FTX used $200 million of customer deposits to fund venture deals

FTX diverted $200 million worth of customer deposits to fund a pair of venture deals in a move that caught the attention of the Securities and Exchange Commission.

In March, the cryptocurrency firm reportedly invested $100 million through its FTX Ventures unit in the fintech company Dave, which had just gone public a few months prior. The companies announced at the time that they would be working to enlarge the “digital assets ecosystem.”

In another deal that caught the SEC’s attention, FTX made a $100 million investment in the Web3 firm Mysten Labs in September. This ended up being a $300 million funding round for the company that saw Mysten Labs valued at $2 billion and was also joined by Binance Labs and Coinbase.

The Financial Times reports that although FTX Ventures was involved in dozens of different transactions, their investments in Dave and Mysten Labs are the only disclosed investments of $100 million.

Former FTX CEO Sam Bankman-Fried has been accused of carrying out widespread fraud after the company went from a valuation of $32 billion earlier in the year to bankruptcy in November. At the heart of many of the charges is the fact that the 30-year-old diverted FTX funds to his hedge fund, Alameda Research, who then used the money to carry out risky trades and make questionable loans.

While Dave and Mysten Labs have not been connected to Bankman-Fried’s wrongdoings, the investments serve as proof of FTX and Bankman-Fried using customer money for venture fundings. It is likely that these and other investments from FTX’s $5 billion venture pool will be under heavy scrutiny as investigations into the use of FTX funds continue.

The SEC has set the stage for clawbacks by linking these two big investments to customer money. Should FTX bankruptcy trustees prove that client money was used to fund investments by Bankman-Fried, they could choose to attempt to recover those funds in their efforts to retrieve customer assets.

While representatives for Mysten Labs declined to comment on the situation, Dave CEO Jason Wilk informed CNBC that the company has already scheduled to repay FTX’s investment in Dave, with interest, by 2026. FTX made their $100 million investment in Dave using a convertible note, which is a short-term cash loan than FTX could choose to convert to shares in the future. However, they never made the conversion, which has left Dave with a liability of $101.6 million to FTX and its successor companies.

Dave noted in a statement that there are no terms in the note that require Dave to repay the investment before the maturity date. However, Wilk emphasized that the firm was not aware that FTX and Alameda had been using customer assets for their investments.

The investment Bankman-Fried made in privately held Mysten Labs is said to be an equity deal.

Questionable investments

These investments have not performed very well, with shares of Dave falling more than 97 percent since they went public. They were warned by Nasdaq this summer that they would be delisted if their share price did not improve; it is currently trading for 28 cents and has a market cap of about $100 million.

Meanwhile, their poorly timed Mysten Labs investment came amid the crypto meltdown, at a time when Ether and Bitcoin were down by more than half for the year and countless lenders and hedge funds were filing for bankruptcy.

Last week, Bankman-Fried’s lieutenants, Caroline Ellison and Gary Wang, pleaded guilty to federal charges over their illicit use of customer funds for venture investments and trading. Both are reportedly cooperating with the federal investigation into the FTX collapse and the actions of Bankman-Fried. Ellison, who was the CEO of Alameda and once dated Bankman-Fried, apologized for defrauding investors. Both individuals said they knew that what they were doing was wrong, which could destroy Bankman-Fried’s defense that his wrongdoings were unintentional mistakes.

Sources for this article include:

CNBC.com

MSNBC.com