Singapore’s Temasek Looks for Answers in FTX Collapse

Deputy prime minister says sovereign fund’s reputation damaged

By: Toh Han Shih

The collapse of FTX, once the world’s third largest crypto exchange worth more than US$30 billion, continues to reverberate in Singapore and the US. Temasek, the Singapore sovereign wealth fund, is conducting an internal review on the failure of its investment in FTX, while in the US, there are calls for further investigations of the collapse even as investigations are already underway.

“What happened with FTX therefore has not only caused financial loss to Temasek, but also reputational damage. Temasek recognises this,” said Singapore Deputy Prime Minister Lawrence Wong in the Singapore Parliament on November 30.

Temasek has initiated an internal review by an independent team to study and improve its processes, and to draw lessons for the future, said Wong, who is also finance minister. The review will be led by people who are separate from the team which invested in FTX and the review team will report directly to the board of Temasek, Wong explained.

Temasek reports to the Ministry of Finance. In a statement, Temasek said it would write down its entire US$275 million investment in FTX, which filed for Chapter 11 bankruptcy protection in the US on November 11.

“It is disappointing when there is a loss by our investment entities, as in the case of Temasek’s investment in FTX,” said Wong, who is tipped to be the next premier in the likely event the ruling People’s Action Party wins the next national election. “Even more so, because the loss arose from what turned out to be a very badly managed company and from possible fraud and mishandling of customer funds. The fact that other leading global institutional investors like BlackRock and Sequoia Capital also invested in FTX does not mitigate this.”

“A loss in what may turn out to be a badly managed company without adult supervision is egg on our face,” wrote Ho Ching, the former Temasek chief executive officer, on her Facebook on November 26. “Folks are right - it does not mitigate the loss or reduce the pain by saying BlackRock or Softbank or Sequoia also invested in FTX.” Ho is the wife of Singapore Prime Minister Lee Hsien Loong.

“We must never take the attitude that it is “0.4B only.” This amount can pay for a lot of electricity and water bills, and be invested in other companies or assets,” Ho added on her Facebook. Temasek’s loss is equivalent to nearly S$0.4 billion.

“There have been investors who have been tricked during due (diligence) process, so due (diligence) is not a sure thing to guarantee that all is well. But this dramatic failure at FTX does raise many other questions which would need time to analyse, sort out, and redress,” Ho said.

According to its statement, Temasek’s due diligence on FTX lasted for eight months, from February to October 2021, mostly under Ho’s watch. She stepped down as Temasek CEO on October 1, 2021, replaced by Dilhan Pillay Sandrasegara.

“Reports have recently surfaced of mismanagement by FTX's executives, including misuse of customer assets. These reports allege serious misconduct or fraud at FTX. We do not condone misconduct in any of our investee companies. We are unable to comment further on FTX given that there are ongoing investigations,” said Temasek’s statement.

Investigations

The US Commodity Futures Trading Commission is collaborating with the US Securities and Exchange Commission on investigating FTX, CFTC chairman Rostin Behnam testified before a US Senate committee on December 1.

Currently, the CFTC is limited in its ability to investigate FTX because it lacks authority to conduct certain types of probes, said Behnam. He called for the speedy implementation of a comprehensive regulatory framework on the crypto sector in the US to widen CFTC’s powers to conduct more far-reaching investigations of FTX.

At the Senate hearing, US Senator John Thune agreed to the urgent need for a comprehensive regulatory framework, “Congress needs to act and Congress needs to act fast.”

The CFTC has discovered a litany of problems in FTX, including significant conflicts of interest, commingling of funds and lack of proper financial statements, Behnam disclosed.

“Many public reports indicate that segregation and customer security failures at the bankrupt FTX entities resulted in huge amounts of FTX customer funds being misappropriated by Alameda for its proprietary trading,” he alleged.

Alameda Research is a crypto-trading firm co-founded by Samuel Bankman-Fried, who also co-founded FTX. The 30-year-old Bankman-Fried is a former CEO of FTX, while his 28-year-old former girlfriend Caroline Ellison is a former CEO of Alameda.

Andrew Vara, the US trustee of the US Department of Justice, called for an examiner to conduct an independent investigation in a motion filed in the US Bankruptcy Court for Delaware on December 1.

“FTX Trading (an FTX subsidiary) has a claim against Alameda Research in the billions of dollars on behalf of its customers in connection with one or more loans of allegedly converted customer funds that FTX Trading had no right to make in the first instance,” Vara said. “Such an immense, out-of-the-ordinary course claim of one Debtor against another, especially one that involves the alleged conversion of customer funds, calls out for independent scrutiny by an independent examiner.”

An independent investigation an examiner is needed, because there are plausible claims that certain people currently or formerly associated with FTX misappropriated $10 billion of their customers’ assets to fund the operations and investments of other entities linked to FTX, Vara explained.

“An examination is preferable to an internal investigation under the facts of these cases because the findings and conclusions of the examination will be public and transparent, which is especially important because of the wider implications that FTX’s collapse may have for the crypto industry. Mr Ray and FTX’s new management have done valuable preliminary work in untangling some of these issues. But the questions at stake here are simply too large and too important to be left to an internal investigation,” Vara said.

John Ray replaced Bankman-Fried as FTX CEO on November 11.

In an interview with CNBC on November 30, Bankman-Fried said he had never tried to commit fraud. In an ABC News interview with Bankman-Fried released on December 1, George Stephanopoulos asked if Bankman-Fried was worried about going to jail. Bankman-Fried replied, “There are a lot of things that are worrying me right now.”

Toh Han Shih is chief analyst of Headland Intelligence, a Hong Kong risk consultancy.