Tag Archives: Bankruptcy

FTX Debacle and Lessons Learned

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The lessons investors can learn from the FTX debacle are not all that new or even groundbreaking. But, the lessons are important ones for investors to learn who desire to build long-term wealth and achieve financial freedom.

The significant lessons are the importance of investors understanding an asset and doing thorough research on companies in which they intend to invest.

In FTX’s case, here is a company, led by it’s under thirty CEO Sam Bankman-Fried (SBF), that in three years grew from relative nothing to $32B literally overnight. It’s meteoric rise attracted thousands of investors who were more than happy to invest their capital in a young company and its brash CEO.

Yet, by performing just basic research on how the company made its money, on the experience and acumen of the CEO, and on the executive management team, and on the company’s financial profitability would have raised red flag to cause serious investor to pause before investing their capital in the company.

Additionally, SBF, FTX’s thirty-something CEO was consider a “wunder-kid” of sorts and featured by Forbes as its #2 “The Forbes 400” in 2022.

In a relatively short time, SBF took FTX from near zero is capitalization to $32B. His feats caused both seasoned and retail investors to flock to FTX.

Now, at the beginning of the week, FTX possessed a capitalization of $32. By Friday, FTX was at near zero capitalization, SBF had resigned, and the luster and shine of the once high flying company had been completely tarnished.

Thus, this is a classic and stark example why investors must understand and do thorough research, and remain disciplined before investing their capital.

References:

  1. https://www.forbes.com/sites/jemimamcevoy/2022/09/27/10-under-40-the-youngest-billionaires-on-the-2022-forbes-400/?sh=2455189c397e

FTX Fraud, Political Donations and False Altruism

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FTX founder Sam Bankman-Fried (SBF) admits masquerading as ‘woke Westerner’.

Sam Bankman-Fried (SBF), the founder and CEO of collapsed cryptocurrency exchange FTX, revealed that ‘the woke appearance’ that he personified and his company displayed was all a “dumb game.”

In an interview, Bankman-Fried confessed that the fake window dressing of altruism was mostly a front and that the performance was done “so everyone likes us.”

Until last week, FTX was the world’s second-largest cryptocurrency exchange and was valued at $32 billion. However, the digital coin exchange collapsed and filed for bankruptcy.

In addition, between $1 billion and $2 billion in customer funds reportedly vanished from the FTX cryptocurrency exchange via corporate fraud, via an apparent hack and/or via an “unauthorized access” by Bankman-Fried.

In an emergency court filing, evidence suggests Bahamian regulators directed former CEO Sam Bankman-Fried to gain “unauthorized access” to FTX systems to obtain digital assets belonging to the company and to transfer those assets to the custody of the Bahamian government.

Bankman-Fried was a Democrat megadonor.

  • He reportedly contributed more than $5 million to Joe Biden in the 2020 presidential campaign.
  • He was the second-biggest individual donor behind George Soros to Democrats in the 2021-2022 election cycle – donating $37 million.
  • He planned to donate “north of $100 million” to Democrats in the 2024 presidential election, but pledged to have a “soft ceiling” of $1 billion in donations to Democrats if former President Donald Trump ran again.

The concern now is whether Democrats will be obliged morally to ‘give back’ the apparent illicit political donations from Bankman-Fried.

A liberal darling

Bankman-Fried, a self-proclaimed “effective altruist,” was promoted by Democrats and hyped up by the media. However, in a new interview, Bankman-Fried confessed that he used his virtuous stances as a front to win the game.

SBF was one of the featured speakers at World Economic Forum 2022 in Davos, Switzerland.

In September, SBF was a featured speaker at the annual meeting for the Clinton Global Initiative.

SBF was slated to be a featured speaker at a summit hosted by the New York Times on Nov. 30, along with BlackRock CEO Larry Fink, New York City Mayor Eric Adams (D), and Ukrainian President Volodymyr Zelenskyy.

Bankman-Fried said it was “never the intention” to squander away investors’ money, but “sometimes life creeps up on you.”

References:

  1. https://www.theblaze.com/news/ftx-sam-bankman-fried-woke-esg
  2. https://www.cnbc.com/2022/11/17/ftx-suggests-sam-bankman-fried-transferred-assets-to-bahamas-government-custody-after-bankruptcy-filing.html

The Impact of FTX’s Collapse

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“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” ~ John Ray, new FTX CEO

Crypto exchange FTX filed for bankruptcy after a stunning five-day collapse of the once-$32 billion dollar crypto company as concerns over its financial health led to a surge in withdrawals and a plunge in the value of its native FTT token. FTX’s founder, Sam Bankman-Fried (SBF), resigned as CEO.

As a result of the collapse, the company and its leadership are facing investigations and potential criminal charges in both the Bahamas and the U.S. for its misappropriation of users’ assets and allegations of fraud. 

Before its collapse, FTX offered retail and professional traders spot crypto investing as well as more complex derivatives trades. At its peak, the platform was valued by investors at $32 billion and had more than 1 million users.

FTX’s books revealed the exchange had more than $9 billion in liabilities, but less than $1 billion in liquid assets the day before its bankruptcy filing. And, after an apparent hack (or “unauthorized access” via a backdoor by SBF) drained $477 million of the company’s remaining assets, customers are facing long odds of ever recovering much of their deposits.

After FTX collapse, at least $1 billion in customer funds are unaccounted for, and FTX may owe as many as one million creditors. Additionally, FTX’s collapse has resulted in:

  • Crypto’s total market cap has dropped below the $1 trillion mark since FTX’s trouble started early last week, and sits near $826 billion as of Wednesday morning, November 9. 2022.
  • After the firm’s bankruptcy filing, BTC price sank nearly 25%, dropping below $16,000, before slightly recovering; ETH fell by more than 30% in the same span.
  • Market contagion and liquidity issues have spread to a growing number of crypto businesses that have suspended redemptions, citing “extreme market dislocation … caused by the FTX implosion.”
  • Several major players have halted customer withdrawals and cited “significant exposure to FTX.” Others are planning to file for bankruptcy.

CNBC reported that Alameda Research, FTX’s sister company, had borrowed billions in customer funds from the exchange to make risky leveraged trades, leaving FTX caught short when users wanted to withdraw their money.

In general, mixing customer funds with counterparties and trading them without explicit consent is illegal, according to U.S. securities law. It also violates FTX’s terms of service. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” said newly appointed FTX CEO John Jay Ray III – a bankruptcy expert with more than 40 years of restructuring experience who liquidated Enron.

Former CEO Bankman-Fried declined to comment on allegations but said the company’s recent bankruptcy filing was the result of fraud, misappropriation and issues with a leveraged trading position placed by Alameda Research.

“In the Bahamas, I understand that corporate funds of the FTX group were used to purchase homes and other personal items for employees and advisors,” Ray wrote. “I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”

Moreover, larger investors and traditional firms been impacted

  • Since its founding in 2019, FTX raised nearly $2 billion in capital from sources like venture capital firms and pension funds, and its bankruptcy means that many of its investors will likely need to write their investments off as losses. 
  • SoftBank, Tiger Global, and Sequoia Capital are among the many well-known firms who made now-worthless bets on FTX. Sequoia was marking its $213 million stake down to $0. 
  • The impact isn’t limited to venture capital firms either — the Ontario Teachers Pension Fund lost $95 million investing in FTX’s funding rounds and professional athletes celebrities like TV producer Larry David and NFL quarterback Tom Brady are among the individuals who had equity stakes in and promoted the company. 
  • In an emergency court filing, evidence suggests Bahamian regulators directed former CEO Sam Bankman-Fried to gain “unauthorized access” to FTX systems to obtain digital assets belonging to the company and to transfer those assets to the custody of the Bahamian government.

In the wake of the FTX exchange’s collapse, there has been calls from financial business leaders and lawmakers regarding the need for greater oversight and regulation of the crypto industry.

U.S. Congressman Patrick McHenry, the top Republican on the House Financial Services Committee, said: “It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.”

Source: Coinbase Bytes

References:

  1. https://www.cnbc.com/2022/11/15/ftx-says-could-have-over-1-million-creditors-in-new-bankruptcy-filing.html
  2. https://www.businessinsider.com/ftx-managers-used-online-chat-emojis-approve-official-expenses-ceo-2022-11
  3. https://www.cnbc.com/2022/11/17/ftx-suggests-sam-bankman-fried-transferred-assets-to-bahamas-government-custody-after-bankruptcy-filing.html

FTX Downfall

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“It’s only when the tide goes out that you learn who has been swimming naked.” Warren Buffett

Things may look good and rosy up to a certain point, but if a company is leveraged too much expecting a wave to come, but instead the tide goes out, everything will be exposed. Federal Reserve Chairman Jerome Powell aggressive interest rate hikes to counter inflation exposed all sorts of companies that were relying on cheap capital to either grow or survive.

In FTX case, a Bahamian cryptocurrency exchange, things were great for a while. Investors were excited about the way the stock price continued to melt up.

FTX was the third-largest crypto market in the world at the start of last week when it announced liquidity problems and would need a massive infusion of cash to stay afloat. However, the tide went out and the problems at FTX began to surface and then totally self-destruct.

In theory, exchanges like FTX make money by allowing customers to trade cryptocurrencies and collecting fees for transactions.

“It was a success story almost too good to resist. In just over three years, FTX would go from nothing to a $32 billion company. Now it’s back to nothing.” ~ Brandon Kochkodin, Forbes Staff

According to WSJ, FTX problems are a result of the loans it extended to Alameda using money that customers had deposited on the exchange for trading purposes. It was a decision that Mr. Sam Bankman-Fried (SBF), the crypto wunderkind who founded the exchange and then drove it into bankruptcy, described as a poor judgment call, writes the Wall Street Journal.

In March 2022, the Fed started raising interest rates to battle inflation. Speculative investment assets started tanking and a number of crypto funds and brokerages crashed. FTX came in as a bailout “savior” with the apparent purpose of sweeping in depositor funds into FTX.

Additionally, SBF’s hedge fund Alameda Research was also hit hard by the crypto drop. SBF was able to temporarily hide the problem by “borrowing” customer deposits at FTX to plug the hole at Alameda. This move may be a violation of the terms of service and potentially violate regulations.

All in all, FTX had $16 billion in customer assets. It is believed that the unregulated exchange transferred more than half of its customer funds to its sister company Alameda, according to WSJ.

In traditional markets, brokers must keep client funds segregated from other company assets. Cryptocurrencies and brokerages that trade them remain unregulated, which means it may not be legally possible for any government agencies to step in to reimburse FTX customers, said corporate lawyer Eric Snyder, chairman of bankruptcy at Wilk Auslander.

“Absent any regulation, it’ll be difficult to show fraud if the agreements between FTX and their customers allowed FTX to use investments at their discretion,” Synder said.

The root of FTX’s downfall lay in its relationship with Alameda, a firm known for aggressive trading strategies funded by borrowed money and allegedly operated by Mr. Bankman-Fried’s ex-girlfriend as CEO of Alameda. Mr. Bankman-Fried is the majority owner of both firms, FTX and Alameda. He was CEO of Alameda until last year, when he stepped back from the role to focus on FTX.

“There’s one fundamental takeaway: Bitcoin itself should never be leveraged. It cannot be leveraged safely. And anybody who thinks that they can lever it safely is going to learn a very hard lesson: that illiquidity is the same thing as insolvency,” commented Caitlin Long, founder and CEO of Custodia Bank, on CNBC’s The Exchange

References:

  1. https://www.forbes.com/sites/brandonkochkodin/2022/11/11/the-red-flags-on-ftx-we-all-seemed-to-miss/?sh=23f8a20111f6
  2. https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732
  3. https://www.oldschoolvalue.com/investing-strategy/warren-buffett-quotes/#8_Swimming_Naked_is_Cute_Only_for_Babies
  4. https://www.cnbc.com/amp/2017/12/11/bitcoin-millionaire-grant-sabatier-dont-buy-bitcoin.html
  5. https://www.marketwatch.com/story/ftx-filed-for-chapter-11-bankruptcy-heres-what-account-holders-should-know-about-this-very-messy-and-complex-bankruptcy-case-11668202547?mod=mw_latestnews

Hurting long before Pandemic, failing companies took stimulus money then closed anyway

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Stein Mart Inc. was in desperate financial shape long before COVID-19 forced closures at its discount department stores. During the past several years, the retailer had hemorrhaged tens of millions of dollars. Like many struggling businesses, the company in June 2020 turned to the federal government’s Paycheck Protection Program, or PPP, as a possible savior. The $10-million loan didn’t last long.

Within two months, Stein Mart filed for Chapter 11 bankruptcy protection, citing more than $500 million in liabilities. The company closed all 280 stores and 9,000 workers lost their jobs. And, the company will never repay American taxpayers the $10-million.

Nothing prevented Stein Mart from taking the PPP handout on its way under.

Lenders participating in the Small Business Administration relief program shelled out more than $520 billion last year to millions of companies searching for a lifeline to stave off the economic impacts of COVID-19. Like Stein Mart, USA TODAY found that some were failing long before the pandemic hit.

Josh Salman from USA Today explains how failing companies were able to take stimulus money and close anyway. USA Today

To read more, go to: https://www.usatoday.com/story/news/investigations/2021/01/13/recipients-stimulus-funds-went-bankrupt-fired-workers-and-closed/3960382001/