Source: Business Times, 16 November 2022
“High Returns With No Risk”. That was allegedly a selling point in the late 2018 – early 2019 promotional materials of Alameda Research, the small hedge fund founded by Sam Bankman-Fried whose cryptocurrency exchange FTX hit every global headlines for all the wrong reasons the past fortnight before filing for bankruptcy last week.
And yet this outright eye-brow-raising preposterous promise was bought by many professional investors including major global financial institutions like Singapore flagship state holding company Temasek Holdings, who is known to have participated in all three rounds of FTX fundraising and now reportedly writing off its entire US$275 million investments (see pic above).
While the loss is pittance and would not cause a noticeable dent to its net portfolio of S$403 billions, many questions were being asked over its leadership and also whether Temasek conducted proper due diligence.
Temasek in its Statement on FTX on 17 Nov defended its “extensive due diligence process on FTX” spanning around 8 months:
During this time, we reviewed FTX’s audited financial statement, which showed it to be profitable. In addition, our due diligence efforts focused on the associated regulatory risk with crypto financial market service providers, particularly licensing and regulatory compliance (i.e. financial regulations, licensing, anti-money laundering (AML)/ Know Your Customer (KYC), sanctions) and cybersecurity. Advice from external legal and cybersecurity specialists in key jurisdictions was sought, with legal and regulatory review done for the investments.
Separately, we also gathered qualitative feedback on the company and management team.
A thorough and proper due diligence? Or yes but with the wrong focus, or oversight, considering what were missed but now emerged: missing funds through “back doors”, imprecise accounting of the value of FTX’s crypto assets, unacceptable management practices, using corporate funds to buy homes in the personal name of employees, etc
“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”
According to court documents filed by the new FTX CEO John Ray III, the administrator brought onboard with some 40 years experience in legal and restructuring experience that included the infamous 2001 collapse of Enron.