Venture Capital Firms: Rash Investing in FTX (2022)

 

(Larg investor of FTX)

ABSTRACT

            In the world of crypto currency and venture capitalist firms,’ ethics is not a term you might think of being especially important. Mr. Bankmen CEO of FTX swindled investors and mismanaged billions of customers money and eventually caused the failure of his company.  FTX and venture capitalist both fail when you grade them against the theory of individualism, they may have not broken laws, but they did not maximize profits. When FTX collapsed in on itself it also took with it many peoples life savings with it and with that their dreams and happiness there for FTX and venture capitalist fail to pass the ethical theory of Utilitarianism. Mr. Bankmen and the venture capitalist were motivated to make as much as possible and to them it did not matter so they were not motivated to do right because it is right, so they fail the theory of Kantianism. If businesspeople always used ethics to help them make their decisions events like the failing of FTX could be avoided.

ETHICS CASE CONTROVERSY

It all started when a Bahamas based cryptocurrency exchange company, FTX, was founded in May 2019 by Sam Bankmen. In the world of cryptocurrency Mr. Bankmen was seen as a savant that had complete understanding of the new and uncharted market of cryptocurrency. FTX’s goal was to try to make an easy and safe way for people to buy and hold and sell cryptocurrency. At their peak, they had over a million users. Sam Bankmen marketed his company aggressively through numerous different commercials. They ranged from comparing FTX to every major invention in history to having professional athletes endorse the company.

(FTX ad ran at the super bowl)

The ads put an emphasis on how safe and easy it was to use and now looking back at these statements it is extremely ironic. Mr. Bankmen’s aggressive marketing tactics also crossed over into his strategies when finding investors. His so-called pitch to potential investors was not really a pitch but a take it or leave it offer. Investors that heard Mr. Banksmen’s pitch stated that Mr. Bankmen believed that investors should only support and observe. This is where the FTX’s story becomes strange. Investors, after hearing Mr. Bankmen’s pitch, did not completely avoid this company like the plague but even more surprisingly invested with extremely little research into the company. The large venture capital’s firms that were investing should have the experience and knowledge not to just trust a person’s word but to conduct in depth research. It seems that they were blinded by the opportunity to be an early investor in a new market the New York Times said, “Investing in FTX gave them a piece of the hottest start-up in an emerging sector that promised to be as big as smartphone apps or the internet itself.” (Griffith, Erin, and David Yaffe-Bellany) New York Times, 11 Nov. 2022). Venture Capital firms completely went away from their due diligence and hard-core review procedures that they got involved in when it came to FTX. They fell in love with this “unique” investment, and it ended up having a detrimental impact on their balance sheets. If investors took the time to investigate FTX’s company’s practices, they all would have turned away from the potential investment. Mr. Bankmen also was the CEO of Alameda Research which is a trading firm that came out November 2, 2022. This trading firm held five billion dollars’ worth of FTT coins, these are FTX’s own coins, and this discovery served as the spark to the powder keg that was FTX. On November sixth the world’s largest crypto currency exchange, Binance, said they were going to liquidate all the holdings of the coin FTT due to their concerns about risk management. This news sent shock waves throughout the crypto currency world causing mass liquidation of the coin. The problem with that is FTX did not actually have the money to give back and found itself in a crisis where they needed to find six billion dollars to give back to customers. During this the price of a FTT coin plummeted eighty percent in just two days. FTX started to look for ways out of the situation they found themselves in, so it had turned to one of its competitors. Binance announced on November eighth that they had made a deal to acquire FTX. They also released that it was still non-binding and did not release the purchase price. After this announcement FTX was going to be bailed out from the predicament that they had gotten themselves into. Only a day later, on November ninth, Binance announced that they would be pulling out of the deal due to their concerns on how the company was run and most importantly how the customer’s finances were being handled,  John J. Ray III a CEO who specializes in bankruptcy had this to say "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," Ray said in a filing on Nov. 17(O'Halloran, Suzanne O'Halloran Fox Business, 28 Nov). This action thrust FTX back into its original position but with the add on of people questioning how their money was managed. November tenth the Bahamas securities regulator froze the remaining FTXs assets and California Department of Financial Protection, and Innovation started an investigation. Mr. Bankmen also took to twitter to inform the world that FTX did not have the capital to fulfill all the customers’ requests. He blamed the over leveraging of the company on “poor internal labeling.” (REIFF, NATHAN Investopedia 18 Nov. 2022) He also said that Alameda would slow down their trading. On November eleventh Mr. Bankmen would step down from his position as CEO and John J. Ray III would take his place as well as the company filing for Chapter 11 bankruptcy protection. When this was filed one hundred and thirty other companies were engaged in the proceedings. Soon after the filings took place, FTX stated that they were victims of “unauthorized transactions.” Third party business analysis believes that in a hack four hundred and seventy-seven million dollars was stolen. After this was discovered, the Securities Commission of the Bahamas, decided on November 18^th that FTX had to move all crypto assets to the regulator’s wallet to help protect everyone. Currently FTX is involved in civil lawsuits and one class-action lawsuit. The failure of FTX will most certainly leave a permanent stain on the crypto currency market and investors that invested in it without the research to see all the warning signs. Some economists have compared the FTX debacle to the collapse of Enron in October 2021.

(Timeline)

STAKEHOLDERS

(FTX's crypto currency) 

                   All those who engaged in FTX, were left with a bad taste in their mouths and less money in their pockets. The stakeholders that were hurt the most in the fall of FTX was the average person who was trying to invest in their future and ended up losing their hard-earned money, like Terri Smith an architect in Seattle who may have lost everything from this situation. Investors are left with depleted accounts and a limited hope of getting anything back once the bankruptcy proceedings happen. FTX did not only burn regular investors, but they did so to many venture capital firm such as Temasek and Sequoia, which stand to lose large amounts of capital.

INDIVIDUALISM

(Past CEO of FTX)

When you look at the case of FTX and the Venture Capital firms that were involved through the scope of individualism, it is hard to fully explore with the information that is currently available. At the time of this writing there are no criminal charges brought against any FTX employees. This lines up with one of the main points of individualism of attempting to maximize profits while staying within the laws. In this instance, FTX was attempting to create the most profit it could and just ended up failing. As far as we know, no laws were violated therefore FTX played by the rules of individualism and just unfortunately went under. When looking at the venture capitalist firms and how they interact with the ideas of individualism it can be looked at in two separate ways. On one hand an argument can, be made that the firms were trying to stay ahead of technology and become an early investor of a brand-new market and did not know how to research an investment like this. In this way the firm was trying to make the most profit and no laws were broken, therefore they followed the ethics of individualism. On the other hand, it could be said that one of the major jobs of an investment firm is to know every aspect of where their money is invested. They were not looking to make the most profit but were just gambling on the perceived golden boy of the crypto world. As of now, FTX only halfway follows the ideas of individualism by failing to maximize profits and the investment firms that invested without investigating the company that they invested in, did not follow the ideas of individualism due to their oversight not only not maximizing profit but actually minimizing it. The massive investments by the Venture Capital market inadvertently represented to the average investor that this was a “solid” investment based on the regular principles usually adhered to by them.

UTILITARIANISM

Looking at FTX and all its doings, it is quite clear that this business was not run under the ethical guidelines of utilitarianism. Utilitarianism is the middle ground between egoism, where you are only looking out for your own happiness and altruism, where you only look out for others happiness. When a company is operated under the guidelines of utilitarianism, the company is not only looking out for themselves but also for everyone involved. FTX showed, with their less than desirable management of themselves and their customers’ investments that they were only looking out for themselves. When Mr. Bankmen did not allow anyone else to help make decisions on his company’s board, he embodied an egoism ethical standpoint and was only looking out for his own interests. The way Mr. Bankmen conducted himself outside of his business also shows that he was only looking out for his own happiness when he used his image as a crypto golden boy to convince investment firms to blindly toss money at his company without proper research. Mr. Bankmen does not fit into utilitarianism clearly and he was known to only be looking out for his own happiness not the happiness of his users or investors. His willingness to lie and swindle people to complete his own agenda of making the most profit for himself proves this. His ethics fit an egotist model due to the fact he was only concerned in what happened to him and not how any of his own actions affected anyone else. Venture capital firms that heavily invested should have been able to see that the CEO of the company they had invested in only cared about his own net worth and happiness and did not care how he increased it.

KANTIANISM

                        Kantianism is an interesting way to approach a business ethical dilemma. Kantianism is based around acting rationally, helping, and allowing people to make their own decisions, respecting people’s decisions and everyone’s individual needs. Finally, to be motivated to do the right thing because it is right. Mr. Bankmen and FTX, under the light of acting rationally did not act in a rational manner, when Mr. Bankmen refused to allow outside help of people that have more experience that could have helped him avoid running his business into bankruptcy. During the operation of FTX people were allowed to make their own decisions if they wanted to invest or if they did not, but Mr. Bankmen did not help them by withholding invaluable information on how FTX was being run and how FTX sister company Alameda held five billion dollars’ worth of FTX own coin. This information would have most certainly changed how investors would have made their decisions, therefore FTX did not allow investors to make their own decisions but coerced them into a decision by withholding essential information about themselves. The only point where a case could be made in FTXs favor, is that they respected people’s decisions and needs. Investing always has an inherent risk involved in it so when a person invests their money in any investment, they also must accept all the risks involved in it as well. In this way, FTX respected everyone’s decisions of taking a risk in this situation. It just did not pan out in a favorable fashion. If you look at the motivations of FTX it is crystal, clear that they were not motivated by the right thing but were motivated to just make the most profit for themselves no matter the amount of people that would be burned by their business plan. They were not motivated to help their investor’s or to improve the new emerging market space, which is crypto, therefore they were not motivated to do the right thing because it is right. Mr. Bankmen did not use Kantianism ethical guidelines to help run his company.

VIRTUE THEORY

                       Some people would describe FTX as generally distrustful and dishonest. Learning and moral leadership are not terms that are used to describe FTX. It is quite the opposite. If you want to look at FTX as a trustworthy company, you must do your proper research on who runs the company and that is Mr. Bankmen. This individual was also the CEO of another investment company. This company also held five billion dollars of the crypto coin FTT. FTT is FTXs own crypto currency made for their exchange in most circumstances this would not be a problem but both companies shared a CEO. This was seen as an extremely shady way to do business and was done to boost the perceived numbers of their own coin. When looking to see if this is an honest company, you must look at how they managed users and how they secured investments for themselves. FTX was well known for partnering with many super star athletes such as Shaquille O'Neal, Trevor Lawrence, David Ortiz, and Tom Brady and even running a Super Bowl ad. The ads that FTX released to the public openly stated how easy and safe their platform is. The ads were not honest to their customers about all the risks involved in investing but made it sound like there was no risk and that anyone could do it with no research on what they were doing. Hearing investors stories that heard Mr. Banksmen’s pitch to invest in his company all share the same few traits. The pitch was often described as not a pitch but a take it or leave it offer to the investment firms and Mr. Bankmen felt strongly against having outside help when making decisions about the company. FTX was extremely dishonest and used the inexperience of the investment firms in the crypto currency market to pull the wool over their eyes and take them for a ride. They had no say in it. Mr. Bankmen was notorious for refusing to allow investors a spot at the table to voice the ideas and concerns. He would not learn from people that had more experience, which could have made the company better, but he remained stuck in his ways and would not accept the help offered. The moral leadership of Mr. Bankmen is not present at any of his companies that he ran. He did not care about anything but how to increase his personal net worth.

JUSTIFICATIED ETHICS EVALUATION

            When you are running an investment firm whether that is in regular stock and securities or forging a path into a new and unclaimed market of crypto currency, the goal should be the same and it is to provide a trustful experience. FTX and Mr. Bankmen failed to provide anything that is even remotely related to the word trust. From the start Mr. Bankmen used extremely aggressive and questionable business tactics. Mr. Bankmen was a predator to all his customers with his promise of a safe exchange platform, but he was unable to provide this. He was unable provide this due to his perceived expertise and not allowing investors to have a say on the decisions with the company and provide insight from there past experiences. The incident that kicked off oversight and poor management was that Mr. Bankmen caused the failure of the company. It was even stated in a tweet that “poor internal labeling” was the cause to all the leveraging and liquidity problems that tore apart the company. If Mr. Bankmen allowed his investors, that have had countless years of experience to help him, I believe that he would have a trustful strong company that is opening a new market and giving everyone the ability to invest with it. If you were to look at it from Mr. Bankmen’s perspective, it might seem a little different. He could have viewed this situation as no one has experience running a company in a crypto currency company and his aggressive business practices could just be him fully believing that he is trying spread the new world changing innovation. In the end Mr. Bankmen and FTX did not follow any ethical guidelines and were only looking out for themselves. It did not matter who they destroyed in the rise to the top. 

CONCLUSION

The way business was conducted for everyone involved in FTX was an unfortunate display of what happens when business is done in complete disregard of any ethical thought. Mr. Bankmen’s desperate crawl to the top not only destroyed his dream of a safe and easy crypto currency exchange but also installed a new distrust for the whole market of crypto currency. It also made venture capitalist firms extremely weary of supporting any of these companies in the future. This will stunt the growth of this new market and limit new innovations in this field. In the end, the way FTX treated their customers and investor’s put a negative view on their whole industry and it all could have been avoided if any ethical thought were used.

 

REFERENCES 

Griffith, Erin, and David Yaffe-Bellany. "Investors Who Put $2 Billion Into FTX Face Scrutiny, Too." The Collapse of FTX, The New York Times, 11 Nov. 2022, www.nytimes.com/2022/11/11/technology/ftx-investors-venture-capital.html.

REIFF, NATHAN. "The Collapse of FTX: What Went Wrong with the Crypto Exchange?" , edited by VIKKI VELASQUEZ, Investopedia, 18 Nov. 2022, www.investopedia.com/what-went-wrong-with-ftx-6828447#:~:text=Cryptocurrency%20exchange%20FTX%20collapsed%20in%20early%20November%202022,portions%20of%20the%20company%20but%20quickly%20backed%.

 

Taranto, Steven, and Isabel Gonzalez. "FTX collapse: Tom Brady, Stephen Curry, Shohei Ohtani among sports figures named in class-action lawsuit." , CBSSPORTS, 16 Nov. 2022, www.cbssports.com/nfl/news/ftx-collapse-tom-brady-stephen-curry-shohei-ohtani-among-sports-figures-named-in-class-action-lawsuit/#:~:text=Those%20three%20are%20part%20of%20a%20group%20of,who%2.

Peterson-Withorn, Chase. "Exclusive: These FTX Investors Stand To Lose The Most From The Crypto Exchange’s Implosion." The fall of FTX, Forbes, 10 Nov. 2022, www.forbes.com/sites/chasewithorn/2022/11/10/exclusive-these-investors-stand-to-lose-the-most-from-ftxs-implosion/?sh=1c04ca326700.

ROBERTS, JEFF J. "SBF in criminal jeopardy: How and when he could face justice." , Fortune Crypto, fortune.com/crypto/2022/11/18/sbf-in-criminal-jeopardy-how-and-when-he-could-face-justice/.

 

O'Halloran, Suzanne O'Halloran. "FTX bankruptcy unique, losses hard to determine: Ken Feinberg." , Fox Business, 28 Nov. 2022, www.foxbusiness.com/markets/ftx-bankruptcy-unique-losses-hard-to-determine-ken-feinberg.