Years before the collapse of Sam Bankman-Fried’s crypto empire, a group of employees quit in a power struggle, after worrying about what they say was his cavalier approach to risk, compliance and accounting.
The employees worked at his trading company, Alameda Research, and were among his early colleagues, including Alameda co-founder Tara Mac Aulay. They left in 2018, long before crypto exchange FTX exited Alameda. FTX and Alameda are now bankrupt.
Mr. Bankman-Fried placed huge bets on crypto assets but paid little attention to the risk of those bets, brushing aside concerns among staffers, according to people familiar with the matter. The company mixed trading capital with operating cash and had poor record keeping that left its profits and losses unclear, they said.
“He didn’t want to feel pressured,” said Naia Bouscal, a former software engineer at Alameda who left with Ms. Mac Aulay and the others. “But as a result, we ended up not really knowing how much money we even had.”
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Mr Bankman-Fried told the Wall Street Journal that staff members had left the company due to personal conflicts and lack of productivity, and that Alameda had addressed accounting, risk and other issues that they had raised.
“Right now, I’m focused on doing what I can to do good for FTX customers,” Mr. Bankman-Fried said.
Some of the issues identified by the group of former employees are similar to those recently identified by FTX’s new chief executive brought in to manage the company after bankruptcy, people familiar with the matter said.
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“I and a group of others have all resigned, in part over concerns over risk management and business ethics,” Ms Mac Aulay tweeted on November 16. “My heart goes out to all the victims whose trust has been betrayed, savings lost, and livelihoods destroyed.”
Alameda was launched by a group led by Mr. Bankman-Fried and Ms. Mac Aulay in the fall of 2017, two years before the FTX crypto exchange launched. At first, the team worked out of a house in Berkeley, California, before moving the business to various apartments and a local office. Most early employees said they were dedicated to effective altruism, or EA, a movement that aims to make charitable giving more effective. They saw Alameda as a way to make big money trading cryptocurrencies — profits that could be funneled to charitable causes using EA’s principles, the people said.
The company started with a few million dollars in money borrowed from wealthy investors, including Effective Altruism Advocates recruited by Ms Mac Aulay, and surpassed $100 million in early 2018, people say familiar with fundraising.
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At first, however, employees were concerned, people familiar with the matter said. Mr. Bankman-Fried had worked at quantitative trading giant Jane Street Capital LLC, a firm that has extensive risk controls. But when colleagues at Alameda proposed putting in place rigorous structures and systems for risk, compliance and accounting, Mr. Bankman-Fried dismissed the idea, people say.
He said such extensive controls could cripple Alameda’s business and limit the speed at which the company could move to place trades, the people said, thereby reducing potential profits.
Alameda built a trading algorithm to perform a large number of automated and fast trades, but some within the company were concerned that it couldn’t keep up with all activity, the people said. Staff members said Alameda needed to do better tracking of its transactions to properly account for its gains and losses, but Mr Bankman-Fried dismissed the idea, people say.
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Staff members were also concerned about how the company’s trading capital was mixed with money dedicated to running the business, the sources said. That made it harder to track Alameda’s performance and its operating expenses, they said.
Within months of starting the business, Mr. Bankman-Fried had placed a series of big bets, including one on the price of ether, ignoring the advice of some colleagues, the people said. Alameda made strong profits with arbitrage trades, or those profiting from different crypto prices in different markets, but then suffered losses from other bets betting on price movements.
Some staff members were frustrated that what they say were poorly maintained balance records and data led to, for example, a series of XRP token transfers being delayed, resulting in several million dollars in losses. .
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According to documents written by Mr. Bankman-Fried, dated 2018 and seen by the Journal, Mr. Bankman-Fried acknowledged that Alameda’s lack of accounting and risk control led to business losses.
“No one was ultimately making sure that our transactions and accounting were correct. We made many botched transactions, which many were worried about at the time,” Mr Bankman-Fried wrote in the documents, saying the issues were helping. precipitate “a number of confrontations” within the company.
According to Bankman-Fried’s documents, the company fixed the issues in March 2018 and Alameda built systems to better calculate the company’s profits, losses and transfers, leading to a more profitable trading system.
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Some of those employees who left said they had shared their concerns about Mr. Bankman-Fried and the company’s lack of risk control with some of Alameda’s investors and members of the altruism community. effective, although it was not possible to determine how detailed their warnings were. were. They never shared their concerns with regulators, the people said, but at that time Alameda was a relatively small company that only invested for deep-pocketed individual investors, and small investors weren’t not at risk.
Former Alameda employees offered Mr. Bankman-Fried a $1 million buyout which he rejected, according to Mr. Bankman-Fried’s documents.
By April 2018, Ms. Mac Aulay and the others had quit, leaving Alameda with a dozen less experienced staff.
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Alameda’s assets fell to around $30 million in the spring of 2018 as some investors withdrew their money, the sources said.
The employee departures occurred in part because Mr. Bankman-Fried and his allies had taken effective control of the business, freezing others, according to some of those who left.
“We looked at Sam and his actions, his decisions, the way he treated people and the way he ran the business and came to the conclusion that he was not someone we wanted to be in business with. or who we partner with,” Ms. Bouscal said.
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“There are many things I wish I had done differently at Alameda,” Mr. Bankman-Fried wrote in the documents. “I was unempathetic, rarely complimented people, and was abrupt with comments.” But Mr Bankman-Fried says in the documents that he changed his treatment of his colleagues after the group left, leading to “a much more cooperative, happier and more productive company”.
Earlier this month, FTX’s new CEO said that FTX did not keep reliable books or track its crypto transactions, among other errors.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has occurred here,” John J. Ray said in a court filing.
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