The Unknown Hedge Fund That Got $400 Million From Sam Bankman-Fried

Not lengthy earlier than FTX collapsed in November, its founder, Sam Bankman-Fried, despatched $400 million to an obscure cryptocurrency buying and selling agency known as Modulo Capital.

The fledgling agency, which was based in March and operated out of the identical Bahamian compound the place Mr. Bankman-Fried lived, had no monitor file or public profile. One of many founders, Duncan Rheingans-Yoo, was solely two years out of school. His enterprise accomplice, Xiaoyun Zhang, often known as Lily, was a former Wall Road dealer who had beforehand been romantically concerned with Mr. Bankman-Fried, in line with 4 folks with data of their relationship.

Now, Modulo is rising as an important a part of the investigation by federal prosecutors into Mr. Bankman-Fried and his as soon as big cryptocurrency change. They’re inspecting whether or not he used FTX’s buyer funds to put money into the little-known agency when his current hedge fund, Alameda Analysis, was struggling amid a wider crypto trade downturn. The $400 million outlay was one in all Mr. Bankman-Fried’s single largest investments.

On the similar time, legal professionals for FTX’s new management are eyeing Modulo’s property as they scramble to get better the billions of {dollars} that clients, lenders and buyers misplaced when the change imploded.

It’s unclear how a lot of FTX’s $400 million funding stays or the place it’s. However the authorities have been conscious of the buying and selling agency for months; the day after Mr. Bankman-Fried was arrested within the Bahamas in mid-December, he was denied bail at a courtroom listening to the place an area prosecutor argued that he was a flight threat and prompt he would possibly be capable of faucet the funds sitting with Modulo.

Earlier than beginning Modulo, Ms. Zhang and Mr. Rheingans-Yoo labored at Jane Road, the Wall Road agency the place Mr. Bankman-Fried, 30, started his profession and met lots of the folks, of their 20s and 30s, who would later assist him construct his crypto empire.

It’s unclear how a lot cash Modulo had aside from Mr. Bankman-Fried’s funding. But it surely started buying and selling crypto earlier than FTX failed, and it has now largely shut down, in line with an individual acquainted with its operations.

Mr. Bankman-Fried’s resolution to offer a lot funding to a start-up buying and selling agency on the similar time that Alameda was shedding cash raised suspicions for investigators.

On the bail listening to in Nassau, the native prosecutor cited an affidavit compiled by one other Bahamian legislation enforcement official that has been underneath seal in courtroom within the Bahamas. Federal prosecutors in Manhattan investigating Mr. Bankman-Fried consider the Modulo funding was made utilizing prison proceeds — misappropriated cash that FTX clients had deposited with the change, stated an individual briefed on the investigation.

Neither of Modulo’s two founders has been accused of wrongdoing, however they just lately employed Aitan Goelman, a prison protection lawyer who’s a former director of enforcement for the Commodity Futures Buying and selling Fee. Mr. Goelman stated he had no remark.

Representatives for FTX, Mr. Bankman-Fried and the U.S. lawyer for the Southern District of New York in Manhattan all declined to remark.

The stream of cash to Modulo has additionally caught the eye of the legal professionals representing FTX within the firm’s chapter continuing in Delaware. In a slide presentation to the change’s collectors that was filed in courtroom final Tuesday, FTX’s legal professionals flagged the transaction with Modulo as one in all its prime targets for reclaiming cash.

The presentation stated Modulo acquired funds in installments within the third and fourth quarters of final yr. Round $300 million of that complete was transferred shortly earlier than FTX’s implosion, in line with the Bahamian prosecutor.

The funds occurred throughout a interval when transfers of cash might be challenged and probably clawed again within the chapter course of. Clawback lawsuits are a robust software in bankruptcies to get better property, and so they performed an important position in serving to the victims of Bernard Madoff’s Ponzi scheme recoup a lot of the $19 billion that was invested in that decades-long fraud.

“Specializing in massive, questionable transactions to a fund, firm or an individual with shut connections to the debtor earlier than the chapter submitting is principally the low-hanging fruit in a chapter case,” stated Lindsey Simon, a company legislation and chapter professor on the College of Georgia Faculty of Regulation.

Final week, FTX’s legal professionals stated that they had discovered $5.5 billion in money, securities and digital property held in buyer accounts or tucked away in different components of the corporate. However the precise worth of lots of the cryptocurrencies owned by FTX is difficult to find out, and the legal professionals stated the corporate nonetheless had a serious shortfall in property.

On Friday, federal prosecutors disclosed that that they had seized greater than $600 million in property belonging to Mr. Bankman-Fried, together with a mixture of money and shares stored in financial institution and brokerage accounts.

Any authorized motion to reclaim the Modulo funds might present a template for broader efforts to get better cash that Mr. Bankman-Fried invested in smaller firms. On the top of his wealth and energy, he funneled an estimated $4.6 billion into greater than 300 firms, together with a man-made intelligence start-up known as Anthropic and the crypto firm Yuga Labs.

Even amid that spending spree, the Modulo deal stands out due to the sum of money concerned and Mr. Bankman-Fried’s shut ties to the agency’s founders. Ms. Zhang and Mr. Rheingans-Yoo had been additionally Modulo’s solely administrators, in line with incorporation papers filed within the Bahamas.

Each left Jane Road final January, in line with brokerage trade information, about three months earlier than Modulo was integrated. (Modulo has no reference to a equally named funding agency in Brazil.)

A 2012 graduate of Amherst Faculty, Ms. Zhang labored at Jane Road for a decade, overlapping with Mr. Bankman-Fried, who spent about three years there after graduating from the Massachusetts Institute of Expertise in 2014. Mr. Rheingans-Yoo was a dealer at Jane Road from 2020 to 2022, becoming a member of shortly after he graduated from Harvard, the place he was captain of the fencing workforce. The crypto publication CoinDesk beforehand reported that Modulo’s founders had labored at Jane Road however didn’t establish them.

Earlier than Modulo acquired the $400 million, the funding was the topic of debate inside Mr. Bankman-Fried’s tight circle of high advisers, in line with two folks acquainted with the discussions.

Finally, Mr. Bankman-Fried moved ahead regardless of reservations voiced by Caroline Ellison, the 28-year-old chief government of Alameda, different folks acquainted with the matter stated. Ms. Ellison has since pleaded responsible to fraud fees for her position in FTX’s collapse and is cooperating with prosecutors within the prison case in opposition to Mr. Bankman-Fried.

Additional complicating the Modulo funding had been the romantic ties among the many executives concerned within the deal. Ms. Ellison and Mr. Bankman-Fried had dated previously, and so they lived along with eight different roommates in a luxurious penthouse at Albany, an oceanside resort on the Bahamian island of New Windfall.

Mr. Bankman-Fried had additionally had a quick romantic relationship with Ms. Zhang once they labored collectively at Jane Road, one of many folks with data of the connection stated. By the point of the funding in Modulo, Mr. Bankman-Fried was not relationship both lady, this individual stated.

Final spring, Modulo arrange an workplace in the identical Albany resort the place Mr. Bankman-Fried and Ms. Ellison lived. Ms. Zhang and Mr. Bankman-Fried had been nonetheless pals, and they might typically journey collectively on constitution flights to New York from the Bahamas, in line with two folks acquainted with the preparations.

Mr. Bankman-Fried started to pour cash into Modulo at a time when Alameda was struggling. After the crypto market crashed in Could, a lot of crypto lenders recalled their loans to Alameda, prompting the buying and selling agency to drag cash from FTX buyer accounts to make up for the shortfall, in line with federal prosecutors, regulators and former Alameda staff.

Someday round September, Mr. Bankman-Fried was severely contemplating shutting down Alameda, in line with public charging paperwork, in addition to personal authorities information obtained by The New York Instances. On the time, Alameda had misplaced $5 billion, which Mr. Bankman-Fried acknowledged to colleagues was greater than the corporate had ever made or was prone to make sooner or later, the federal government information stated. However he additionally expressed considerations about how FTX would perform with out Alameda buying and selling on it.

The connections between FTX and the Modulo founders went past Mr. Bankman-Fried’s relationship with Ms. Zhang. Final yr, FTX additionally employed Mr. Rheingans-Yoo’s older brother, Ross Rheingans-Yoo, from Jane Road to take a high job on the FTX Basis, a charitable group funded by Mr. Bankman-Fried.

Ross Rheingans-Yoo, who graduated from Harvard in 2016, labored on the muse’s pandemic preparedness efforts, in line with a web page on his private web site that’s now not energetic. There isn’t a indication that he had something to do with Modulo, and he didn’t reply to a request for remark.

However his charitable work aligned carefully with the priorities of Mr. Bankman-Fried’s youthful brother, Gabe Bankman-Fried, who ran Guarding Towards Pandemics, an advocacy group that FTX helped bankroll. Each Rheingans-Yoo brothers, in line with archived variations of their private biography pages, had been supporters of the rules of efficient altruism, a philanthropic motion that urges adherents to donate the majority of their earnings to charity and use data-driven evaluation to maximise the influence of the contributions.

Mr. Bankman-Fried had additionally aligned himself with the motion. For years, he invoked his dedication to efficient altruism as he cultivated a worldwide model, claiming that he obtained into crypto buying and selling to make billions of {dollars} for worthy causes.

Kitty Bennett and Alain Delaquérière contributed analysis.