Follow the Money

The situation at FTX is awful, with the distinct possibility that hundreds of thousands of customers have lost billions of dollars of precious capital, but Samuel Bankman-Fired’s one saving grace was that he didn’t seem to be in it for the money. 

A mop-haired techie who favored dressing in T-shirts and shorts, SBF came across in articles as a somewhat frazzled graduate student trying to reinvent the world for the better.

That has changed. 

First, Bankman-Fried confessed to a Vox reporter on Thursday that his advocacy for better crypto regulation in Washington was “just PR.”

Then, lawyers for FTX alleged that Bankman-Fried was working with the government of the Bahamas to transfer FTX assets into accounts outside the control of management, even after the company filed for bankruptcy in Delaware last week. 

And now today, the Wall Street Journal reports about an FTX financing round last year raises new questions about FTX’s governance. 

In October, 2021, FTX raised $420.69 million (yes, the choice of digits was deliberate) from investors, and as part of this transaction, Bankman-Fried cashed out $300 million of his FTX stock, a fact that has not been previously reported.

According to The Journal, Bankman-Fried told investors at the time it was a partial reimbursement of the $2.1 billion he spent to buy out Binance’s stake in FTX a few months earlier.

The Journal article points out that it is usually a bad sign when a founder sells stock in a secondary offering. 

However, this new information also raises some troubling questions.

Given it’s not clear where Bankman-Fried got the rest of the money – some $1.3 billion – one wonders what role FTX’s capital played in all of this. Did Bankman-Fried use $1.3 billion in FTX capital to purchase the Binance shares? Could this be the $1.2 billion related party receivable listed on FTX’s balance sheet as of December 31st? And, if so much FTX capital was involved, why didn’t FTX purchase these shares instead of Bankman? Surely, it would have been in the company’s strategic interest to do so given its business momentum and $25+ billion valuation. 

New FTX CEO John J. Ray may have cleaned up Enron, but he will certainly have his work cut out for him in trying to figure out what Bankman-Fried did with all of this money.

The Tragedy of Elizabeth Holmes

Former Theranos founder and CEO Elizabeth Holmes was sentenced today to more than 11 years in prison, two years more than a probation officer had recommended but nine years less than the maximum amount specified in federal guidelines.

Holmes’s lawyers had asked for a sentence of home confinement and community service and no more than 18 months in prison, while prosecutors were seeking a 15-year prison sentence to send a message to potential wrongdoers.

Holmes does not have to report to prison for five months, and her lawyers will almost certainly appeal the sentence, but if her lawyers are unsuccessful, her 135 month prison term will be a tough road to hoe. Holmes and her partner have a young son, and she is currently pregnant. 

In a statement to the court, Holmes said, “I stand before you taking responsibility for Theranos.” Still, Holmes did not explicitly acknowledge the fraud that she had perpetrated nor the lives of Theranos patients that she put at risk. 

Before sentencing Holmes, Judge Edward Davila talked about letters he had received from venture capitalists in support of Holmes. Although these VCs reminded Davila that failure in Silicon Valley was not uncommon, “[T]hey didn’t endorse failure by fraud,” Judge Davila said. “Those letter writers did not condone misrepresentation and manipulation.”

Davila explained that he didn’t give Holmes the maximum sentence because he didn’t believe her main objective was to enrich herself.  

“The tragedy in this case is that Ms. Holmes is brilliant,” he concluded.