Shortly before FTX collapsed in November, its founder, Sam Bankman-Fried, sent $400 million to an obscure cryptocurrency trading firm called Modulo Capital.
The new firm, which was set up in March and operated from the same Bahamian premises where Mr Bankman-Fried lived, had no track record or public profile. One of the founders, Duncan Ringens-U, was only two years out of college. His business partner, Xiaoyun Zhang, known as Lily, was a former Wall Street trader who was previously romantically involved with Mr Bankman-Fried, according to four people with knowledge of their relationship. .
Now, modulo is emerging as a key part of an investigation by federal prosecutors into Mr. Bankman-Fried and his once-giant cryptocurrency exchange. They are being investigated over whether he used FTX’s customer funds to invest in a little-known firm when his existing hedge fund, Alameda Research, was struggling amid a broader crypto industry downturn. . The $400 million outlay was one of Mr. Bankman-Fried’s single largest investments.
At the same time, lawyers for FTX’s new leadership are eyeing Modulo’s assets as they scramble to recover the billions of dollars that customers, lenders and investors lost when the exchange imploded.
It is unclear how much of FTX’s $400 million investment is left or where it is. But the authorities have been aware of the trading firm for months; A day after Mr Bankman-Fried was arrested in the Bahamas in mid-December, he was denied bail at a court hearing where a local prosecutor argued he was a flight risk and suggested that he might be able to tap the money sitting with Modulo. ,
Before starting Modulo, Ms. Zhang and Mr. Rengans-Yu worked at Jane Street, the Wall Street firm where Mr. Bankman-Fried, 30, began his career and met many people in their 20s and 30s who would later Let me help him build his crypto empire.
It is not clear how much money Modulo had in addition to Mr. Bankman-Fried’s investment. But it began trading crypto before FTX failed, and has now largely shut down, according to a person familiar with its operations.
Mr. Bankman-Fried’s decision to provide so much money to a start-up trading firm at the same time that Almeida was losing money raised suspicions for investigators.
During the bail hearing in Nassau, the local prosecutor cited an affidavit compiled by another Bahamian law enforcement official, which is sealed in a Bahamas court. Federal prosecutors in Manhattan probing Mr Bankman-Fried believe the Modulo Investments were made using criminal proceeds FTX clients misappropriated funds they deposited with the exchange, a The person gave information on the investigation.
Neither of Modulo’s two founders has been accused of wrongdoing, but they recently hired a criminal defense attorney, Aitan Goleman, who is the former director of enforcement for the Commodity Futures Trading Commission. Mr. Goelman said he had no comment.
What to know about the fallout of FTX
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What is FTX? FTX is now a bankrupt company which was one of the largest cryptocurrency exchanges in the world. This enabled customers to trade digital currencies for other digital currencies or traditional money; It also had an original cryptocurrency known as FTT. Based in the Bahamas, the company built its business on risky trading options that are not legal in the United States.
Who is Sam Bankman-Fried? He is the 30 year old founder of FTX and former CEO of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and is known for his commitment to effective altruism, a charitable movement that urges followers to give away their money in an efficient and logical manner. .
How did FTX’s troubles begin? Last year, Changpeng Zhao, chief executive of the world’s largest crypto exchange, Binance, sold his stake in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in return. In November, Mr. Zhao said he would be selling the tokens and expressed concerns about the financial stability of FTX. This move, which brought down the price of FTT, spooked investors.
What caused the downfall of FTX? Mr. Zhao’s announcement sent the price lower and spooked investors. Traders rushed to exit FTX, leaving the company with an $8 billion shortfall. Binance, FTX’s main rival, offered a loan to rescue the company, but later pulled it out, forcing FTX to file for bankruptcy on November 11.
Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission into whether FTX improperly used customer funds to run Alameda Research, a crypto trading platform that Mr. Bankman-Fried helped start. It was On 12 December, Mr Bankman-Fried was arrested in the Bahamas on charges of lying to investors and perpetrating fraud. The next day, the SEC also filed civil fraud charges.
Representatives for FTX, Mr. Bankman-Fried, and the US attorney for the Southern District of New York in Manhattan declined to comment.
The influx of money into Modulo has attracted the attention of attorneys representing FTX in the company’s bankruptcy proceedings in Delaware. In a slide presentation to the exchange’s creditors filed in court last Tuesday, FTX’s attorneys highlighted the transaction with Modulo as one of their key goals to recover funds.
Modulo received the money in tranches in the third and fourth quarters of last year, the presentation said. According to Bahamian prosecutors, a total of $300 million was transferred shortly before FTX exploded.
The payment occurred during a period when the transfer of funds could be challenged and potentially brought back in the bankruptcy process. Clawback lawsuits are a powerful tool in bankruptcy to recover assets, and they played a key role in helping victims of Bernard Madoff’s Ponzi scheme reap much of the $19 billion invested in that decade-long fraud.
The focus on large, questionable transactions for a fund, company or individual with close connections to the debtor prior to the bankruptcy filing is basically low-hanging fruit in a bankruptcy case, says Lindsey Simon, a corporate law and bankruptcy professor. he said. University of Georgia School of Law.
Last week, FTX lawyers said they found $5.5 billion in cash, securities and digital assets held in customer accounts or kept in other parts of the company. But the true value of the many cryptocurrencies owned by FTX is hard to determine, and lawyers say the company still has a significant shortfall in assets.
On Friday, federal prosecutors revealed they had seized more than $600 million in assets belonging to Mr Bankman-Fried, including a mix of cash and stocks in bank and brokerage accounts.
Any legal action to recover the Modulo funds could provide a template for wider efforts to recover the money Mr Bankman-Fried invested in smaller companies. At the height of his wealth and power, he invested an estimated $4.6 billion in more than 300 companies, including an artificial intelligence start-up called Anthropic and crypto company Yuga Labs.
Even amid a spending spree, the Modulo deal stands out because of the amount of money involved and Mr. Bankman-Fried’s close relationship with the firm’s founders. According to incorporation papers filed in the Bahamas, Ms. Zhang and Mr. Ringans-Yu were also Modulo’s sole directors.
The duo left Jane Street last January, about three months before Modulo was inducted, according to brokerage industry records. (Modulo has no affiliation with the similarly named investment firm in Brazil.)
A 2012 graduate of Amherst College, Ms. Zhang worked 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. Ringans-yu was a Jane Street merchant from 2020 to 2022, having joined shortly after graduating from Harvard, where he was captain of the fencing team. Crypto publication CoinDesk previously reported that Modulo’s founders worked at Jane Street, but did not identify them.
After the Fall of FTX
The spectacular collapse of crypto exchanges in November stunned the industry.
Before Modulo received the $400 million, according to two people familiar with the discussions, the investment was a topic of debate in Mr. Bankman-Fried’s circle of top advisers.
Ultimately, Mr. Bankman-Fried proceeded despite reservations raised by Caroline Ellison, the 28-year-old chief executive of Alameda, said other people familiar with the matter. Ms. Ellison has since pleaded guilty to fraud charges for her role in the collapse of FTX and is cooperating with prosecutors in the criminal case against Mr. Bankman-Fried.
Further complicating the modulo investment were romantic relationships between executives involved in the deal. Ms. Ellison and Mr. Bankman-Fried had dated in the past, and they lived with eight other roommates in a luxury penthouse on the oceanfront in Albany on the Bahamian island of New Providence.
Mr Bankman-Fried also had a brief romantic relationship with Ms Zhang when they worked together at Jane Street, said one of the people with knowledge of the relationship. At the time of investing in Modulo, Mr. Bankman-Fried was not dating any women, this person said.
Last spring, Modulo set up an office at the same Albany resort where Mr. Bankman-Fried and Ms. Ellison lived. According to two people familiar with the arrangement, Ms. Zhang and Mr. Bankman-Fried were still friends, and they sometimes traveled together on charter flights from the Bahamas to New York.
Mr. Bankman-Fried started pouring money into Modulo at a time when Almeida was struggling. According to federal prosecutors, regulators and former Alameda employees, after the crypto market crashed in May, several crypto lenders pulled back their loans to Alameda, prompting the trading firm to siphon money from FTX customer accounts.
Around September, Mr. Bankman-Fried was seriously considering closing Alameda, according to public charging documents as well as private government records obtained by The New York Times. At the time, Alameda had lost $5 billion, which Mr. Bankman-Fried acknowledged to aides, more than the company had ever made or was likely to make in the future, government records said. But he also expressed concern about how FTX would function without Alameda Trading.
The relationship between the founders of FTX and Modulo went beyond Mr. Bankman-Fried’s relationship with Ms. Zhang. Last year, FTX hired Mr. Ringans-Yu’s older brother, Ross Ringans-Yu, from Jane Street, to take a top job at the FTX Foundation, a charitable group funded by Mr. Bankman-Fried.
Ross Ringens-Yu, who graduated from Harvard in 2016, worked on the foundation’s pandemic preparedness efforts, according to a page on his personal website that is no longer active. There is no indication that he had anything to do with Modulo, and he did not respond to a request for comment.
But his charitable work is closely aligned with the priorities of Mr. Bankman-Fried’s younger brother, Gabe Bankman-Fried, who ran Guarding Against the Pandemic, an advocacy group that FTX helped bankroll. Both the Ringan-Yu brothers were, according to archived versions of their individual biography pages, proponents of the principles of effective altruism, a philanthropic movement that encourages followers to donate the bulk of their income to charity and uses data-driven analysis to maximize impact. urges to use. of contributions.
Mr. Bankman-Fried also associated himself with the movement. For years, he invoked his commitment to effective philanthropy as he cultivated a global brand, claiming he entered crypto trading to make billions of dollars for worthy causes.
Kitty Bennett and Alain Delaquarriere contributed research.
