{"id":18784,"date":"2023-01-11T17:06:40","date_gmt":"2023-01-11T22:06:40","guid":{"rendered":"https:\/\/azzadasset.com\/?p=18784"},"modified":"2025-02-14T10:21:37","modified_gmt":"2025-02-14T15:21:37","slug":"ftx-lessons-learned-from-a-lack-of-due-diligence","status":"publish","type":"post","link":"https:\/\/intelliserver.net\/wordpress\/blog\/ftx-lessons-learned-from-a-lack-of-due-diligence\/","title":{"rendered":"FTX \u2013 Lessons Learned from a Lack of Due Diligence"},"content":{"rendered":"\n<p>What do a supermodel, Shark Tank star and sovereign wealth fund have in common? They all failed to ask questions before investing their money. The investments were related to the cryptocurrency exchange FTX and its trading arm affiliate, Alameda Research. Here are 4 factors you should consider <a href=\"https:\/\/ip1.us\/aam\/blog\/five-things-to-consider-before-you-invest\/\" target=\"_blank\" aria-label=\"undefined (opens in a new tab)\" rel=\"noreferrer noopener\">before you invest<\/a> in any potential investment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Conflicts of Interest Between Affiliated Entities<\/h2>\n\n\n\n<p>The adage \u201c<em>follow the money\u201d<\/em> can help you identify potential conflicts of interest between entities. Conflicts of interest may sometimes be unavoidable. They aren\u2019t always a bad thing. However, related party transactions should be disclosed. You should also understand how such conflicts are mitigated.<\/p>\n\n\n\n<p>Contrary to assurances that Alameda and FTX were separate entities, the two firms were intertwined. In fact, the collapse of FTX can be directly attributed to Alameda trading billions of dollars from FTX accounts and leveraging the exchange&#8217;s native token, FTT, as collateral. At the time, it would have been easy to press both companies for more information.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Weak Governance and Poor Financial Controls<\/h2>\n\n\n\n<p>A strong effective control environment reflects the values of an organization. A legitimate organization will have well-defined policies and procedures that govern its operations. Additionally, those controls will be overseen by an independent party. At FTX, there were no such controls. In fact, the lack of any cash controls allowed customer funds to be freely transferred to Alameda. It certainly would have been a red flag during any due diligence process.<\/p>\n\n\n\n<p>Additionally, you should review an organization\u2019s board of directors. An independent board serves as a fiduciary and is enlisted to protect shareholder interests. FTX did not have a board of directors. They refused to do so and were audited by two little known auditing firms\u2014more red flags.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Inexperienced Executive Team<\/h2>\n\n\n\n<p>The most nominal due diligence process involves reviewing an organization\u2019s executives. Executives who may be politically exposed, have prior criminal records, bankruptcies or have poor track records may indicate more red flags.<\/p>\n\n\n\n<p>By now, it shouldn\u2019t come as a surprise to learn that FTX did not have a CFO. FTX\u2019s Chief Regulatory Officer, Dan Friedberg, was previously the General Counsel at Ultimate Bet, an online gambling site. A deeper dive would\u2019ve revealed that, while at Ultimate Bet, Friedberg was embroiled in a poker cheating scandal where he was caught on tape allegedly aiding the perpetrators of the fraud.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Unregulated Assets in a Foreign Country<\/h2>\n\n\n\n<p>When considering whether to invest in an organization, it is very important to know where that entity is domiciled and the applicable laws and regulations which would help protect your investment in case of insolvency. The lack of regulation for <a href=\"https:\/\/ip1.us\/aam\/halal-investing\/should-you-invest-in-bitcoin\/\" target=\"_blank\" aria-label=\"undefined (opens in a new tab)\" rel=\"noreferrer noopener\">crypto<\/a> assets continues to be a significant risk for investors. While the securities market is governed by the SEC, and the commodities, futures and options markets are governed by the CFTC, there are no specific laws which directly govern FTX and\/or any crypto businesses directly. In addition, FTX was located offshore in the Bahamas. That provided even less protection for investors in the event of insolvency.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Don\u2019t Make Yourself a Victim<\/h2>\n\n\n\n<p>Before you invest in any venture, make sure you understand the <a href=\"https:\/\/ip1.us\/aam\/investment-strategies\/\" target=\"_blank\" aria-label=\"undefined (opens in a new tab)\" rel=\"noreferrer noopener\">investment strategy<\/a> behind it. Learn as much as you can about the people who are running it, including their backgrounds. Make sure you understand the control environment of the firm\u2019s operations. You should also know what protections you can rely on if something goes wrong. Most importantly, if you don\u2019t receive sufficient answers to your questions, it\u2019s time to move on to another opportunity. Never allow yourself to be consumed by FOMO (or fear of missing out). You and your family have worked much too hard for your money.<\/p>\n\n\n\n<p>Azzad emphasizes ongoing due diligence as part of our investment manager research process. In fact, verification and due diligence is the third of the <a aria-label=\"undefined (opens in a new tab)\" href=\"https:\/\/ip1.us\/aam\/investing-philosophy\/\" target=\"_blank\" rel=\"noreferrer noopener\">Seven Tenets of Halal Investing at Azzad<\/a>. To learn more about our due diligence and <strong>Islamic investment<\/strong> process, please contact us.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What do a supermodel, Shark Tank star and sovereign wealth fund have in common? They all failed to ask questions before investing their money. The investments were related to the cryptocurrency exchange FTX and its trading arm affiliate, Alameda Research. Here are 4 factors you should consider before you invest in any potential investment. Conflicts [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":18785,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[9,24],"tags":[867,868,354],"class_list":["post-18784","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","category-halal-investing","tag-crypto-hedge-fund","tag-cryptocurrency-exchange","tag-investment-strategy"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>FTX \u2013 Lessons Learned from a Lack of Due Diligence - Azzad Asset Management<\/title>\n<meta name=\"robots\" content=\"noindex, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"FTX \u2013 Lessons Learned from a Lack of Due Diligence - Azzad Asset Management\" \/>\n<meta property=\"og:description\" content=\"What do a supermodel, Shark Tank star and sovereign wealth fund have in common? They all failed to ask questions before investing their money. The investments were related to the cryptocurrency exchange FTX and its trading arm affiliate, Alameda Research. Here are 4 factors you should consider before you invest in any potential investment. 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