After the cryptocurrency exchange FTX collapsed last year, bankruptcy lawyers, federal prosecutors and forensic investigators embarked on a global hunt to recover billions of dollars in lost deposits and repay the firm’s customers.
One large chunk of money has been sitting for months in an interest-bearing account at JPMorgan Chase, the world’s largest bank. JPMorgan holds $400 million that FTX’s founder, Sam Bankman-Fried, invested in an obscure hedge fund, Modulo Capital, four people with knowledge of the matter said.
The founders of Modulo, which has drawn scrutiny from prosecutors investigating FTX’s implosion, are now negotiating the return of the funds with bankruptcy lawyers representing the exchange, said two of the people, who were not authorized to speak publicly. There is no indication that the Modulo founders did anything wrong, and they are looking for FTX to release them from certain legal liabilities in exchange for returning the money, one of the people said.
The talks show the complexity of retrieving funds in one of the largest corporate bankruptcies in recent history, with an initial shortfall that was estimated at $8 billion. Until late last year, FTX was among the biggest and most powerful companies in the emerging crypto industry, a prolific investor that backed hundreds of other start-ups. Now investigators have to not only scour company accounts but also untangle a vast web of outside investments — and then negotiate to secure the money.
Recovering $400 million from Modulo would be a major coup for FTX. Last month, FTX’s lawyers said they had located $5.5 billion in cash, securities and digital assets held in customer accounts or stored in other parts of the company. But that total includes a large stash of cryptocurrencies whose actual value is hard to determine, and the company’s lawyers say FTX still has a significant shortfall in assets.
What to Know About the Collapse of FTX
What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.
FTX is chasing another $4.6 billion tied up in more than 300 companies that Mr. Bankman-Fried funded. The $400 million Modulo transaction was one of his single largest outlays. But other investments financed fledgling crypto companies that now have dubious value, meaning it’s unclear just how much money FTX lawyers can reclaim from those ventures in so-called clawback lawsuits to make customers, lenders and other creditors whole.
The Modulo funds are stored at JPMorgan because the bank served as the hedge fund’s prime broker, handling its trading in stocks and stock futures. In November, around the time FTX collapsed, Modulo’s holdings were converted into cash. The money has been sitting at JPMorgan ever since.
In recent weeks, FTX’s new management has mounted an aggressive campaign to reclaim money. Last month, FTX sued Voyager Digital, a crypto lending firm, to recover $446 million in loan repayments. FTX also announced on Feb. 5 that it had sent letters to the politicians and political committees that received $93 million from Mr. Bankman-Fried and others at FTX, asking for the funds back.
Federal prosecutors in Manhattan have also seized assets they contend were acquired with money misappropriated from FTX’s customer accounts. Last month, the prosecutors disclosed that they had seized more than $600 million in assets belonging to Mr. Bankman-Fried, including cash and stocks kept in bank and brokerage accounts.
It’s unclear why prosecutors have not seized the Modulo funds at JPMorgan. Representatives for FTX, JPMorgan and the U.S. attorney’s office for the Southern District of New York declined to comment. A representative for Modulo’s two founders, Duncan Rheingans-Yoo and Xiaoyun Zhang, known as Lily, said they declined to comment.
FTX filed for bankruptcy in November after a run on deposits exposed the $8 billion hole in its accounts. Mr. Bankman-Fried, 30, resigned as chief executive, handing control to a new management team.
In December, federal prosecutors in Manhattan charged Mr. Bankman-Fried with fraud, money laundering and campaign finance violations. He was accused of using billions of dollars in customer deposits to finance lavish real estate purchases, political donations and investments in other companies. Two of his closest associates have pleaded guilty and are cooperating with the authorities.
The Aftermath of FTX’s Downfall
The spectacular collapse of the crypto exchange in November has left the industry stunned.
Prosecutors soon began scrutinizing Modulo. Ms. Zhang, a 2012 graduate of Amherst College, worked for a decade at Jane Street, a global quantitative and proprietary trading firm, before she started Modulo. Mr. Rheingans-Yoo also worked at Jane Street, joining in 2020 after he graduated from Harvard.
Ms. Zhang and Mr. Rheingans-Yoo have close personal ties to Mr. Bankman-Fried, who started his career at Jane Street. Modulo was incorporated last spring in the Bahamas, where FTX was also based. And it operated out of the same luxury resort on the Bahamian island of New Providence where Mr. Bankman-Fried lived with some of his top lieutenants.
The $400 million transaction also attracted suspicion because Mr. Bankman-Fried made the investment shortly before FTX imploded. After he was arrested in December, a local prosecutor in the Bahamas argued at a bail hearing that the FTX founder might still be able to tap the funds he had sent to Modulo, making him a flight risk. In a Jan. 17 court filing, FTX’s lawyers flagged the $400 million investment in Modulo as a likely target for recovery efforts.
Modulo traded a combination of traditional stocks and cryptocurrencies before halting its operations when FTX filed for bankruptcy. During its brief time trading, the company made a small profit, two people briefed on the matter said.
Over the past few months, Ms. Zhang and Mr. Rheingans-Yoo have been on something of a whirlwind tour of Wall Street, meeting with representatives from some of the country’s largest hedge funds and trading companies as they plot their next moves, three people briefed on the matter said. They have had talks with firms such as Millennium Management, Citadel Securities and Point72 Asset Management, the people said.
It’s unclear whether Ms. Zhang and Mr. Rheingans-Yoo are close to joining any other firms. Before FTX’s collapse, they had hoped to raise money from other investors, according to a person familiar with their plans. In the end, the only money they raised came from FTX.
