Let’s be clear right off the bat. Kevin O’Leary thinks that the Senate hearing on the FTX crash, where he testified on December 14, 2022, allowed him to profess everything he wanted to. His overall impression was that he sensed a “frustration” starting to occur. “I think the legislators, the Senators, the Congressmen are tired of having hearings about crypto blowing up,” he revealed. “I had a chance to talk to a few of them afterwards. These legislators have had enough. They’re tired of gathering every six months to talk about billions of dollars of loss of some crypto company that went to zero. And the fact is, unless there’s legislation, this will happen over and over and over again.”

Before the FTX imploded, President Biden stepped toward the first regulatory framework on crypto. The downfall of his second-largest donor, who was given the charismatic title “JP Morgan of crypto,” by the mainstream media, could make the President skeptical about digital assets and decentralized finance. The advice Kevin O’Leary has for Biden is to “not let this nascent industry that has so much promise fall to the wayside because of the lack of or the first managers, the idiot managers, the incompetent managers, the rogue players, the all of the people that have used the lack of regulation to profit in nefarious ways. That is not the destiny of crypto,” O’Leary is certain. “Crypto has such potential to drive innovation in financial services that we must regulate.” 

At the Senate hearing on the FTX crash, Kevin O’Leary began detailing his thinking about what led to the collapse of the FTX but was cut off by Senator Sherrod Brown (D-OH) because he was three minutes over his allotted time. 

“The hearing has a format that has to be abided by, I understand that. But, the basics that were put on the table, I think they understand some of the details I was discussing, and what my concerns were and what I hope I can do, if I get on the credit committee, in terms of discovering what happened and working towards getting some of this capital back for investors,” revealed O’Leary. 

“Venture investing, eight out of 10 investments don’t work out and normally, I would just write it off and move on. Not this one. This one is one I want to stay with until the end,” he said of the loss he experienced with the FTX. Shark Tank investor hopes that he will be able to teach one day in his guest lectures at Harvard and other colleges the outcomes of this “remarkable story” as  “there’s a lot to learn here.”

Curtain-Raiser: From speculation to evidence 

Kevin O’Leary met Sam Bankman-Fried when the young crypto billionaire asked him to be the FTX spokesperson in September 2021. The Canada-born investor was paid approximately $15 million, including $3 million to cover a portion of the taxes. According to O’Leary, $1 million was invested in FTX equity and approximately $10 million in tokens held in FTX wallets. “The equity is now most likely worthless, and the accounts have been stripped of their assets and financial records. I have written them off to zero,” O’Leary said at the hearing about the state of his FTX investment. He shared with the members of the Senate that he “never invested any capital from our partners or LPs.” The money he lost was his own.

Flash forward to November 2022 when the FTX scandal broke, when asked if crypto wunderkind was honest when he said that he did nothing wrong, O’Leary’s answer is “I don’t know.” He won’t speculate because he knows “the data is there. We just don’t have it yet.”

When people ask him how Sam Bankman-Fried did it or what occurred, he tries to steer away from speculations. “There’s no information that’s actually concrete and I want that. I really do,” he explained. “I feel that we’ve gone through the phase of the mob herd because this is a really intense social media story. It gets scrutinized every hour. But we’re past all that now, in the sense that most people that are rational, now want the data. They want the service to be turned back on, they want to get the transactional records,” he said. “There’s a lot of information we don’t know. And so that that will tell the story. There’s so much speculation on what occurred that we’re going to get to the bottom of it by fact.”

The topic O’Leary kept coming back to during our interview is the nexus between the Changpeng Zhao, aka CZ, and SBF, which, O’Leary believes, gave birth to the downfall of the FTX. We discussed at some length the scope of the conversations O’Leary had with Sam Bankman-Fried and how a competition of the two frenemies for a global market spiraled out of control and brought Sam Bankman-Fried within the orbit of law.  

“I had multiple conversations with him,” revealed O’Leary. “I was frustrated that I couldn’t get any answers out of the management after the bankruptcy occurred. I was wondering what happened to my accounts. What happened between Thursday and Saturday at three o’clock was really what I was trying to find out. When I couldn’t get any answers out of anybody else, I simply called up Sam and said, what’s going on? I’d like to know what happened to the money and then, more importantly, the actual records. There were no records there, which I find really strange,” he said. Sam told O’Leary that once the bankruptcy was declared, they removed his access from the servers.

“He was basically pushed out, and I understand that. But I said, ‘Okay. I’d like to go backwards then to when you were the CEO, and ask you what the use of capital was that came off your balance sheet, not the small stuff.’ You know, if you’re a $32 billion company, and you go bankrupt, you have to somehow scrape clean the balance sheet of any assets to do that, and have liabilities so great that they outweigh the assets. This is a very simple exercise. It’s not complicated,” continued O’Leary. “So I said, let’s go back, let’s go back 24 months, that’s not a long period. It’s a venture company. It’s virtually a startup in its early years. And that’s when I discovered the transaction of repurchasing all those shares from Binance. Now, I have all kinds of issues with that. Because, at the time I was speaking to Sam, I didn’t know whether it was cash or tokens or combination of both or whatever, but it was assets. And so you’ve got a situation here where two large shareholders do a transaction and all the assets end up on the other shareholders balance sheet. Basically, that’s what happened. That’s the way I view it,” explained O’Leary. 

All out War between CZ and SBF

The camera on the FTX downfall turned on November 2, 2022 and kept running. The plot kept thickening. The pressure on the Hill to address the elephant in the room increased. Treading into legal, political, and media jeopardy, Sam Bankman-Fried told Congresswoman Maxine Waters that he will virtually appear at the House hearing on December 13, 2022. Kevin O’Leary was asked to appear on December 14, 2022, at the Senate hearing and what he found out in a phone call with Sam took him by surprise. 

“At that time, Sam—this is before I got the invitation to come and testify, the day before— I was just stunned. I’m saying, ‘Wait a second, why would you do that [repurchase shares from Changpeng Zhao, CZ]? For what reason would you do that?’ And he told me that he did it at a 50% discount to a $32 billion valuation. And I said, ‘What would motivate you to do that? That makes no sense at all.’ He said, ‘Well, everywhere we went to get licensed, we got turned down, and the regulators told us it was because of the lack of transparency on the 20% ownership by Binance. So whatever the regulators wanted out of CZ, he wasn’t giving it to them. I don’t know for what reason that occurred. But CZ was not being cooperative, according to the words of Sam Bankman-Fried,” relayed O’Leary. 

— And none of the investors, including you, knew that? He never shared that information?, I asked. 

“I don’t know for others, but I certainly didn’t. I can only speak for myself,” responded O’Leary. “I was shocked. Because it doesn’t make sense,” he added. “Then, I started thinking. Wait a second, you’ve got these two, they’re no longer friends. There’s been a falling out here. They’re obviously two giants, unregulated global competitors, the only two big ones, and they’re at war with each other. And then, the next morning, I got a phone call from Senator Toomey and he said, ‘You’re coming to Washington.’ I said, ‘Okay.’ Then, I called Sam back to confirm, because during the first conversation Sam said to me, ‘I can’t remember whether it was 2 billion or 3 billion.’ And I said, ‘Sam, that’s a huge number.’ So I called him back the next day. ‘Can you confirm now? I have to go testify, I’ll be under oath, you gotta give me the best facts you can.’ And Sam said it might have been 3 billion, but he didn’t have access to the records. It’s now been confirmed, because CZ has gone on the air saying that it was 2.1 billion,” recalled O’Leary. 

“I’m just stringing together now what I’m seeing as a result of the testimony,” he clarified. ” Because, the week of November 6, you see this really strange series of social media tweets coming out of CZ, that he has 550 million FTT tokens that he’s going to blow into the market. So why would you do that? What reason would you do that? If you have a large blockchain in any asset class, you arrange for a syndicate of buyers, do a cross, do price discovery, and try and optimize your purchase, your sale price, but you don’t disrupt the market. Unless— and this is sheer speculation— you want to have a collapse of the token’s value. You want to put the final knife in the back of this thing and put it out of business, which is what I think happened, and that’s a personal speculation,” said O’Leary. “Now, CZ doesn’t like that version of what occurred, but there’s no question that happened.”

What needs to be done, according to O’Leary, is to have CZ and SBF in the same room. “They need to get in a room together and tell us what happened. Whether that ever occurs, I have no idea. But there’s something here that doesn’t make sense,” he added. ” And so I argue that these two behemoths saw the great prize of getting the global monopoly. That’s what they did. They went after each other and there’s only one winner.”

—But then the winner could not take him down if he didn’t do anything wrong, allegedly, I remarked. 

“Allegedly, exactly,” O’Leary confirmed. “There are other problems, obviously. But that last 550 million, that cash call, that was, if you asked me why it went bankrupt, that’s why,” he shared his thinking. “First, you just strip the balance sheet of all the assets to 2.1 so it becomes a weakened company, then you hit it with the $550 million cash call in addition to all the alleged transfers and everything else,” explained O’Leary. 

If buying out CZ was the only way for Sam Bankman-Fried to get cleared for the license and he was facing problems, one question still needs to be accounted for. Why did he not turn to investors of the highest order for help, the heavyweights like Kevin O’Leary, Mike Novogratz, and Sequoia he had in his corner?

“I think the decision was beyond just Sam,” said O’Leary. “ I think it was the management of FTX, there were other people involved. Obviously, he was hiring people in jurisdictions like Abu Dhabi, Canada, and in European countries. They were not successful in getting an Abu Dhabi license either and I think it’s because of this friction with the regulators and Binance, “ O’Leary revealed. “ I mean, look, we’re speculating at this point. But I don’t think you’re going to go to your customers and start telling them your problems, you’re going to try and resolve it internally first. Besides that, I’m sure Novogratz and whoever else you’re talking about are also dealing on Binance, these are the two global exchanges, for institutional diversity. I do this myself, “ he said. “ I don’t have an account on Binance and I never will. But I’m never gonna have assets on the unregulated exchange ever again. Never. I’m never putting in. I’m sure most institutions feel the same way. The problem with this now is it’s really focusing on what’s wrong with lack of regulation, scrutiny, transparency, test of reserves, all of these things that come into focus, ” he said. 

“It’s a nascent industry, it has great promise, but the lack of stability and infrastructure is really starting to show up now. I told the committee, we’re going to be back here again in six months, I don’t know who it’s gonna be next. But unless you put some guardrails in place where you’re just gonna keep meeting or I might as well get an apartment here in DC.”

One of the things O’Leary discussed at the Senate hearing was that in the FTX portfolio of companies, the only one that did not go bankrupt was LedgerX, heavily regulated by CFTC in the US.

“If you go look at what’s working right now, in North America, the only exchanges that are functioning successfully are regulated. If you look at the 130 plus companies that went bankrupt in the portfolio of FTX, the only one that didn’t was LedgerX, and that was being regulated by the CFTC. The regulators kept such scrutiny on it that it functioned perfectly, it’s still working, it still has all the assets there, it’s got a custodial system setup, people have their assets safely in a custodial, so it works,” he said. 

The other example O’Leary deems a good crypto regulation reference is the license the Ontario Securities Commission (OSC) and Canada granted to BitBuy, which Wonderfi bought. “It’s a public company, they have almost a million accounts across Canada, highly regulated by the OSC, they limit the number of tokens, I believe it’s under 20, or just over 20. They limit margin, they do not allow commingling of assets, there is a scrutiny of proof of reserves. It is a highly regulated broker dealer tied to an exchange and successful. So here you have it, where you can point your finger at what works. And you can also point your finger at what doesn’t,” he said. 

Risky margin trades by Alameda

The task of reviewing the FTX documents after Sam Bankman-Fried filed for bankruptcy on November 11, 2022, fell in the hands of an appointed CEO John Ray.  At the House hearing on FTX on December 13, the day before Kevin O’Leary testified at the Senate, Ray said that one of the reasons for the collapse of FTX was risky margin trades by Almeida. I asked O’Leary if he had any thoughts about these margin trades that Alameda possibly did with consumers’ money.

“Well, that’s an ancient problem,” responded O’Leary. “That’s a 100 year old problem, right? When you use leverage, you have high risk, but there’s volatility.” He added that he has “not seen any records yet produced by John Ray” and “does not know” the specifics. “I certainly have requested them,” he revealed. 

“I’m fortunate I have the resources to pursue my own forensic audit, particularly on our corporate accounts, which I’m going to do. But this is a long journey. And I’m certainly going to be aggressive and looking for clawback opportunities,” he said.

“There should be an easy path to recovery here, not easy but the point is, everything is auditable, the wire transfers in, the transactions in Alameda, the transactions between FTX and Alameda and transactions within FTX. All assets leading up the FTX are on the blockchain, if they’re in crypto. It’s going to take time, but if I had access to the records, I have good forensic auditors, we could figure it out.”

What SBF told O’Leary about Chapter 11

In a leaked House testimony to Forbes, Sam Bankman-Fried was planning to deliver at the House, he spoke at length about his decision to file for Chapter 11. “Starting on November 8th, I was put under extreme pressure to file for Chapter 11. Most of that pressure came from Ryne Miller, the General Counsel of FTX US and a former partner at Sullivan & Cromwell (S&C), and Sullivan and Cromwell itself,” he stated. I asked O’Leary if SBF spoke about any of these in conversations they had on the phone. 

“What he said to me in our last conversation was he regretted filing for bankruptcy because he didn’t understand the ramifications of being stripped of the ability to get access to the files, and being pushed out of the company so abruptly because he couldn’t try and do anything at that point to try and embrace anymore financing,” O’Leary conveyed what Sam Bankman-Fried told him. 

“What he would have preferred to have done is simply gated all the accounts—this is him speaking in hindsight. If he had gated the accounts and not bankrupt the companies, if that was an option, then he could have secured financing and raised the gates once he had done that. That’s what he had hoped to do,” revealed O’Leary.

“Now, it sounds like things were unraveling. We’re learning more. It sounds like his CEO Ryan Salame had already gone, this is again alleged in the press, to regulators saying there were some issues prior to the bankruptcy. So we don’t know the timing of this. But again, it will come out. But to answer your question, yes, Sam Bankman-Fried did have some remorse about taking this path that he was under tremendous pressure. He was, you know, told to sign the documents as the CEO and when he did that, he was out.”

What led Ryan Salame to tip off Sam Bankman-Fried to regulators three days prior to a bankruptcy filing is still the area of inquiry outside the public domain. O’Leary reiterated that what he is “most interested” in is where the records of transactions are. “It’s a highly unusual situation where not only the assets are scraped, but also all the data. That concerns me. Where is that data? There’s always a backup in the cloud,” he said. 

“Sam Bankman-Fried admitted there was a backup. He said that he thinks it’s on AWS but he doesn’t have the keys to get in anymore. So this is now under the purview of probably John Ray. John Ray has that and he’s checking that his mandate is to work through this spaghetti. It’s a mess. But there’s other interested parties, and I’m one of them. That’s why I seek a seat on the credit committee.”

The dagger that finished FTX off 

The first time O’Leary met Sam Bankman-Fried, his initial feeling toward the young man was positive. “At the essence of who he is, he’s a coder,” assessed O’Leary from his experience of working with coders his entire professional life worldwide. “This is an eclectic scale, half art, half science. He fell right into that category,” he further illuminated his observation of Sam’s personality.

“A lot of people thought he was an unusual person. For me, he wasn’t because he just fit into the slot of coding that I’ve seen for decades. So that was not different,” he said.

“The premise of the platform, when I looked at it first, I said it wasn’t robust enough to be compliant with my compliance department. And he put me on with some other coders that were willing to listen to make modifications. Over the month that I was involved, and I’m sure other institutional clients who were saying the same thing, that became a very robust trading platform, a really strong trading platform with very good reporting. Now, it wasn’t automated into our compliance systems, it couldn’t mark to market because most markets close at four o’clock. This is a 24 hour market. So what we would do is, we would mark to market with four o’clock prices that were on the platform with the reporting system with all the transfers that occurred, and we did that within our own, and it was working. My sense of how the company was evolving from the coding side was good, but I also made the assumption, as he grew, that they would hire more managers, which is what you do, you hire more people, particularly in compliance. That’s really important.”

In hindsight, O’Leary believes that hiring more people in the compliance department was something Sam Bankman-Fried “should have done” more of. “Obviously, all of these alleged talk of backdoors, and everything— I don’t know if that’s true. I got to see the records. But clearly, in my mind, what triggered the collapse of the FTX was the cash call of 550 million. That was the dagger that finished it off. And we know where that came from.”

Justice operates on its own schedule

At the House hearing, Congressman William Timmons said that “someone at the DOJ made a decision” to arrest Sam Bankman-Fried on the eve of his scheduled testimony to prevent him from appearing at the hearing. AOC also questioned the arrest timeline, but that’s not how O’Leary sees it. 

“Justice operates on its own schedule,” insisted O’Leary. “I don’t think it was considering all the questions everybody was having about the timing. They just came to a point where they made a decision, and that was that.” Pointing to other alleged fraud and bankruptcy cases, he said, “DOJ moves to its own step, to its own drummer and did the same thing here.”

Sam Bankman-Fried is now in prison on wire and securities fraud charges, where any contact between him and O’Leary has ceased. 

—Did you have a chance to talk to his parents after the arrest or anyone in his immediate circle?, I asked.

“No, I haven’t spoken to the parents since I met them last in Miami. I was involved in a charity with them. This was long before any of the problems emerged. So it was in a different environment. We weren’t talking about FTX as a crypto company. We were talking about philanthropic initiatives,” revealed O’Leary. 

—No one knows what’s going on with him right now?

“You know, I don’t know. I haven’t talked to him since he got arrested. I don’t think anybody has. Only his lawyers, I’m sure,” responded O’Leary.  

Since the arrest occurred, Kevin O’Leary maintained that the presumption of one’s innocence must be respected. “I’m not talking about Sam Bankman-Fried when I say that,” clarified O’Leary. “That’s a fundamental principle of our justice society. Obviously, the social media of today can create an angry mob in a matter of minutes. And that’s exactly what’s happened with Sam Bankman-Fried. But many of those people in that angry mob are going to want to use in their lifetimes the presumption of innocence when they get in trouble. And many of them are going to, they just don’t know it yet. And so what is the pillar of the criminal justice system and it will remain so long after this case, it is the presumption of innocence until proven guilty. I can’t understand anybody that doesn’t want that right,” he said. ” It’s a right as a citizen you have, why would you ever give that up? And so that’s the case here. And so when people ask me, ‘Why aren’t you condemning him?’ I don’t condemn anybody until they have their day in trial. Anybody. Not just Sam Bankman-Fried. So that’s it. You know, if people have a problem with that, I couldn’t care less.”

As America has entered the age of the eternal scorn of the social media  and trial in the court of public opinion, Sam Bankman-Fried has set out on a round-robin of interviews prior to his arrest. On more than one occasion, he has absolutely and publicly denied an intent to defraud the consumers and investors, but has the verdict on Sam Bankman-Fried has already been made? 

“Social media has forever changed how people look at the justice system, because everybody’s getting a chance to be judge and jury at the same time, long before there is a judge or jury,” said O’Leary.

As Sam Bankman-Fried awaits extradition to the US in Fox Hill prison in the Bahamas, O’Leary is aware that the young man, obviously, is in a “very difficult” situation. “His name and his family are all at jeopardy. He’s in a really tough place and everybody knows that. And he’s going to have to deal with it. And there’s no option for him. It’s part of the story. It’s a disaster, and it’s still playing out,” said O’Leary. 

The Senate Committee on Banking, Housing and Urban Affairs said in a joint statement that Sam Bankman-Fried declined to appear at the hearing even under a threat of subpoena. However, it may have been the case  that appearing to testify before the Senate was “still an option” in Sam’s mind if the arrest did not happen. 

“I mean, nobody knew. It would seem to me, I think if he was to go for the first day why not hit the second day too?  You know, it’s more of the same. He seemed to have wanted to tell his side of the story, but that is not an option for him anymore,” said O’Leary. 

In the world of venture investing, the collapse of FTX won’t stop the pursuit of the next unicorn. According to Kevin O’Leary, if there is a silver lining out of this mess, “it’s going to be that the crypto industry finally gets the long awaited regulations.”

As for Sam Bankman-Fried, the veracity of the documents and transactions will have the last say. Until then, the truth remains his best counsel. 

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