Crypto investors face sloppy due diligence investigation

[ad_1]

The United States Securities and Exchange Commission (SEC) is reportedly investigating FTX investors’ due diligence approach.

This, as high-profile investors who donated equity to the bankrupt crypto exchange increasingly learn that their investments may prove worthless.

As PYMNTS was one of the first to point out last November, a slew of well-respected investors lined up to give the so-called cool kid du jour, Sam Bankman-Fried, money at eye-popping valuations. .

Following FTX’s quick and highly publicized demise, the SEC has alleged that the crypto exchange has raised over $1.8 billion from various equity investors, including 90 US-based investors, since May 2019.

These backers include Patriots owner Robert Krafts Kraft Group, entertainment giant Endeavour, the family investment office of an Alibaba co-founder as well as billionaire Hedge Funder Daniel Och, founder of Och- Ziff and board member of Endeavour.

But Bankman-Fried has coaxed its biggest checks from some of the venture capital industry’s best-known companies, like Tiger Global Management, SoftBank and Sequoia Capital, which handed over their money to FTX with few questions asked.

The SEC, along with the US Department of Justice (DOJ), claim that Bankman-Fried was actually orchestrating a massive, years-long fraud.

A representative for the SEC did not respond to a request for comment from PYMNTS.

No one has done their homework

According to a Reuters report citing unnamed sources, the SEC is investigating the extent of due diligence policies and procedures blue-chip financial firms and other investors had in place before donating capital to the crypto exchange. .

As previously reported by PYMNTS, the FTX collapse provided a masterclass in crypto industry risk management and accounting failures. FTX had extremely poor internal controls, including the lack of an independent chief financial officer or board of directors and fundamentally flawed risk management procedures that allowed assets and liabilities of all forms to be generally treated as interchangeable.

As his financial empire crumbled, Bankman-Fried tweeted: Internal mislabeling of bank accounts meant I was significantly off my sense of user margin.

5) The full story here is one I’m still fleshing out every detail of, but as a very high level I messed up twice.

The first time around, poor internal labeling of bank accounts meant I was considerably off my sense of user margin. I thought it was much lower.

SBF (@SBF_FTX) November 10, 2022

He even admitted in a TV interview after his business’ stunning implosion: I wasn’t even trying, like, I wasn’t spending any time or effort trying to manage risk on FTX.

Bankman-Fried added: What happened, happened, and if I had spent an hour a day thinking about risk management on FTX, I don’t think it would have happened.

SEC investigations do not indicate wrongdoing on the part of investors, but at the heart of the agencies’ investigation is whether venture capital and investment funds have fulfilled their fiduciary duties to their own sponsors and investors.

The outcome of the SEC investigation could see these funds and investment vehicles subject to regulatory scrutiny, the report says, even if they are simultaneously seen as victims and creditors of allegedly fraudulent Bankman-Frieds orchestrations. .

That FTX was able to extract nearly $2 billion in funding from some of the sharpest financial minds in the industry might land as an asterisk on their accolades.

For now, while humble investors downplay their financial involvement and losses in FTX, they are simultaneously pointing the finger at other successful investments they have made. While more details will surely emerge as the October trial date approaches, questions remain as to the long-term effect this ordeal will have on risk appetite within the capital industry. -risk.

PYMNTS Data: Why Consumers Are Trying Digital Wallets

A PYMNTS study, New Payments Options: Why Consumers Are Trying Digital Wallets, reveals that 52% of US consumers tried a new payment method in 2022, and many chose to try digital wallets for the first time.

[ad_2]