FTX diverted $200 million of customer money for two venture deals that caught the SEC’s attention

Of the billions of {dollars} in buyer deposits that disappeared from FTX in a flash, $200 million was used to fund investments in two corporations, in response to the Securities and Exchange Commission, which charged founder Sam Bankman-Fried with “orchestrating a scheme to defraud equity investors.”

Through its FTX Ventures unit, the crypto agency in March invested $100 million in Dave, a fintech firm that had gone public two months earlier by way of a particular function acquisition firm. At the time, the businesses mentioned they might “work together to expand the digital assets ecosystem.”

The different deal the SEC seems to have referenced was a $100 million funding spherical in September for Mysten Labs, a Web3 firm. In complete, it was a $300 million funding spherical that valued Mysten at $2 billion and included participation from Coinbase Ventures, Binance Labs and Andreessen Horowitz’s crypto fund.

While FTX Ventures has performed dozens of transactions, in response to PitchBook, the Mysten Labs and Dave investments had been the one two disclosed investments of $100 million, primarily based on paperwork printed by the Financial Times, which broke down how the corporate put $5.2 billion to work. FTX Ventures was described as a $2 billion enterprise fund, in its press launch with Dave.

Bankman-Fried, 30, stands accused of committing widespread fraud after FTX, which was valued by personal buyers at $32 billion earlier this 12 months, sank into bankruptcy in November. A central theme within the fees is how Bankman-Fried diverted funds from FTX to his hedge fund, Alameda Research, which then used that cash for dangerous trades and loans. FTX Ventures was allegedly a part of that scheme.

Neither Mysten nor Dave have been linked to any alleged wrongdoing inside Bankman-Fried’s empire. But the investments seem like the primary recognized examples of buyer cash being utilized by FTX and Bankman-Fried for enterprise funding. As investigators and FTX legal professionals try and retrace the outflow of FTX funds, these recognized investments and others within the $5 billion enterprise pool will appeal to heavy scrutiny.

In explicitly linking the 2 $100 million investments to buyer cash, the SEC has raised the chance that they will be prospects for clawbacks. If FTX chapter trustees can set up that consumer cash funded Bankman-Fried’s investments, they might pursue restoration of these funds as a part of an effort to retrieve buyer property.

A spokesperson for the SEC declined to remark.

Dave CEO Jason Wilk advised CNBC that FTX’s funding in Dave is already scheduled to be repaid, with curiosity, by 2026. FTX’s $100 million funding was by way of a convertible be aware, a short-term mortgage of money that FTX might convert into shares at a later date. That conversion was by no means made, leaving Dave with a $101.6 million legal responsibility, together with curiosity, to FTX and any successor corporations, in response to the corporate’s most up-to-date SEC filings.

“The note issued to FTX is due for repayment in March 2026,” the corporate mentioned in an announcement. “No terms contained in the note trigger any current obligation by Dave to repay prior to the maturity date.”

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

Bankman-Fried’s funding in Mysten Labs was an fairness deal. Because Mysten is a privately held firm, there is no clearly outlined course of in U.S. chapter code for clawing again these funds.

Mysten declined to remark. Lawyers at Sullivan & Cromwell, which represents FTX, didn’t reply to requests for remark.

An SEC criticism filed towards two of Bankman-Fried’s lieutenants, Caroline Ellison and Gary Wang, specified that “two $100 million investments made by FTX’s affiliated investment vehicle, FTX Ventures Ltd., were funded with FTX customer funds that had been diverted to Alameda.”

Irrespective of what cash was getting used, FTX’s investments had been ill-timed.

Dave shares have plummeted over 97% because the firm went public, mirroring the efficiency of the broader basket of SPACs. In July, the Nasdaq warned Dave that if its share value did not enhance, it was susceptible to being delisted. The inventory at present trades for 28 cents and the market cap sits at round $100 million.

Alameda Research had beforehand made a $15 million funding in Dave in August 2021, earlier than the Nasdaq itemizing. Dave was based in 2016 and affords prospects a free money advance on their future earnings as a part of a set of banking merchandise. Mark Cuban led a $3 million seed spherical in 2017.

The funding might have been profitable for FTX if Dave’s share value had improved past $10 a share, permitting FTX to transform at a revenue.

FTX’s funding in Mysten got here within the midst of a crypto meltdown. Bitcoin and ether had been down by greater than half for the 12 months and quite a few hedge funds and lenders had gone bankrupt.

The funds had been for use in Mysten’s effort to “build a blockchain that scales with demand and incentivizes growth,” Mysten CEO Evan Cheng mentioned on the time.

Representatives for Ellison and Wang didn’t reply to requests for remark. A consultant for Bankman-Fried declined to remark.

Ellison, 28, and Wang, 29, pleaded responsible in New York final week to federal fees over the illicit use of buyer funds for buying and selling and enterprise investments, allegedly directed by Bankman-Fried. Both are cooperating with federal investigations into Bankman-Fried and the collapse of FTX.

WATCH: The phrases of the $250 million bail settlement for FTX founder Sam Bankman-Fried