FTX Pursues $460M Claw-Back from Modulo Capital: Unraveling the Bankman-Fried Investment Web

In the ever-unfolding saga of the FTX collapse, the bankrupt cryptocurrency exchange is now aggressively pursuing the recovery of assets to compensate its creditors. The latest target? Venture capital firm Modulo Capital. FTX is suing Modulo for a staggering $460 million, alleging the VC firm benefited from misused customer funds. Let’s dive into the details of this significant claw-back effort and what it means for the FTX bankruptcy proceedings.

What’s the $460 Million Lawsuit Against Modulo Capital About?

At the heart of this legal action is a substantial investment made by Alameda Research, FTX’s sister trading firm, into Modulo Capital in 2022. Remember Alameda Research? It was deeply intertwined with FTX and also helmed by Sam Bankman-Fried (SBF). This investment, now under scrutiny, is believed to be one of the largest FTX-related investments directed by Bankman-Fried.

According to a court filing on March 22nd, FTX alleges that SBF orchestrated a series of transfers from Alameda Research to Modulo Capital, totaling $475 million, starting in May 2022. This wasn’t just a casual investment; FTX claims these were customer assets that were improperly diverted.

The Limited Partnership Agreement: The Foundation of the Investment

To formalize this financial relationship, Alameda Research and Modulo Capital entered into a limited partnership agreement on June 16, 2022. This agreement saw Alameda transfer the aforementioned funds to Modulo in exchange for a 20% stake in Modulo’s Class A shares. Think of it as Alameda buying a significant piece of Modulo.

Here’s a breakdown of the key terms:

• Investment Amount: $475 million
• Recipient: Modulo Capital
• Investor: Alameda Research (funded by FTX customer assets, according to the lawsuit)
• Agreement Date: June 16, 2022
• Equity Stake: 20% of Modulo’s Class A shares for Alameda

Why ‘Claw-Back’? Bankruptcy Basics Explained

In bankruptcy proceedings, there’s a concept known as a “claw-back.” It essentially allows a bankrupt entity to recover payments made before the bankruptcy filing. This is crucial for ensuring fairness to all creditors and maximizing the assets available for distribution.

Think of it like this: if a company is going bankrupt, it shouldn’t be able to preferentially pay off certain entities just before filing, leaving others empty-handed. Claw-back provisions are designed to prevent such scenarios.

There are different timelines for claw-backs:

• General Unsecured Creditors: Subject to a 90-day claw-back period.
• “Insiders” (like general partners): Face a longer, one-year claw-back period.

In this case, FTX is leveraging these claw-back rules to try and recover funds from Modulo Capital, arguing that the initial transfer was made using misused customer assets and occurred within the relevant claw-back timeframe.

The Settlement Agreement: A Partial Victory for FTX Creditors?

Here’s a glimmer of potential good news for FTX creditors: Modulo Capital has reportedly agreed to a settlement! According to the settlement agreement, Modulo will:

• Repay $404 million in cash.
• Relinquish claims to $56 million in assets held on the FTX exchange.
• Surrender Alameda’s shares in Modulo.

This settlement represents roughly 97% of FTX’s initial investment. While not the full $475 million, it’s a significant recovery. Effectively, Modulo is giving back almost everything it received from Alameda/FTX.

Who is Modulo Capital and What’s the SBF Connection?

Modulo Capital is a relatively young venture capital firm, established in March 2022. Interestingly, it was founded by three former executives from Jane Street, a well-known trading firm. The connection to the FTX saga gets even more intriguing because two of these founders have close ties to key figures in the FTX/Alameda universe:

• Sam Bankman-Fried: One of the founders, and the mastermind behind FTX and Alameda.
• Caroline Ellison: Former CEO of Alameda Research and also a founder of Modulo.

This close network raises eyebrows and questions about the nature of the investment and potential conflicts of interest.

The Love Connection Rumor: Adding Another Layer of Intrigue

Adding a layer of personal drama to this financial entanglement is a rumor swirling around Sam Bankman-Fried and Xiaoyun “Lily” Zhang, another Modulo Capital founder. Reports suggest a “love connection” between SBF and Zhang.

While unconfirmed, this rumor has fueled speculation that SBF’s decision to invest in Modulo might have been influenced by personal motivations, rather than purely sound financial reasoning. If true, it would further complicate the already murky picture of FTX’s investment decisions.

Next Steps: Court Approval and the Road Ahead

This settlement isn’t finalized just yet. It requires the approval of United States Bankruptcy Judge John Dorsey. A motion hearing is scheduled for April 12th, where the judge will review the agreement and decide whether to give it the green light.

Judge Dorsey’s decision is crucial for the settlement to move forward and for FTX creditors to potentially recoup a portion of their lost funds.

The $7 Billion Shortfall: Putting the Settlement in Perspective

While recovering $460 million (or $404 million in cash plus assets) is undoubtedly a positive development for FTX creditors, it’s essential to keep it in perspective. FTX’s latest presentation to creditors revealed a staggering $11 billion in claims against it, with only $4.7 billion in assets. This leaves a massive shortfall of nearly $7 billion.

The Modulo Capital settlement, even if fully approved, would only cover a small fraction – less than 7% – of this enormous gap. It’s a step in the right direction, but the road to fully compensating FTX creditors remains long and challenging.

Conclusion: A Small Win in a Vast Bankruptcy Landscape

The FTX lawsuit against Modulo Capital and the resulting settlement agreement represent a significant, albeit partial, victory for creditors seeking to recover their assets. It highlights the ongoing efforts to untangle the complex web of FTX’s finances and claw back funds wherever possible.

While the $460 million recovery is a welcome development, it underscores the immense scale of the FTX collapse and the long journey ahead for creditors hoping to recoup their losses. The saga of FTX is far from over, and the legal battles to recover and distribute assets will likely continue for a considerable time.