Cryptocurrency investor says he saw 'serious red flags' with FTX founder Sam Bankman-Fried

Serious reddish flags astir Sam Bankman-Fried's FTX emerged earlier the now-embattled cryptocurrency speech adjacent launched, according to an aboriginal would-be investor.

Alex Pack, present the CEO of New York-based task superior steadfast Hack VC, said helium met Bankman-Fried successful 2018. At the time, the entrepreneur hadn't yet founded FTX and was seeking backing for different institution helium started, Alameda Research.

Bankman-Fried stepped down arsenic CEO of FTX past Friday arsenic the crypto institution filed for Chapter 11 bankruptcy protection. The crypto powerhouse, once valued astatine $32 billion, collapsed successful a substance of days amid a liquidity crunch and allegations that it was misusing lawsuit funds. The Securities and Exchange Commission and the Department of Justice are investigating what happened, according to The Wall Street Journal.

And connected Thursday, recently appointed FTX CEO John Ray III declared successful a U.S. Bankruptcy Court filing that "in his 40 years of ineligible and restructuring experience," helium had ne'er seen "such a implicit nonaccomplishment of firm controls and specified a implicit lack of trustworthy fiscal accusation arsenic occurred here."

In 2018, Bankman-Fried was a comparatively chartless laminitis seeking a woody successful the emerging crypto market.

Pack said Bankman-Fried was hunting for "single digit millions" successful equity from Pack's anterior crypto steadfast DragonFly Capital, which helium co-founded. Dragonfly is an early-stage exertion institution investing successful blockchain exertion and astatine the clip was a $100 cardinal money seeking to assistance crypto startups. Pack, who has 9 years of acquisition successful the space, had antecedently been manager of web investing astatine Bain Capital Ventures, a spouse astatine AngelList and worked astatine Arbor Ventures successful Hong Kong.

At first, Pack said, everything seemed fine.

"I was captivated by him for the archetypal period until helium showed america everything," describing him arsenic "incredibly astute and charismatic."

Over a play of astir 5 to six months, Pack said, helium and his squad met with Bankman-Fried much than a twelve times. But aft extended owed diligence, Pack said everyone came to the aforesaid conclusion.

"After spending months with him, we realized his risk-taking was catastrophic," Pack told CNBC. "We looked astatine it and saw reddish flags – excessively overmuch risk."

Pack provided CNBC with copies of a WeChat past helium had with Bankman-Fried successful 2018 and 2019 that amusement the 2 discussing a imaginable deal. But arsenic Pack's squad did its owed diligence, helium said alarm bells went off. Alameda's equilibrium expanse showed "an uncharacteristic monolithic nonaccomplishment of much than $10 million, precise quickly, according to Pack.

Pack said it appeared to beryllium a commercialized mistake oregon a bid of commercialized errors. And determination was ambiguity astir the losses.

"We could ne'er fig out: Was it fraud, was it monolithic hazard taking, was it a clump of honorable mistakes?"

Another reddish flag, according to Pack, was that Bankman-Friend allegedly hid the beingness of the cryptocurrency speech FTX astir that time. He said his squad discovered that Alameda was "hemorrhaging wealth to wage for FTX."

"We asked him 'what's going connected here?' beauteous nonchalantly," Pack said. "He said, "I can't retrieve if I told you I had this thought for an exchange. For that reason, I've been spending astir of my clip connected it truthful we person been neglecting the halfway business.'"

"There was a batch helium would oregon wouldn't share. There was a wide signifier of hidden monolithic risk," Pack said. "He ne'er truly showed Alameda's books to immoderate aboriginal capitalist – that's wherever each the atrocious worldly was happening."

In a series of tweets successful August 2020, Bankman-Fried appears to person told a antithetic mentation of events, without naming the parties involved. Pack said the tweets were referencing the DragonFly deal.

"They expressed involvement successful Alameda, and tendency to assistance it grow," 1 tweet from Bankman-Fried said. "They understood the business. Alameda has ne'er taken an outer investor, but this seemed similar a bully opportunity."

Bankman-Fried tweeted that it was really his squad that rejected the offer, which was astir one-third of Alameda's valuation.

"They did not respond good to america saying no, and we were surprised. Like, of course, we said no! They lone bid 1/3 of our offer," according to the tweet. After much discussions to salvage the deal, "eventually we said nary to them. They said nary to america saying no, and we weren't truly definite however 1 responds to that, truthful we conscionable stopped responding."

A spokesperson for Bankman-Fried did not respond to CNBC's petition for comment.

Pack said the rejection came backmost to haunt him. He would larn aboriginal that helium was chopped retired of aboriginal deals successful which Bankman-Fried was involved. While helium told different task superior firms astir what happened, helium said helium didn't disclose thing publicly.

Pack said helium did not fto the acquisition dilatory him down.

Earlier this year, Hack VC announced a $200 cardinal "Crypto Seed Fund" for investments successful crypto, Web3 and blockchain startups.

Today, erstwhile helium looks backmost connected his dealings with Bankman-Fried, Pack sees what happened arsenic foreshadowing the illness of FTX.

"It was similar intelligibly 4 years ago, this feline hid superior things and took unthinkable risks with different peoples' money," Pack said. "And present helium appears to person done the nonstop aforesaid happening connected a grander catastrophic scale."