By SINGAPORE — Temasek Holdings issued a statement yesterday (17 Nov 2022) to announce that it will be writing down its US$275 million into the cryptocurrency exchange FTX in light of FTX’s bankruptcy filing.
This statement by the Singapore investment firm which was issued a week after the news of the bankruptcy filing — might have been spurred by public criticism over its due diligence in investing in the ill-fated FTX exchange.
FTX was founded by arbitrage trader, Sam Bankman-Fried, in 2019.
Temasek defended itself saying, “Our investment discipline, centred around intrinsic value and our risk-return framework, guides our due diligence for new investments and ongoing engagement with our investee companies.”
“We do recognise the inherent risks of investing in early stage companies and take a very measured approach to such investments by applying an illiquidity risk premium on the cost of capital,” it added. “In addition, we also add on a venture risk premium for the early stage they are in.”
Temasek also claimed that it had conducted an extensive due diligence process on FTX, which took approximately 8 months from February to October 2021.
“During this time, we reviewed FTX’s audited financial statement, which showed it to be profitable,” it said. “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,” it assured but did say that it isn’t practicable to eliminate all risks.
Temasek then blamed Mr Bankman-Fried, “It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced.” (emphasis ours)
It said it had expected FTX to act ethically always, “We expect companies that we invest in to comply with their obligations under the laws and regulations of jurisdictions in which they have investments or operations; abide by sound corporate governance; and above all act ethically always.”
While Temasek claims that its US$275 million investment was made across 2 funding rounds from October 2021 to January 2022, FTX itself said in a press statement that Temasek had participated in the previously announced Series B in July 2021 along with the Series B-1 fundraiser held in October 2021.
If what FTX said was true, then Mdm Ho Ching would have overseen the initial investment into FTX before she stepped out of her CEO position in Oct last year.
Bankman-Fried Accused Of Fraud
Mr Bankman-Fried has since resigned from FTX when the saga began.
He has since been replaced by a new CEO, John Ray, a restructuring expert appointed to oversee the liquidation process.
After taking over the company, Mr Ray expressed his shock by saying, “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.”
Mr Ray said his immediate priorities are locating and securing assets, investigating claims against insiders like former FTX CEO Sam Bankman-Fried, and cooperating with dozens of regulatory investigations in the US and abroad.
Sources told Reuters that Mr Bankman-Fried had secretly used US$10 billion in customer funds to prop up his own trading company Alameda Research, and at least US$1 billion of those deposits have vanished.
Mr Ray said Mr Bankman-Fried had claimed in 2021 that customers held US$15 billion on FTX’s platform, but this cannot be verified.
Also, previously, FTX did not record customer deposits as balance sheet assets, and balance sheets prepared under Bankman-Fried’s leadership cannot be trusted, Mr Ray added. FTX is attempting to recover additional assets, including US$372 million that was withdrawn without authorization on the day of the company’s bankruptcy filing.
What is equally if not more alarming, is that FTX did not have an in-house accounting department and had its accounts audited by an unknown Certified Public Accountant (CPA) Prager Metis which refers to itself as the first-ever CPA firm to open its Metaverse headquarters in the metaverse platform Decentraland.
In any case, the bankruptcy might result in the publication of FTX customers’ names, email addresses and transaction history, something which crypto owners would rather not reveal in general.