Blue Chip FTX Crypto Investors Face Probe Into Sloppy Due Diligence

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

This, as high-profile investors who gave the bankrupt crypto exchange equity capital are increasingly learning that their investments may turn out to be worthless.

As PYMNTS was one of the first to highlight this past November, a slew of well-respected investors lined up to give money to the so-called “cool kid” du jour, Sam Bankman-Fried — at eye-popping valuations.

In the wake of FTX’s rapid and high-profile demise, the SEC has alleged the crypto exchange raised more than $1.8 billion from different equity investors, including 90 U.S.-based investors, dating back to May 2019.

These backers include Patriots owner Robert Kraft’s Kraft Group, entertainment giant Endeavor, the family investment office of an Alibaba co-founder as well as that of billionaire hedge funder Daniel Och, founder of Och-Ziff and a board member of Endeavor.

But Bankman-Fried cajoled his biggest checks from some of the venture capital industry’s most well-known firms, like Tiger Global Management, SoftBank and Sequoia Capital, which handed over their money to FTX with few questions asked.

The SEC, along with the U.S. Department of Justice (DOJ), claim that Bankman-Fried was in reality orchestrating a “massive, years-long” fraud.

A representative for the SEC has not replied to a request for comment by PYMNTS.

No One Did Their Homework

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

As reported earlier by PYMNTS, the FTX collapse provided a master class in crypto industry risk management and accounting failures. FTX had tremendously poor internal controls — including no chief financial officer or independent board — and fundamentally “deficient” risk management procedures that allowed assets and liabilities “of all forms to be generally treated as interchangeable.”

As his financial empire was collapsing, Bankman-Fried tweeted: “… a poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin.”

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

The first time, a poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower.

— SBF (@SBF_FTX) November 10, 2022

He even acknowledged in a televised interview after his company’s stunning implosion: “I wasn’t even trying, like, I wasn’t spending any time or effort trying to manage risk on FTX.”

Bankman-Fried went on to add: “What happened, happened — and, if I had been spending an hour a day thinking about risk management on FTX, I don’t think that would have happened.”

The SEC’s inquiries do not indicate wrongdoing on the part of the investors, but at the heart of the agency’s investigation is the question of whether the venture capital and investment funds met their fiduciary duties to their own limited partners and investors.

The outcome of the SEC investigation could see those funds and investment vehicles facing regulatory scrutiny, according to the report, even if they are simultaneously considered victims and creditors of Bankman-Fried’s allegedly fraudulent orchestrations.

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

For now, as humbled investors are busily downplaying the scale of their financial involvement and losses in FTX, they’re simultaneously pointing to other successful investments they’ve made. While more details will surely emerge as the October trial date approaches, questions linger as to the long-term effect this ordeal will have on risk appetite within the venture industry.