FTX founder Sam Bankman-Fried
Key Man Risk rings out loud as the world grapple this week with the sudden rapid collapse of FTX, one of the world’s largest cryptocurrency exchanges.
One may argue no amount of in-depth due diligence would have mitigated the risks of investors losing their monies in this crypto equivalent of a classic case of bank run, not till at least after digital currencies news portal CoinDesk raised the red flags , based on leaked financial documents, that the bulk of the assets of Alameda Research are held in FTT, a digital token minted by the former’s sister firm FTX. While FTT and FTX appeared unrelated on paper, Alameda Research is the hedge fund founded by FTX founder Sam Bankman-Fried.
“Today, I filed FTX, FTX US, and Alameda for voluntary Chapter 11 proceedings in the US”, Bankman-Fried tweeted 11 November following his “I *ucked Up” Twitter announcement the day before.
The investors in FTX include institutional investors like major sovereign funds, pension funds, hedge funds, etc. These are major financial institutions who conduct various types of pre-transaction due diligence as part of compliance and regulatory requirements. Often times especially when things turned dire, the key question is not whether they did but what and how much they covered in the risks mitigation process – a mere cursory check-the-box due diligence exercise or one that leaves no stone unturned?
To illustrate, I have once assisted a major hedge fund in investigating a red chip the client was contemplating to position, long or short. Much like FTX the outperforming company was founded by an individual whose background resembles the many rags to riches stories one may doubt but well primed for a Hollywood script. The client’s research team unearthed some but very limited insights with their focus on analysts notes and stock exchange disclosures, ie. Window dressings materials.
With in-depth investigative due diligence through open source intelligence research plus exhaustive cloak-and-dagger like intelligence gathering with well-placed sources, our findings highlighted various serious red flags with roots traced to the founder, including behind-the-curtain transactions between what seemed initially like unaffiliated entities – much like the CoinDesk relevations about FTX and FTT.
Key man risk, that’s the takeaway for the client. The pivotal findings have helped them to manage what could otherwise resemble FTX’s journey from crypto white knight to pariah in a matter of days.