The Unknown Hedge Fund That Got $400 Million From Sam Bankman-Fried

Not lengthy earlier than FTX collapsed in November, its founder, Sam Bankman-Fried, despatched $400 million to an obscure cryptocurrency buying and selling agency referred to as Modulo Capital.

The fledgling agency, which was based in March and operated out of the identical Bahamian compound the place Mr. Bankman-Fried lived, had no observe document or public profile. One of the founders, Duncan Rheingans-Yoo, was solely two years out of school. His enterprise associate, Xiaoyun Zhang, generally known as Lily, was a former Wall Street dealer who had beforehand been romantically concerned with Mr. Bankman-Fried, in accordance with 4 individuals with information of their relationship.

Now, Modulo is rising as a vital a part of the investigation by federal prosecutors into Mr. Bankman-Fried and his as soon as big cryptocurrency alternate. They’re analyzing whether or not he used FTX’s buyer funds to spend money on the little-known agency when his present hedge fund, Alameda Research, was struggling amid a wider crypto business downturn. The $400 million outlay was one among Mr. Bankman-Fried’s single largest investments.

At the identical time, attorneys for FTX’s new management are eyeing Modulo’s property as they scramble to get well the billions of {dollars} that clients, lenders and buyers misplaced when the alternate imploded.

It’s unclear how a lot of FTX’s $400 million funding stays or the place it’s. But the authorities have been conscious of the buying and selling agency for months; the day after Mr. Bankman-Fried was arrested within the Bahamas in mid-December, he was denied bail at a courtroom listening to the place a neighborhood prosecutor argued that he was a flight threat and prompt he may be capable of faucet the funds sitting with Modulo.

Before beginning Modulo, Ms. Zhang and Mr. Rheingans-Yoo labored at Jane Street, the Wall Street agency the place Mr. Bankman-Fried, 30, started his profession and met lots of the individuals, of their 20s and 30s, who would later assist him construct his crypto empire.

It’s unclear how a lot cash Modulo had apart from Mr. Bankman-Fried’s funding. But it started buying and selling crypto earlier than FTX failed, and it has now largely shut down, in accordance with an individual accustomed to its operations.

Mr. Bankman-Fried’s determination to supply a lot funding to a start-up buying and selling agency on the identical time that Alameda was dropping cash raised suspicions for investigators.

At the bail listening to in Nassau, the native prosecutor cited an affidavit compiled by one other Bahamian legislation enforcement official that has been beneath seal in courtroom within the Bahamas. Federal prosecutors in Manhattan investigating Mr. Bankman-Fried imagine the Modulo funding was made utilizing legal proceeds — misappropriated cash that FTX clients had deposited with the alternate, mentioned an individual briefed on the investigation.

Neither of Modulo’s two founders has been accused of wrongdoing, however they not too long ago employed Aitan Goelman, a legal protection lawyer who’s a former director of enforcement for the Commodity Futures Trading Commission. Mr. Goelman mentioned he had no remark.

Representatives for FTX, Mr. Bankman-Fried and the U.S. lawyer for the Southern District of New York in Manhattan all declined to remark.

The circulate of cash to Modulo has additionally caught the eye of the attorneys representing FTX within the firm’s chapter continuing in Delaware. In a slide presentation to the alternate’s collectors that was filed in courtroom final Tuesday, FTX’s attorneys flagged the transaction with Modulo as one among its prime targets for reclaiming cash.

The presentation mentioned Modulo obtained funds in installments within the third and fourth quarters of final yr. Around $300 million of that whole was transferred shortly earlier than FTX’s implosion, in accordance with the Bahamian prosecutor.

The funds occurred throughout a interval when transfers of cash could be challenged and probably clawed again within the chapter course of. Clawback lawsuits are a robust software in bankruptcies to get well property, they usually performed a vital function in serving to the victims of Bernard Madoff’s Ponzi scheme recoup a lot of the $19 billion that was invested in that decades-long fraud.

“Focusing on large, questionable transactions to a fund, company or a person with close connections to the debtor before the bankruptcy filing is basically the low-hanging fruit in a bankruptcy case,” mentioned Lindsey Simon, a company legislation and chapter professor on the University of Georgia School of Law.

Last week, FTX’s attorneys mentioned that they had discovered $5.5 billion in money, securities and digital property held in buyer accounts or tucked away in different elements of the corporate. But the precise worth of lots of the cryptocurrencies owned by FTX is difficult to find out, and the attorneys mentioned the corporate nonetheless had a serious shortfall in property.

On Friday, federal prosecutors disclosed that that they had seized greater than $600 million in property belonging to Mr. Bankman-Fried, together with a mixture of money and shares saved in financial institution and brokerage accounts.

Any authorized motion to reclaim the Modulo funds might present a template for broader efforts to get well cash that Mr. Bankman-Fried invested in smaller firms. At the peak of his wealth and energy, he funneled an estimated $4.6 billion into greater than 300 firms, together with an synthetic intelligence start-up referred to as Anthropic and the crypto firm Yuga Labs.

Even amid that spending spree, the Modulo deal stands out due to the amount of cash concerned and Mr. Bankman-Fried’s shut ties to the agency’s founders. Ms. Zhang and Mr. Rheingans-Yoo have been additionally Modulo’s solely administrators, in accordance with incorporation papers filed within the Bahamas.

Both left Jane Street final January, in accordance with brokerage business information, about three months earlier than Modulo was included. (Modulo has no reference to a equally named funding agency in Brazil.)

A 2012 graduate of Amherst College, Ms. Zhang labored at Jane Street for a decade, overlapping with Mr. Bankman-Fried, who spent about three years there after graduating from the Massachusetts Institute of Technology in 2014. Mr. Rheingans-Yoo was a dealer at Jane Street from 2020 to 2022, becoming a member of shortly after he graduated from Harvard, the place he was captain of the fencing group. The crypto publication CoinDesk beforehand reported that Modulo’s founders had labored at Jane Street however didn’t establish them.

Before Modulo obtained the $400 million, the funding was the topic of debate inside Mr. Bankman-Fried’s tight circle of prime advisers, in accordance with two individuals accustomed to the discussions.

Ultimately, Mr. Bankman-Fried moved ahead regardless of reservations voiced by Caroline Ellison, the 28-year-old chief government of Alameda, different individuals accustomed to the matter mentioned. Ms. Ellison has since pleaded responsible to fraud costs for her function in FTX’s collapse and is cooperating with prosecutors within the legal case in opposition to Mr. Bankman-Fried.

Further complicating the Modulo funding have been the romantic ties among the many executives concerned within the deal. Ms. Ellison and Mr. Bankman-Fried had dated previously, they usually lived along with eight different roommates in a luxurious penthouse at Albany, an oceanside resort on the Bahamian island of New Providence.

Mr. Bankman-Fried had additionally had a quick romantic relationship with Ms. Zhang once they labored collectively at Jane Street, one of many individuals with information of the connection mentioned. By the time of the funding in Modulo, Mr. Bankman-Fried was not relationship both girl, this particular person mentioned.

Last spring, Modulo arrange an workplace in the identical Albany resort the place Mr. Bankman-Fried and Ms. Ellison lived. Ms. Zhang and Mr. Bankman-Fried have been nonetheless buddies, and they might typically journey collectively on constitution flights to New York from the Bahamas, in accordance with two individuals accustomed to the preparations.

Mr. Bankman-Fried started to pour cash into Modulo at a time when Alameda was struggling. After the crypto market crashed in May, various crypto lenders recalled their loans to Alameda, prompting the buying and selling agency to tug cash from FTX buyer accounts to make up for the shortfall, in accordance with federal prosecutors, regulators and former Alameda staff.

Sometime round September, Mr. Bankman-Fried was significantly contemplating shutting down Alameda, in accordance with public charging paperwork, in addition to personal authorities information obtained by The New York Times. At the time, Alameda had misplaced $5 billion, which Mr. Bankman-Fried acknowledged to colleagues was greater than the corporate had ever made or was more likely to make sooner or later, the federal government information mentioned. But he additionally expressed issues about how FTX would perform with out Alameda buying and selling on it.

The connections between FTX and the Modulo founders went past Mr. Bankman-Fried’s relationship with Ms. Zhang. Last yr, FTX additionally employed Mr. Rheingans-Yoo’s older brother, Ross Rheingans-Yoo, from Jane Street to take a prime job on the FTX Foundation, a charitable group funded by Mr. Bankman-Fried.

Ross Rheingans-Yoo, who graduated from Harvard in 2016, labored on the muse’s pandemic preparedness efforts, in accordance with a web page on his private web site that’s now not lively. There isn’t any indication that he had something to do with Modulo, and he didn’t reply to a request for remark.

But his charitable work aligned carefully with the priorities of Mr. Bankman-Fried’s youthful brother, Gabe Bankman-Fried, who ran Guarding Against Pandemics, an advocacy group that FTX helped bankroll. Both Rheingans-Yoo brothers, in accordance with archived variations of their private biography pages, have been supporters of the rules of efficient altruism, a philanthropic motion that urges adherents to donate the majority of their revenue to charity and use data-driven evaluation to maximise the affect of the contributions.

Mr. Bankman-Fried had additionally aligned himself with the motion. For years, he invoked his dedication to efficient altruism as he cultivated a worldwide model, claiming that he acquired into crypto buying and selling to make billions of {dollars} for worthy causes.

Kitty Bennett and Alain Delaquérière contributed analysis.

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