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

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Sam Bankman-Fried, founder and chief executive officer of FTX Cryptocurrency Derivatives Exchange, during a Senate Agriculture, Nutrition and Forestry Committee hearing in Washington, D.C., on Wednesday, Feb. 9, 2022.

Sarah Silbiger | Bloomberg | Getty Images

Serious red flags around Sam Bankman-Fried’s FTX emerged before the now-embattled cryptocurrency exchange even launched, according to an early would-be investor.

Alex Pack, now the managing partner of New York-based venture capital firm Hack VC, said he met Bankman-Fried in 2018. At the time, the entrepreneur hadn’t yet founded FTX and was seeking funding for another company he started, Alameda Research.

Bankman-Fried stepped down as CEO of FTX last Friday as the crypto company filed for Chapter 11 bankruptcy protection. The crypto powerhouse, once valued at $32 billion, collapsed in a matter of days amid a liquidity crunch and allegations that it was misusing customer funds. The Securities and Exchange Commission and the Department of Justice are investigating what happened, according to The Wall Street Journal.

And on Thursday, newly appointed FTX CEO John Ray III declared in a U.S. Bankruptcy Court filing that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

In 2018, Bankman-Fried was a relatively unknown founder seeking a deal in the emerging crypto market.

Pack said Bankman-Fried was hunting for “single digit millions” in equity from Pack’s prior crypto firm DragonFly Capital, which he co-founded. Dragonfly is an early-stage technology company investing in blockchain technology and at the time was a $100 million fund seeking to help crypto startups. Pack, who has nine years of experience in the space, had previously been director of network investing at Bain Capital Ventures, a partner at AngelList and worked at Arbor Ventures in Hong Kong.

At first, Pack said, everything seemed fine.

“I was captivated by him for the first month until he showed us everything,” describing him as “incredibly smart and charismatic.”

Over a period of about five to six months, Pack said, he and his team met with Bankman-Fried more than a dozen times. But after extensive due diligence, Pack said everyone came to the same conclusion.

“After spending months with him, we realized his risk-taking was catastrophic,” Pack told CNBC. “We looked at it and saw red flags – too much risk.”

Pack provided CNBC with copies of a WeChat history he had with Bankman-Fried in 2018 and 2019 that show the two discussing a potential deal. But as Pack’s team did its due diligence, he said alarm bells went off. Alameda’s balance sheet showed “an uncharacteristic massive loss of more than $10 million, very quickly,” according to Pack.

Pack said it appeared to be a trade error or a series of trade errors. And there was ambiguity around the losses.

“We could never figure out: Was it fraud, was it massive risk taking, was it a bunch of honest mistakes?”

‘Hemorrhaging money’

Another red flag, according to Pack, was that Bankman-Friend allegedly hid the existence of the cryptocurrency exchange FTX around that time. He said his team discovered that Alameda was “hemorrhaging money to pay for FTX.”

“We asked him ‘what’s going on here?’ pretty nonchalantly,” Pack said. “He said, “I can’t remember if I told you I had this idea for an exchange. For that reason, I’ve been spending most of my time on it so we have been neglecting the core business.'”

“There was a lot he would or wouldn’t share. There was a clear pattern of hidden massive risk,” Pack said. “He never really showed Alameda’s books to any future investor – that’s where all the bad stuff was happening.”

In a series of tweets in August 2020, Bankman-Fried appears to have told a different version of events, without naming the parties involved. Pack said the tweets were referencing the DragonFly deal.

“They expressed interest in Alameda, and desire to help it grow,” one tweet from Bankman-Fried said. “They understood the business. Alameda has never taken an external investor, but this seemed like a good opportunity.”

Bankman-Fried tweeted that it was actually his team that rejected the offer, which was roughly one-third of Alameda’s valuation.

“They did not react well to us saying no, and we were surprised. Like, of course, we said no! They only bid 1/3 of our offer,” according to the tweet. After more discussions to salvage the deal, “eventually we said no to them. They said no to us saying no, and we weren’t really sure how one responds to that, so we just stopped responding.”

A spokesperson for Bankman-Fried did not respond to CNBC’s request for comment.

Pack said the rejection came back to haunt him. He would learn later that he was cut out of future deals in which Bankman-Fried was involved. While he told other venture capital firms about what happened, he said he didn’t disclose anything publicly.

Pack said he did not let the experience slow him down.

Earlier this year, Hack VC announced a $200 million “Crypto Seed Fund” for investments in crypto, Web3 and blockchain startups.

Today, when he looks back on his dealings with Bankman-Fried, Pack sees what happened as foreshadowing the collapse of FTX.

“It was like clearly four years ago, this guy hid serious things and took incredible risks with other peoples’ money,” Pack said. “And now he appears to have done the exact same thing on a grander catastrophic scale.”


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Two children and two adults survive after Tesla plunges 250 feet off California cliff

View from the helicopter during a rescue operation after a vehicle carrying two adults and two children went over a cliff in Devil’s Slide, San Mateo county, California, U.S., January 2, 2023, plunging hundreds of feet, according to the Department of Forestry and Fire Protection, in this still image obtained from social media video.

CHP – Golden Gate Division | Reuters

Two adults and two children were rescued from a Tesla that plunged 250 feet off a cliff Monday morning in San Mateo County, California, officials said. 

The car was traveling southbound on the Pacific Coast Highway when it went over the cliff at Devil’s Slide, south of the Tom Lantos tunnel, and landed near the water’s edge below, the Cal Fire San Mateo-Santa Cruz Unit said. 

The car flipped and landed on its wheels in the fall, CAL FIRE/Coastside Fire Incident Commander Brian Pottenger said. Witnesses saw the accident and called 911. 

As crews were lowered down, they were able to see movement in the front seat, through their binoculars, meaning someone was alive.

“We were actually very shocked when we found survivable victims in the vehicle. So, that actually was a really hopeful moment for us,” Pottenger said. 

Fire officials called for helicopters to help hoist the survivors to safety. As they waited, firefighters rappelled to the scene and rescued the two children.

Rescue teams are seen at the scene as a Tesla with four occupants plunged over a cliff on Pacific Coast Highway 1 at Devils Slide on January 2, 2022 in San Mateo County, California, United States.

Tayfun Coskun | Anadolu Agency | Getty Images

The California Highway Patrol shared video on social media showing helicopters lower first responders to the scene to extricate and rescue two adults inside. 

All four were hospitalized. The San Mateo Sheriff’s Office said the two adults suffered non-life-threatening injuries and the two children were unharmed.

It’s not clear what caused the car to go over the cliff. CHP is handling the investigation. 

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Tesla shares tumble more than 10% following deliveries report

Tesla vehicles are shown at a sales and service center in Vista, California, June 3, 2022.

Mike Blake | Reuters

Shares of Tesla dropped 13% on Tuesday morning, a day after the electric auto maker reported fourth-quarter vehicle production and delivery numbers for 2022.

Deliveries are the closest approximation of sales disclosed by Tesla. The company reported 405,278 total deliveries for the quarter and 1.31 million total deliveries for the year. These numbers represented a record for the Elon Musk-led automaker and growth of 40% in deliveries year over year, but they fell shy of analysts’ expectations.

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According to a consensus of analysts’ estimates compiled by FactSet, as of Dec. 31, 2022, Wall Street was expecting Tesla to report around 427,000 deliveries for the final quarter of the year. Estimates updated in December, and included in the FactSet consensus, ranged from 409,000 to 433,000.

Those more recent estimates were in line with a company-compiled consensus distributed by Tesla investor relations Vice President Martin Viecha. 

Some Wall Street analysts think Tesla’s deliveries miss spells trouble for the electric vehicle maker, but others see a buying opportunity for the company in 2023.

Baird analyst Ben Kallo, who recently named Tesla a top pick for 2023, maintained an outperform rating and said he would remain a buyer of the stock ahead of the company’s earnings report, which is scheduled for Jan. 25.

“Q4 deliveries missed consensus but beat our estimates,” he said in a Tuesday note. “Importantly, production increased ~20% q/q which we expect to continue into 2023 as gigafactories in Berlin and Austin continue to ramp.”

Analysts at Goldman Sachs said they consider the delivery report to be an “incremental negative,” and view Tesla as a company that is “well positioned for long-term growth.” Goldman reiterated its buy rating on the stock in a Monday note and said that making vehicles more affordable in a challenging macroeconomic environment will be a “key driver of growth.”

“We believe key debates from here will be on whether vehicle deliveries can reaccelerate, margins and Tesla’s brand,” the analysts said.

Shares of Tesla suffered an extreme yearlong sell-off in 2022, prompting CEO Musk to tell employees in late December not to be “too bothered by stock market craziness.”

Musk has blamed Tesla’s declining share price in part on rising interest rates. But critics point to his rocky $44 billion Twitter takeover as a bigger culprit for the slide.

Morgan Stanley analysts said they think the company’s share price weakness is a “window of opportunity to buy.”

“Between a worsening macro backdrop, record high unaffordability, and increasing competition, there are hurdles for all auto companies to overcome in the year ahead,” they said in a note Tuesday. “However, within this backdrop we believe TSLA has the potential to widen its lead in the EV race, as it leverages its cost and scale advantages to further itself from the competition.”

CNBC’s Lora Kolodny and Michael Bloom contributed to this report.

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Tesla makes China boss Tom Zhu its highest-profile executive after Elon Musk

Tom Zhu Xiaotong, Tesla’s current executive in charge of China, speaks as a new Tesla experience store opens on Aug. 18, 2015 in Hangzhou, China.

Visual China Group | Getty Images

Tesla’s China chief Tom Zhu has been promoted to take direct oversight of the electric carmaker’s U.S. assembly plants as well as sales operations in North America and Europe, according to an internal posting of reporting lines reviewed by Reuters.

The Tesla posting showed that Zhu’s title of vice president for Greater China had not changed and that he also retained his responsibilities as Tesla’s most senior executive for sales in the rest of Asia as of Tuesday.

The move makes Zhu the highest-profile executive at Tesla after Chief Executive Elon Musk, with direct oversight for deliveries in all of its major markets and operations of its key production hubs.

The reporting lines for Zhu would keep Tesla’s vehicle design and development — both areas where Musk has been heavily involved — separate while creating an apparent deputy to Musk on the more near-term challenges of managing global sales and output.

Tesla did not immediately respond to a Reuters request for comment.

Reuters reviewed the organizational chart that had been posted internally by Tesla and confirmed the change with two people who had seen it. They asked not to be named because they were not authorized to discuss the matter.

Elon Musk needs to go back to Tesla and have others run Twitter, says Jim Cramer

Zhu and a team of his reports were brought in by Tesla late last year to troubleshoot production issues in the United States, driving an expectation among his colleagues then that he was being groomed for a bigger role.

Zhu’s appointment to a global role comes at a time when Musk has been distracted by his acquisition of Twitter and Tesla analysts and investors have urged action that would deepen the senior executive bench and allow him to focus on Tesla.

Under Zhu, Tesla’s Shanghai plant rebounded strongly from Covid lockdowns in China.

Tesla said on Monday that it had delivered 405,278 vehicles in the fourth quarter, short of Wall Street estimates, according to data compiled by Refinitiv.

The company had delivered 308,600 vehicles in the same period a year earlier.

The Tesla managers reporting to Zhu include: Jason Shawhan, director of manufacturing at the Gigafactory in Texas; Hrushikesh Sagar, senior director of manufacturing at Tesla’s Fremont factory; Joe Ward, vice president in charge of Europe, the Middle East and Africa; and Troy Jones, vice president of North America sales and service, according to the Tesla notice on reporting lines reviewed by Reuters.

Tesla country managers in China, Japan, Australia and New Zealand continued to report to Zhu, the notice showed.

Zhu does not have a direct report at Tesla’s still-ramping Berlin plant, but a person with knowledge of the matter said responsibility for that operation would come with the reporting line for Amsterdam-based Ward. Ward could not be immediately reached for comment.

Zhu, who was born in China but now holds a New Zealand passport, joined Tesla in 2014. Before that he was a project manager at a company established by his MBA classmates at Duke University, advising Chinese contractors working on infrastructure projects in Africa.

During Shanghai’s two-month Covid lockdown, Zhu was among the first batch of employees sleeping in the factory as they sought to keep it running, people who work with him have said.

Zhu, a no-fuss manager who sports a buzz cut, favors Tesla-branded fleece jackets and has lived in a government-subsidized apartment that is a 10-minute drive from the Shanghai Gigafactory. It was not immediately clear whether he would move after his promotion.

He takes charge of Tesla’s main production hubs at a time when the company is readying the launch of Cybertruck and a revamped version of its Model 3 sedan. Tesla has also said it is developing a cheaper electric vehicle but has not provided details on that plan.

When Tesla posted a picture on Twitter last month to celebrate its Austin, Texas, plant hitting a production milestone for its Model Y, Zhu was among hundreds of workers smiling on the factory floor.

Why China is beating the U.S. in electric vehicles

Allan Wang, who was promoted to vice president in charge of sales in China in July, was listed as the legal representative for the operation in registration papers filed with Chinese regulators in a change by the company last month.

Tesla board member James Murdoch said in November the company had recently identified a potential successor to Musk without naming the person. Murdoch did not respond to a request for comment.

Electrek previously reported that Zhu would take responsibility for U.S. sales, delivery and service.

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