OPINION | Lessons for Singaporean investors from the conviction of ex-FTX boss

The conviction of Samuel Bankman-Fried, the former chief executive officer (CEO) of FTX, holds lessons for Singaporeans when Singapore lost its entire investment in FTX. On Nov 2, a jury in a New York court found Bankman-Fried guilty on all seven charges, including fraud and money laundering. US prosecutors accused him of stealing US$8 billion (S$10.9 billion) from customers of FTX. The sentencing of Bankman-Fried is scheduled for March next year when he will be sentenced to possibly as long as 115 years in prison. This means the 31-year-old entrepreneur, who was once worth more than US$20 billion, may spend the rest of his life in jail. The troubles of FTX, previously one of the world’s largest crypto exchanges, came to light when it filed for US bankruptcy protection in November 2022. In November 2022, Temasek announced it would write down its entire investment of US$275 million in two FTX units, FTX International and FTX US. On May 29, Temasek chairman Lim Boon Heng announced, “Although there was no misconduct by the investment team in reaching their investment recommendation, the investment team and senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced.” “With FTX, as alleged by prosecutors and as admitted by key executives at FTX and its affiliates, there was fraudulent conduct intentionally hidden from investors, including Temasek. Nevertheless, we are disappointed with the outcome of our investment, and the negative impact on our reputation,” Lim, a former minister, added. Indeed, fraud was intentionally hidden, as Caroline Ellison, a former CEO of Alameda Research, said in her testimony against Bankman-Fried in October. Ellison told the New York court that she and Bankman-Fried had committed crimes together. Previously, Bankman-Fried repeatedly said publicly that Alameda, a cryptocurrency trading firm, was independent of FTX. But Ellison testified Alameda had borrowed US$13 billion from FTX customers by June 2022. When FTX collapsed, Ellison said, “I felt a sense of relief that I didn’t have to lie anymore.” At Bankman-Fried’s direction, Ellison prepared seven different versions of Alameda’s balance sheet to potentially show to lenders, fearing that the real version would lead customers to withdraw money, she told the court. Since Bankman-Fried ordered different versions of Alameda’s balance sheets for investors, I would not put it past him to prepare different versions of the financial statements of FTX to hoodwink Temasek and other investors. On Nov 17, 2022, Temasek said in a statement, “We 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 is normal for investors to take a company’s audited financial statements at face value. I admit that during my previous career as a business journalist, I regularly wrote stories on companies where I accepted their audited financial statements as true. “We also gathered qualitative feedback on the company and management team based on interviews with people familiar with the company, including employees, industry participants, and other investors,” Temasek said in its statement on Nov 17, 2022. There are ways to spot signs of potential fraud in a company, according to a report in 2018 by Deloitte, a Big Four accounting firm. According to the Deloitte report, potential fraud red flags include a company’s management living beyond their means and the company having an unusually close association with a vendor.

Relationships

These two red flags applied to FTX. The management of FTX enjoyed lavish lifestyles, while Alameda and FTX had a close relationship, notwithstanding Bankman-Fried’s previous statements that the two companies were separate. Alameda was co-founded by Bankman-Fried in September 2017, and 90 per cent owned by him. Ellison was previously a girlfriend of Bankman-Fried, the 28-year-old woman admitted in court. Ellison, Bankman-Fried and several senior executives of FTX and Alameda lived in the same penthouse in the Bahamas, the tropical island nation where FTX is headquartered, reported CNBC. Given these circumstances, it is unimaginable that Alameda and FTX had little to do with each other. The luxurious lifestyle of senior management of FTX and Alameda is another warning sign. Of course, there is nothing wrong with a company spending good money on nice offices in prime locations. However, it becomes a problem if the lifestyle of management is excessively extravagant. The 11,500-square-foot Bahamas penthouse where Bankman-Fried, Ellison and senior executives of FTX and Alameda previously lived, valued at US$35 million to US$40 million (S$54.4 million), commanded a scenic view of the Atlantic Ocean and had Italian marble floors, a spa, swimming pool and jacuzzi, reported CNBC. Jordan Belfort, an American speaker, author and former financier, smelt a rat when he saw the lavish lifestyles of people involved in making the movie “The Wolf of Wall Street”, based on his crimes on US stocks, which landed him in a US prison for 22 months. Belfort, portrayed by Leonardo DiCaprio in the film, said that he sensed something fraudulent about the film’s production company, Red Granite Pictures, according to an article in Hollywood Reporter. Red Granite Pictures has paid the US government a settlement of US$60 million for its role in the 1MDB scandal, a multibillion-dollar money laundering case involving a defunct Malaysian sovereign wealth fund, 1MDB. “But I met these guys, and said to Anne (Koppe, Belfort’s then fiancée) these guys are f—ing criminals,” Belfort quoted in the Hollywood Reporter. “It hadn’t even gone into production yet, and they threw a launch party. They must have spent US$3 million on a launch party. They flew in Kanye West (a US rapper), and I said to Anne, this is a f---g scam, anybody who does this has stolen money.‘ You wouldn’t spend money you worked for like that,” Belfort added. There is a saying that it takes one crook to know another.

Bribery risks

The trial of Samuel Bankman-Fried showed he bribed Chinese officials and bought influence from US politicians. If Bankman-Fried is capable of doing that to officials in the US and China, he is capable of trying the same with officials in other countries. In social media posts which have been deleted, Ellison said her ideal man was someone “controlling most major world governments (and having) sufficient strength to physically overpower you”, reported the Guardian. Her former boyfriend, Bankman-Fried, certainly wanted to influence various governments. Bankman-Fried paid US$150 million in bribes to Chinese officials and tens of millions of US dollars to US politicians, including President Joseph Biden, Ellison said in her testimony in October. “He donated US$10 million to Biden and that was a relatively small amount of money. He felt that was something that got him influence and recognition.” A US indictment unsealed in February accuses Bankman-Fried of having directed at least 300 illegal campaign donations, totalling up to US$100 million, to both Democrats and Republicans through unnamed FTX executives.

Don’t follow the crowd 

Although it is unfair to generalize for all Singaporeans, I have noticed a tendency among some Singaporeans to assume that if an important person or company supports something, it must be good. If Singaporeans, by using their own thinking and doing their homework, decide something is not worth investing in, they should stick with that decision, even if major world figures and superstars say it is good. Singaporeans should not hero-worship the global elite and blindly follow them in bad investment decisions.

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Toh Han Shih is chief analyst of Headland Intelligence, a Hong Kong risk consulting firm