U.S. prosecutors have accused Sam Bankman-Fried (SBF) of using money from his cryptocurrency exchange, FTX, to invest in a venture capital firm called Modulo Capital.
The New York Times reported that SBF’s hedge fund, Alameda Research, and FTX invested a total of $400 million in Modulo in 2022. This investment has raised concerns among regulators, as Modulo is a relatively unknown firm that raised a substantial amount of capital during a difficult time for the crypto market.
According to the prosecutors, the Modulo investment was likely made using money that FTX customers had deposited with the exchange. This money was allegedly misappropriated by SBF. The prosecutors also stated that Modulo has become an important part of the investigation and that FTX lawyers are now looking at Modulo’s assets as they try to recover money for their customers, investors, and other creditors. The whereabouts of SBF’s $400 million investment in Modulo is currently unclear.
Modulo Capital was founded in March 2022 by three former executives of Jane Street, a New York-based firm that once employed SBF and Alameda CEO Caroline Ellison. One of the founders, Duncan Rheingans-Yoo, was reportedly only two years out of college.
Another co-founder, Xiaoyun Zhang, known as Lily, was a former Wall Street trader with ties to SBF. Modulo is also known to operate from the same Bahamian condo community where SBF lived.
The news comes as the U.S. commissioner for the Commodity Futures Trading Commission, Christy Goldsmith Romero, is questioning the due diligence work done by venture capitalists and money managers who funded FTX. “Why did they turn a blind eye to what should have been really flashing red lights?” Romero asked.
This is not the first time that concerns have been raised about investments in FTX. Previously, the deputy prime minister of Singapore admitted that the government-owned investment firm Temasek faced “reputational damage” due to their investment in the exchange.
FTX is one of the largest and most popular cryptocurrency exchanges in the world. However, this recent revelation about the use of misappropriated funds to invest in a venture capital firm raises serious questions about the management and operations of the exchange.