Totally Fried

FTX founder Sam Bankman-Fried has been talking the ears off of journalists, but up until now, he has avoided speaking to Congressional investigators. 

That has changed. 

Today, Bankman-Fried tweeted that he would appear before the House Committee on Financial Services this coming Tuesday.

SBF will presumably be under oath, so it’s probably a good thing that he has hired a high-profile lawyer to represent him. (This same advocate recently represented Ghislaine Maxwell, Jeffrey Epstein’s partner in pedophilia.) 

Still, Bankman-Fried will have a lot of splainin’ to do. 

The former crypto wunderkind will inevitably be asked whether he transferred customer deposits to Alameda Research, a hedge fund that he controlled. FTX’s new CEO, John J. Ray, III, a man who has been hired to clean up the mess at FTX, has stated that SBF used “special software to conceal the misuse of customer funds,” which Bankman-Fried has denied

It would also not be unreasonable to think that SBF will face questioning about the $1 billion that he borrowed from Alameda as well as the $2.3 billion that an Alameda affiliate loaned Paper Bird, another company that he controlled. 

And he will surely face questioning about the money he put to work with both the Democratic and Republican parties as well as news organizations such as the crypto news publication The Block, which, according to a report in today’s Axios, received some $43 million in loans from  Alameda. Was this all part of a cynical and manipulative game that the former billionaire was playing as he intimated to a Vox reporter in a series of late night DMs? 

For what it’s worth, if the House Committee is open to suggestions, I would like to know more about the Signal conversations that SBF had with Binance CEO Changpeng (CZ) Zhao in the days leading up to FTX’s bankruptcy and what they reveal about the state of the cryptocurrency market. In a fascinating article in today’s Times, reporters  David Yaffe-Bellany and Emily Flitter write about one such conversation in which CZ accuses Bankman-Fried of trying to tank Tether, a USD stablecoin, with a $250,000 trade. SBF retorts that there is no way such a small trade could ever undermine Tether, but the fact that Zhao was so concerned about Tether’s stability does not speak well for stablecoins or the crypto industry in general. 

So we will be watching on Tuesday and looking to see in particular if committee members will be able to poke any holes in SBF’s defense, namely that he was a terrible CEO and lost sight of FTX’s risk exposure. 

One thing is certain: whatever SBF’s lawyer is getting paid, it’s not enough. 

Game On!

Yesterday, the Federal Trade Commission announced that it would seeks to block Microsoft’s $69 billion acquisition of Activision, the video game behemoth behind Call of Duty, a franchise that has generated almost $30 billion in revenue from game sales and microtransactions since 2003.

It’s a curious development for two very different reasons. First, according to a story in today’s Wall Street Journal, Microsoft has been engaged in a charm offensive with every regulator that will sit down with it, an effort led by its vice chairman and president, Brad Smith, who joined the company back in 1993. To allay regulators’ concerns, Microsoft has made many promises, the most important of which is that Call of Duty will be available on other platforms, such as Sony PlayStation. 

Perhaps a more important reason that the FTC’s move came as a surprise is that courts have been skeptical of challenges to so-called vertical mergers, or mergers in which two businesses don’t compete directly. Although the landmark Paramount case famously barred vertical integration in the movie business, in which studios tried to control production, distribution, and exhibition of feature films, the justice system has looked the other way when it comes to other vertical mergers. One famous albeit dated example is the AT&T / TIme Warner merger, which was ultimately allowed. 

Given how many concessions Microsoft has made to help this deal go through, Daniel Francis, an assistant professor of law at New York University and a former F.T.C. official, thinks the FTC has overplayed its hand. “Courts have been surprisingly solicitous about the kind of things that Microsoft has offered here,” he told the New York Times.

The Times also notes that the FTC’s leader, Lina Khan, has been very aggressive in pursuing novel novel or little-used arguments to challenge deals.

Still, any parent of a thirteen-year-old StrictlyVC intern who plays NBA 2K can tell you that Xbox and PlayStation don’t always play well together, especially when it comes to fast-twitch games like Call of Duty. 

No matter how much Microsoft protests that Call of Duty will not tilt the scales in its favor, we can definitely see why regulators and Sony are so concerned

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.