos at Temasek gave the green light to dive right in no thanks to their FOMO mindsets....now shit has hit the fan and they are probably keeping darn silent in hopes that everything gets swept under the carpet and us taxpaying Sinkies wouldn't go to the extent of baying for blood.
In an interview with The New York Times in April, Mr Ramnik Arora, one of FTX’s top executives, described a video meeting last year between Mr Bankman-Fried and partners at a top venture firm. In the meeting, Mr Bankman-Fried delivered a well-received presentation while simultaneously playing a video game.
“In the entire partner meeting, he was playing League Of Legends at the same time,” Mr Arora said.
Before another investor meeting, Mr Arora said, the investors asked Mr Bankman-Fried to put together a slide deck. The entrepreneur threw the presentation together in about a couple of hours.
“There is no formatting anywhere; fonts are everywhere,” Mr Arora said. “You can just feel discomfort – both sides – because the investors are like, ‘How the hell are we being shown a deck that clearly no one spent any time on?’”
......But even by 2021’s frothy standards, Mr Bankman-Fried’s latitude from investors was extreme. Despite raising US$2 billion, he remained the majority owner of the company. No investors joined FTX’s board of directors, which was made up of Mr Bankman-Fried, an FTX employee and a lawyer. An advisory board of investors had no functional control over the company."
…’Wow! It looks like there is an MIT Crypto Mafia run by the SEC's Gary Gensler that includes his old boss at MIT Glenn Ellison as well as his daughter Caroline Ellison...the current CEO of Alameda Research of FTX fame! Will Gensler throw the daughter of his old boss in JAIL or was Gensler himself involved in a DeFi Ponzi SET-UP to crash the cryptos and implement massive REGULATIONS?! This shit stinks!’…(via the RoadToRoota YouTube channel11/10/22)
At least US$1 billion of client funds missing at failed crypto firm FTX: Sources
NEW YORK: At least US$1 billion of customer funds have vanished from collapsed crypto exchange FTX, according to two people familiar with the matter.
The exchange's founder Sam Bankman-Fried secretly transferred US$10 billion of customer funds from FTX to Bankman-Fried's trading company Alameda Research, the people told Reuters.
A large portion of that total has since disappeared, they said. One source put the missing amount at about US$1.7 billion. The other said the gap was between US$1 billion and US$2 billion.
While it is known that FTX moved customer funds to Alameda, the missing funds are reported here for the first time.
The financial hole was revealed in records that Bankman-Fried shared with other senior executives last Sunday, according to the two sources. The records provided an up-to-date account of the situation at the time, they said. Both sources held senior FTX positions until this week and said they were briefed on the company's finances by top staff.
Bahamas-based FTX filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week. A rescue deal with rival exchange Binance fell through, precipitating crypto’s highest-profile collapse in recent years.
In text messages to Reuters, Bankman-Fried said he "disagreed with the characterisation" of the US$10 billion transfer.
"We didn't secretly transfer," he said. "We had confusing internal labeling and misread it," he added, without elaborating.
Asked about the missing funds, Bankman-Fried responded: "???"
FTX and Alameda did not respond to requests for comment.
In a tweet on Friday, Bankman-Fried said he was "piecing together" what had happened at FTX. "I was shocked to see things unravel the way they did earlier this week," he wrote. "I will, soon, write up a more complete post on the play by play."
At the heart of FTX's problems were losses at Alameda that most FTX executives did not know about, Reuters has previously reported.
Customer withdrawals had surged last Sunday after Changpeng Zhao, CEO of giant crypto exchange Binance, said Binance would sell its entire stake in FTX's digital token, worth at least US$580 million, "due to recent revelations". Four days before, news outlet CoinDesk reported that much of Alameda's US$14.6 billion in assets were held in the token.
That Sunday, Bankman-Fried held a meeting with several executives in the Bahamas capital Nassau to calculate how much outside funding he needed to cover FTX's shortfall, the two people with knowledge of FTX's finances said.
Bankman-Fried confirmed to Reuters that the meeting took place.
Bankman-Fried showed several spreadsheets to the heads of the company's regulatory and legal teams that revealed FTX had moved about US$10 billion in client funds from FTX to Alameda, the two people said. The spreadsheets displayed how much money FTX loaned to Alameda and what it was used for, they said.
The documents showed that between US$1 billion and US$2 billion of these funds were not accounted for among Alameda's assets, the sources said. The spreadsheets did not indicate where this money was moved, and the sources said they don't know what became of it.
In a subsequent examination, FTX legal and finance teams also learned that Bankman-Fried implemented what the two people described as a "backdoor" in FTX's book-keeping system, which was built using bespoke software.
They said the "backdoor" allowed Bankman-Fried to execute commands that could alter the company's financial records without alerting other people, including external auditors. This set-up meant that the movement of the US$10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX, they said.
In his text message to Reuters, Bankman-Fried denied implementing a "backdoor".
The US Securities and Exchange Commission is investigating FTX.com's handling of customer funds, as well its crypto-lending activities, a source with knowledge of the inquiry told Reuters on Wednesday. The Department of Justice and the Commodity Futures Trading Commission are also investigating, the source said.
FTX's bankruptcy marked a stunning reversal for Bankman-Fried. The 30-year-old had set up FTX in 2019 and led it to become one of the largest crypto exchanges, accumulating a personal fortune estimated at nearly US$17 billion. FTX was valued in January at US$32 billion, with investors including SoftBank and BlackRock.
The crisis has sent reverberations through the crypto world, with the price of major coins plummeting. And FTX's collapse is drawing comparisons to earlier major business meltdowns.
On Friday, FTX said it had turned over control of the company to John J Ray III, the restructuring specialist who handled the liquidation of Enron Corp – one of the largest bankruptcies in history.
• Temasek invested in FTX in the Series B, Series B extension and Series Cfunding round. FTX raised US$1 billion, US$420 million and US$400 million in the three rounds.
Temasek, other institutions sued for ‘aiding and abetting’ FTX fraud
SINGAPORE – Investment company Temasek was named in a class action lawsuit filed in Miami, Florida, on Wednesday as one of 18 defendants that allegedly conspired with troubled cryptocurrency exchange FTX to defraud customers.
The complaint was filed by one of the exchange’s customers, Mr Connor O’Keefe, a Mississippi resident, on behalf of himself and “all others similarly situated”.
The suit claimed that “defendant venture capital firms wielded their power, influence and deep pockets to launch FTX’s house of cards to its multi-billion dollar scale”. The class members are seeking compensatory and punitive damages, among other reliefs.
These firms named include the New York-based Signature Bank, as well as venture capital firms such as Sequoia Capital Operations and Softbank Vision Fund.
The 83-page document seen by The Straits Times alleges that the firms had been aware of fraud being committed by FTX, by virtue of conducting due diligence checks prior to their investments.
It cited a Nov 17, 2022, statement on Temasek’s website days after FTX filed for bankruptcy protection in the US, which said: “We conducted an extensive due diligence process on FTX, which took approximately eight months from February to October 2021.”
This included looking into the associated regulatory risk with crypto financial market service providers, as well as combing through the exchange’s audited financial statement.
As part of its process, Temasek had also sought the advice of external legal and cybersecurity specialists, and interviewed people familiar with the company, namely employees, industry participants and other investors.
The statement said: “Throughout the multiple rounds of due diligence, FTX demonstrated a clear willingness to discuss and engage with us, which indicated that they were willing to do business in the right way.
“During this process, we enquired about the relationship, preferential treatment, and separation between Alameda and FTX, and were given appropriate confirmations that were contractually binding.”
It reiterated that its US$275 million (S$369.7 million) investment into FTX was not made into cryptocurrencies, with its US$210 million investment for a minority stake of about 1 per cent in Bahamas-headquartered FTX International, while the other US$65 million was for a minority stake of about 1.5 per cent in FTX US, the American subsidiary.
More at https://www.straitstimes.com/singapore/temasek-other-institutions-sued-for-aiding-and-abetting-ftx-fraud
Due diligence? Temasek invested in FTX which had no accounting dept within the company
Bloomberg published an opinion piece on Wednesday (14 Dec) stating that the lack of a serious accounting system or even basic internal controls had contributed to the downfall of cryptocurrency exchange FTX.
The article was written by two accounting professors, Michelle Hanlon and Nemit Shroff, from the MIT Sloan School of Management.
“As professors of accounting, it’s a continual challenge convincing students that our courses are important when they’re tempted by sexier-sounding classes with titles that include words like ‘innovation’, ‘artificial intelligence’ or ‘fintech’. ‘Introduction to Financial Accounting’ doesn’t pique the interest of the typical 20-year-old,” Hanlon and Shroff wrote.
“The FTX debacle has given us our best argument yet. It enshrines all the reasons a solid accounting system and well-structured internal controls are critical to a business and its investors, creditors, customers, suppliers and other stakeholders.”
Apparently, FTX didn’t even implement any internal controls at all, which are needed, especially for financial institutions that maintain custody of customer assets.
“If FTX had implemented such controls even at a minimal level, many of the company’s deficiencies would have become known sooner and the large-scale meltdown might have been prevented,” the professors said.
FTX’s bankruptcy filing indicated that it had no in-house accounting department and failed to take even the most basic measures, such as segregating duties and establishing a system to keep track of accounts.
The filing also stated that corporate funds were used to purchase homes and other personal items for employees and advisors and that FTX used software to conceal the misuse of customer funds.
Due diligence failure
The professors wondered how it was possible for FTX to raise a total of US$1.8 billion in funding over seven rounds, and be valued at US$32 billion, given that there was a complete failure of corporate controls without even an accounting department in the company.
“It’s true that FTX’s investors should have demanded greater accountability, such as attestations of internal controls by both management and a reputable independent auditor,” the professors continued.
“That they didn’t doesn’t mean that they’re responsible for FTX’s failure; it simply means they failed at their own due diligence,” said the professors.
“One can only speculate why sophisticated investors didn’t do more to protect their investment. Perhaps the potential for large gains outweighed the risk of loss on a few investment decisions. Even so, investors would certainly have reduced their exposure by demanding some visibility into accounting safeguards.”
Indeed, Temasek Holdings, one of the prominent investors in the company, was said to have spent eight months, from February to October last year, doing its supposedly thorough due diligence before investing US$275 million in FTX over three rounds of funding.
Yet, Temasek couldn’t even detect that there was no accounting department in the company or whether the absence of one mattered in its decision to invest in the company.
And when FTX collapsed, Temasek quickly issued a statement blaming former FTX CEO Sam Bankman-Fried, “It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced.”
Ho Ching, the wife of PM Lee, also commented about the FTX losses on her Facebook page, saying that Temasek can afford to be contrarian.
“Temasek can afford to be contrarian because it has its own balance sheet and can think long term,” she wrote.
“With a long term stance, and all the pros and cons that come with that stance, Temasek is not fazed by the twiddles and sentiments of the market.”
A review will be conducted by Temasek on its decision to invest in FTX. However, it will be conducted by an internal team on its investment team, which made the decision.
Director of crypto investment team, a top FinTech influencer in Singapore
It’s not known who in Temasek was responsible for overseeing the due diligence of FTX investment, but according to LinkedIn, Antony Lewis, who joined Temasek in 2020, is the Director of the crypto and blockchain venture investment team.
On his LinkedIn, Lewis wrote, “I work in Temasek’s blockchain venture building and investment team. We are focused on building game-changing commercial businesses using decentralised technologies, and invest in these technologies too.”
“Previously I worked at enterprise blockchain firm R3 as Director of Digital Assets, and Director of Research. I was regarded as the firm’s subject matter expert in tokenised money and central bank digital currencies,” he added.
“In 2015 and 2016, I was recognised as a Top 100 influencer in FinTech in Asia at www.fintechasia100.com and a top 30 Singapore FinTech influencer. In 2017 I was an Asia top 8 blockchain influencer according to BlockShow (that can’t actually be true though can it) and this FinTech list too:”
Bankrupted FTX and FTX US, first direct investment handled by crypto investment team in Temasek
Speaking at the fifth Ethereum Community Conference on 19 July this year, Lewis shared his involvement in the sovereign wealth fund’s investment into the crypto business before the fall of FTX.
“So the ones that we’ve disclosed FTX and FTX US and Immutable from Australia, Consensus and Amber. So we continue to invest in single names, we continue to invest in funds through the cycle,” said Mr Lewis.
He added, “In fact, there’s never been more activity. We are pretty active now. The team is scaled up. We have the investing team. We also work with other teams in the organisation.”
“So it’s been it’s been a pretty interesting journey convincing the organization, and convincing management and everyone around that coins aren’t just a massive Ponzi and scam, although many of them maybe. And then, of course, the selection of like what you invest in is, is the core of what we do as an investment team.”
Answering a question from the audience about consideration for investment into crypto, Lewis said, “So our first direct investment was FTX and FTX US, and you know, when we first started the legal and we were like, oh, this is all illegal, they’re doing all of this unregulated legal stuff.”
“Well, if an activity is unregulated, you don’t need a license, you can just go and do that. Doesn’t mean you’re doing anything illegal. It just means it’s not a licensed activity.” said Lewis.
“So, you know, they’re playing in these spaces where you don’t need a license, you’re not going to get a whole bunch of licenses. As so these companies are all skilling up and all becoming more compliant as it becomes kind of business-critical.”
He added, “I think in that process, a whole bunch of people in different departments learned more about crypto and I think when you first come into it doesn’t for certain types of people, especially more conservative folks, there’s immediate like, no, everything is bad.”
“But as you learn more, you’ll actually know that’s not the case. It’s also you have a much more nuanced view. I think as the view becomes more nuanced or educated and at the same time, regulations are changing and in some cases becoming more crypto friendly, if not crypto aware, right?”
“The words they’re using in regulation are becoming more like crypto words. The word, Stablecoin wasn’t anything like five years ago. So as the regulatory landscape changes as we upskill all our stuff, I think you can be a lot more nuanced about saying yes to investments as opposed to no.”
If Lewis was involved in doing due diligence for FTX, it’s not known if he knew that the company had no accounting department set up.
In any case, the whole FTX saga led the 2 MIT professors to conclude, “Accounting classes may never sound thrilling to most young students and entrepreneurs, but FTX’s collapse proves the necessity of learning the principles of sound accounting for any business.”
Meanwhile, Bankman-Fried was arrested on Monday (12 Dec) in the Bahamas and charged with eight criminal counts in the US.
https://www.theonlinecitizen.com/2022/12/16/due-diligence-temasek-invests-in-ftx-with-no-accounting-dept-in-company/
Temasek initiates internal review after loss of investment in FTX
SINGAPORE: Temasek has initiated an internal review after it said it would write down its US$275 million investment into cryptocurrency exchange FTX, Deputy Prime Minister Lawrence Wong told Parliament on Wednesday (Nov 30).
The internal review will be done by an independent team and is intended "to study and improve its processes, and to draw lessons for the future".
Mr Wong, who is also Minister for Finance, was responding to questions by several Members of Parliament (MPs) on the impact of FTX's collapse.
Earlier this month, Temasek said it would write down its investment in FTX, irrespective of the outcome of the cryptocurrency exchange's bankruptcy protection filing.
Mr Wong noted that one of the areas that the private equity arms of Temasek and GIC operate in is new technology and early-stage companies.
"As long-term investors, our investment entities have to operate in this space. They do their best due diligence based on the information available," said Mr Wong.
"Having made the investments, they monitor the investee companies closely, but no amount of due diligence and monitoring can eliminate the risks altogether."
Mr Wong said it is disappointing when there is a loss by Singapore's state investment entities, as in the case of Temasek's investment in FTX.
"Even more so, because the loss arose from what turned out to be a very badly managed company and from possible fraud and mishandling of customer funds," said the Deputy Prime Minister.
The fact that other leading global institutional investors like BlackRock and Sequoia Capital also invested in FTX did not mitigate this, he added.
"What happened with FTX therefore has not only caused financial loss to Temasek, but also reputational damage," said Mr Wong.
"Temasek recognises this and has issued a comprehensive statement to explain its due diligence process and the circumstances leading to its investment in FTX."
After Leader of the Opposition MP Pritam Singh (WP-Aljunied) sought clarification, Mr Wong said the internal review would be "led by people who are separate from the investment team that made this decision".
"So they will be separate, they will not be clouded by what steps were taken, and they will report directly to the board," he said.
He added that this review was a "step up" from Temasek's usual review process. Temasek has conducted reviews in the past when there were "similar instances" – for example, a write-off in an investment project where there is permanent impairment – but it does not happen very often, he said.
Mr Wong added that the Government would not rule out calling in external auditors, but that would mean it was not just a matter of an investment loss.
"It would be something that we feel has gone wrong within the organisation, possibly, there might be negligence, there might be fraud, there might be misconduct," he said.
More at https://www.channelnewsasia.com/singapore/temasek-internal-review-ftx-crypto-investment-due-diligence-lawrence-wong-3111221
The next time you are tasked by superiors to find project vendors, simply settle for your friend's company and state that you made an informed judgement based on "my interactions with him and views expressed in my discussions with others". If you get chided, feel free to let them know you were merely taking a leaf out of Ho Ching's playbook. ;)
News analysis: What does FTX's crash mean for Temasek Holdings, and should such entities invest in the crypto industry?
SINGAPORE — The fall of crypto exchange FTX last week should be seen as an isolated incident, not as a systemic failure of the industry, and should not deter institutional firms from investing in such outfits, said analysts.
Instead, FTX's demise, which was shocking to many, should underline how important it is for investors to study the risks they take when they park their money in a lightly regulated industry, they added.
FTX's collapse has led to a further tumbling in crypto assets such as bitcoin and ethereum, which had already taken a battering earlier in the year.
Noting that an exchange this large has never failed in this manner, Blockchain Association Singapore co-chairman Chia Hock Lai said: “I think it’s an isolated incident and there’s an element of fraud involved.”
Mr Chia added that FTX was one of the largest crypto exchanges in the world, with a high trading volume and institutional investors such as venture capital firm Sequoia Capital and state investment firm Temasek Holdings.
According to Forbes, Temasek has a 1 per cent stake in FTX and the value of its investment at its peak last January was US$320 million (S$439 million).
In response to TODAY's queries, Temasek said that it had no further comment. It had previously told Reuters that it was aware of the developments between FTX and Binance and was engaging FTX in its capacity as a shareholder.
TODAY takes a look at what the crash of FTX means for Temasek and if it is prudent for such institutional investors to invest in the industry.
WHAT HAPPENED TO FTX?
FTX, which is headquartered in the Bahamas but managed from the United States, is a cryptocurrency exchange, which means it helps people to buy and sell crypto assets.
FTX had valued its assets at between US$10 billion and US$50 billion, and listed more than 130 affiliated companies around the world, according to its bankruptcy filing.
Last week, FTX sought bankruptcy protection after a rapid series of events that unfolded largely on Twitter which involved FTX attempting to sell a large part of its operating business to rival Binance after customers fled the exchange over fears that the firm may have had insufficient capital.
But just as quickly as Binance offered its rescue package in the form of an acquisition, the company backed out of the deal.
And within only a few days, the multibillion-dollar crypto exchange went from crypto leader to bankrupt. Its chief executive officer and founder also resigned.
Hours later, the trading firm said there had been “unauthorised access” and that funds had disappeared. Analysts say hundreds of millions of dollars may have vanished.
Social media users also debated whether the exchange was hacked or a company insider had stolen funds — a possibility that analysts did not rule out.
The Monetary Authority of Singapore (MAS) said earlier this week that FTX is neither licensed nor exempted from licensing here amid reports that many Singaporeans had invested in the beleaguered firm and are now at risk of losing their money.
Among the questions that have been raised since the FTX collapse is why MAS had not made a move to stop the company from collecting funds from Singapore-based investors, when it had done so against Binance.
WHAT DOES THIS MEAN FOR TEMASEK?
Maybank economist Chua Hak Bin said that while the loss to Temasek is painful, it represents less than 0.1 per cent of Temasek’s total assets, which are estimated to be about S$403 billion in 2022.
Mr Chia agreed, saying that such losses are part and parcel of investing and that it is common for institutional investors such as Temasek to diversify their portfolios to include all sorts of asset classes.
“As an investor you have to take risks to get returns, and historically Temasek has been able to generate good returns,” he said.
The analysts noted that while it seemed as though Temasek has invested in an asset that is considered speculative, such as cryptocurrency, institutional investors typically do not invest in the digital currency itself but the ecosystem and the technology behind it.
Cryptocurrencies are all based on the same basic structure: A publicly available “blockchain” that records ownership without having any central authority in control.
CIMB economist Song Seng Wun said: “It is less so about putting money in the asset but the operation of the system and the dominant players in the industry.
“So they’re not investing in the cryptocurrency — that can go up and down — but the companies that make money from the trading, such as FTX.”
IS IT WISE TO STILL INVEST IN CRYPTO?
Analysts said that there are many institutional investors here that park their money in firms that offer promise in the area of blockchain technology and should continue to do so.
Singapore sovereign wealth fund GIC, for example, invested about S$230 million in blockchain data platform Chainalysis earlier this year. The firm also invested in digital currency exchange Coinbase and digital asset bank Anchorage, among others.
In response to TODAY’s queries on the amount it has invested on such firms and whether it will keep its investments given the FTX situation, GIC said: “GIC does not comment on individual investments. Our focus is on the development of blockchain technology and business models over the long term. In the short term, we expect volatility to remain high.”
The collapse of FTX also reveals very little about the technological shortcomings of blockchain technology or design of cryptocurrencies, said analysts.
Rather, it underlined the need for a more comprehensive regulatory framework in the space.
Dr Julian Hosp, chief executive officer and co-founder of crypto technology company Cake DeFi, said: “This will push exchanges and other players in this space to be more accountable and transparent, which has the potential to protect long-term investors from fraud and other risks."
When investing in blockchain, institutional investors such as Temasek should also put a lot of value on companies that value transparency, he said, adding that this is perhaps a “strong reflection point” that the firm will have to make following the loss it suffered with FTX.
Mr Chia said the blockchain space is very promising, likening it to the next internet.
“When the internet started, no one expected an entire digital economy to be running on it. Now, companies are depending on it, the whole world is depending on it,” he said. “And blockchain will be next.”
https://www.todayonline.com/singapore/explainer-ftx-crash-temasek-wise-invest-2047966
MAS banned Binance, while FTX got a free pass thanks to Temasek holding a significant stake in it - what gives?
Crypto crash: Temasek stands to lose billions, issue may not be meaningful for MPs to query?
The collapse of crypto exchange FTX US is not the first, and won’t be the last.
https://bravenewcoin.com/insights/36-bitcoin-exchanges-that-are-no-longer-with-us
When it comes to cryptocurrency investment, Temasek (and GIC) leads the pack of punters, according to a July 28 SWF article this year:
"Despite the fall from grace of crypto currencies in recent months, sovereign investors are still looking at exposure to the sector …, with Singaporean state-owned investors GIC and Temasek leading the charge." https://globalswf.com/news/focus-sovereign-investors-and-the-crypto-crisis (Funds inflow into GIC – comprising reserves and CPF monies – is estimated to be at least $40 billion annually.)
Of the US$1.82 bil raised by FTX in the Series B, Series B extension and Series C funding round, Temasek must have invested hundreds of millions. Loose change to former CEO Ho ‘Buffet’ Ching who is estimated to be earning around $100 mil annually/$300,000 per day.
The crypto market has lost over US$2 trillion in market value since reaching its height in last year.
Assuming Temasek’s share of the loss is a mere 0.5%, our reserves would have been reduced by $10 bil. This is entirely possible because Temasek was still bullish on crypto just a few months ago.
Yesterday, Bitcoin experienced a 15% fall, one of the biggest in percentage terms. A lot more pain ahead.
Temasek is now desperately trying to prevent its FTX investment from being wiped out but unlikely to salvage much as Binance will be calling the shots. https://www.businesstimes.com.sg/garage/temasek-is-engaging-with-ftx-after-potential-binance-bailout
What goes up must come down and the FTX token has indeed come a long way … down, about 95% from its high slightly more than a year ago.
The normalization of interest rates has exposed cryptocurrencies for what they really are: gigantic Ponzi schemes.
After FTX, will Binance be next? Does Temasek have any plan to exit its investment in it?
https://www.scmp.com/tech/blockchain/article/2169809/temasek-backed-vertex-invests-binance-develop-fiat-cryptocurrency
Source: https://likedatosocanmeh.wordpress.com/2022/11/10/crypto-crash-temasek-stands-to-lose-billions-issue-may-not-be-meaningful-for-mps-to-query
How Sam Bankman-Fried seduced blue-chip investors
From billionaire to zilch: heartiest congratulations to the newly minted pauper Sam Bankman-Fried!
Fun fact: Temasek was the third largest investor in FTX.
At least US$1 billion of client funds missing at failed crypto firm FTX: Sources
NEW YORK: At least US$1 billion of customer funds have vanished from collapsed crypto exchange FTX, according to two people familiar with the matter.
The exchange's founder Sam Bankman-Fried secretly transferred US$10 billion of customer funds from FTX to Bankman-Fried's trading company Alameda Research, the people told Reuters.
A large portion of that total has since disappeared, they said. One source put the missing amount at about US$1.7 billion. The other said the gap was between US$1 billion and US$2 billion.
While it is known that FTX moved customer funds to Alameda, the missing funds are reported here for the first time.
The financial hole was revealed in records that Bankman-Fried shared with other senior executives last Sunday, according to the two sources. The records provided an up-to-date account of the situation at the time, they said. Both sources held senior FTX positions until this week and said they were briefed on the company's finances by top staff.
Bahamas-based FTX filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week. A rescue deal with rival exchange Binance fell through, precipitating crypto’s highest-profile collapse in recent years.
In text messages to Reuters, Bankman-Fried said he "disagreed with the characterisation" of the US$10 billion transfer.
"We didn't secretly transfer," he said. "We had confusing internal labeling and misread it," he added, without elaborating.
Asked about the missing funds, Bankman-Fried responded: "???"
FTX and Alameda did not respond to requests for comment.
In a tweet on Friday, Bankman-Fried said he was "piecing together" what had happened at FTX. "I was shocked to see things unravel the way they did earlier this week," he wrote. "I will, soon, write up a more complete post on the play by play."
At the heart of FTX's problems were losses at Alameda that most FTX executives did not know about, Reuters has previously reported.
Customer withdrawals had surged last Sunday after Changpeng Zhao, CEO of giant crypto exchange Binance, said Binance would sell its entire stake in FTX's digital token, worth at least US$580 million, "due to recent revelations". Four days before, news outlet CoinDesk reported that much of Alameda's US$14.6 billion in assets were held in the token.
That Sunday, Bankman-Fried held a meeting with several executives in the Bahamas capital Nassau to calculate how much outside funding he needed to cover FTX's shortfall, the two people with knowledge of FTX's finances said.
Bankman-Fried confirmed to Reuters that the meeting took place.
Bankman-Fried showed several spreadsheets to the heads of the company's regulatory and legal teams that revealed FTX had moved about US$10 billion in client funds from FTX to Alameda, the two people said. The spreadsheets displayed how much money FTX loaned to Alameda and what it was used for, they said.
The documents showed that between US$1 billion and US$2 billion of these funds were not accounted for among Alameda's assets, the sources said. The spreadsheets did not indicate where this money was moved, and the sources said they don't know what became of it.
In a subsequent examination, FTX legal and finance teams also learned that Bankman-Fried implemented what the two people described as a "backdoor" in FTX's book-keeping system, which was built using bespoke software.
They said the "backdoor" allowed Bankman-Fried to execute commands that could alter the company's financial records without alerting other people, including external auditors. This set-up meant that the movement of the US$10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX, they said.
In his text message to Reuters, Bankman-Fried denied implementing a "backdoor".
The US Securities and Exchange Commission is investigating FTX.com's handling of customer funds, as well its crypto-lending activities, a source with knowledge of the inquiry told Reuters on Wednesday. The Department of Justice and the Commodity Futures Trading Commission are also investigating, the source said.
FTX's bankruptcy marked a stunning reversal for Bankman-Fried. The 30-year-old had set up FTX in 2019 and led it to become one of the largest crypto exchanges, accumulating a personal fortune estimated at nearly US$17 billion. FTX was valued in January at US$32 billion, with investors including SoftBank and BlackRock.
The crisis has sent reverberations through the crypto world, with the price of major coins plummeting. And FTX's collapse is drawing comparisons to earlier major business meltdowns.
On Friday, FTX said it had turned over control of the company to John J Ray III, the restructuring specialist who handled the liquidation of Enron Corp – one of the largest bankruptcies in history.
https://www.channelnewsasia.com/business/ftx-bankruptcy-us-1-billion-client-funds-missing-sources-bankman-fried-alameda-3066266
If this isn't profligate spending, I don't know what is.
HUAT AH!
FYI Temasek participated in all 3 major funding rounds: