The Breakdown - SBF ‘Loaned’ the CEO of The Block $43M

Episode Date: December 13, 2022

This episode is sponsored by Nexo.io, Circle, Kraken and the Galaxy Brains Podcast.   Another day, another betrayal. On Friday, news broke that former FTX CEO Sam Bankman-Fried made three loans totaling $43 million to Michael McCaffrey, CEO of CoinDesk competitor The Block. Those loans went to buying out The Block’s investors, to expanding operations and (of course) to an apartment for McCaffrey in the Bahamas. On today’s episode, NLW looks at the latest betrayal.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company ensures the safety of your funds and keeps innovating with products like the Nexo Wallet - a non-custodial smart wallet that allows you to create your Web3 identity. Get early access at nexo.io/wallet. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today's show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. Your account is covered by regular Proof of Reserves audits, industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com/breakdown. - Galaxy Brains: Whether it’s breaking down market volatility or analyzing the latest development, come for the latest market insights from our in-house trading professionals and renowned experts from across the industry. Stay for the occasional rap from host Alex Thorn. Check out the latest episodes here: https://www.galaxy.com/research/podcasts/galaxy-brains/?utm_source=BD&utm_medium=podcast&utm_id=CoinDesk - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is "Back To The End" by Strength To Last. Image credit: Juan Moyano/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

There are two ways to look at this. Sam was spending tens of millions of dollars to get preferential coverage in the short term, or Sam was spending tens of millions of dollars in loans that theoretically he could call due to have an option to buy out the actual media apparatus if and as it was relevant and at a time that suited him. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and Cracken, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, December 12th, and today we are talking about what else?

Another crazy, deceptive thing that Sam did, because that is the story, I guess, of 2022. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Bit I'm excited to also share that this week the podcast is brought to you by Galaxy and the Galaxy Brains podcast. Transparency is more important than ever in crypto. If you're here, it's obvious how important it is to you to find reliable information. For more shows like this, for more shows like The Breakdown, check out the Galaxy Brains podcast. To tell you a little more, here's the host

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Stay for the occasional rap from yours truly. Check it out at galaxy.com slash research. Well, holy shit, friends, I honestly shouldn't have been surprised. When your business ethics compass is twisted enough to do the mental gymnastics to justify plowing billions of customer funds into your failing hedge fund, I guess it was inevitable that more dubious deals were going to be uncovered. Still, I will admit shock at the utter prazenness of what was revealed on Friday evening.

Late Friday afternoon, news broke that Crypto News website The Block, or more specifically its CEO Michael McCaffrey, had been receiving secret funding from Sam Bankman-Fried since early 2021. To be specific and clear, the block CEO Michael McCaffrey received a series of loans to his holding company. McCaffrey claims that the first two loans for a total of $27 million were used to fund day-to-day operations at the block. McCaffrey used a third loan taken earlier this year for $16 million, in part to purchase personal real estate in the Bahamas. McAfrey claims that no one else knew about the loans and that the editorial and research teams were not influenced by Sam's funding of the company. McCaffrey resigned on Friday effective immediately, with Chiefs.

Chief Revenue Officer Bobby Moran, stepping in to helm the company. On Friday, December 9th, McCaffrey tweeted, I have difficult news to share. I'm stepping down as the Block's CEO. While it's personally painful, it's the right thing for the Block and the team. Editor's note, don't talk about your personal pain when you've been involved in deceptive fraud. Anyway, back to McCaffrey's tweets. In early 2021, the Block was in a precarious place, and I was evaluating whether to sell, merge or restructure. The only option that materialized was to restructure when I was able to obtain a $12 million loan for my holding company from SBF in February of 2021. Sorry, I don't mean to keep doing this, but another editor's note, that wasn't the only option, deceptively taking money from a crypto billionaire

for your cryptojournalism site. That was the option that allowed you to do what you wanted. Those are not the same thing. Anyway, back to McCaffrey's tweets. The loan was to an entity I own and the funds were used to affect the restructuring. In early 2022, there was an additional $15 million loan to strengthen the business's position. I didn't disclose the loan to anyone. Absolutely no one at the block knew about the financial arrangement between my holding company and SBF, including the editorial and the research teams. My rationale, undoubtedly poor judgment in hindsight, was that the knowledge of the loan might be seen to compromise the objectivity of their coverage of SBF in his related entities. Editor's note, you think? Back to McCaffrey. I never attempted to influence coverage of FTX,

Alameda or SPF. Nevertheless, my decisions undermine the credibility of the block and the talented people who work nonstop to cover this complicated and evolving industry. I apologize to my teammates at the block. I am truly sorry for the lack of judgment. I have full confidence to the team to continue to do what they do best, delivering clear-eyed research and news in a space that needs it now more than ever. End tweet thread. So when I first saw this, I read about it in Frank Chaparro's thread. Frank is the host of the scoop and one of the best reporters at the block and wrote, absolutely gutted by this news, which was briefed to the company this afternoon. Underpinning my shock or feelings of utter disgust and betrayal by Mike's actions, greed,

lack of disclosure. He's literal scum. He kept every one of us in the dark. I put my trust in him to run the block as an independent media entity as CEO and majority shareholder, and was misled. This is really painful because I put many years into shaping the block into what it is today. I also thought of him as a friend. Had I known about this, I would have not only called it out and disputed his actions, but called for an immediate change in leadership. Putting aside the FTX meltdown, there is no excuse for his deception and disregard to the 160 people who work at the block. My track record as an independent reporter in the crypto space over the last five years speaks for itself. That's evident as recently as my no-holds

barred interview with Sam Bangman-Fried just last week. What I can say to you all as he steps down to CEO is that I'm angry and hurt but more committed than ever to my job as a journalist and doing what I can to help my news colleagues during this time to report on the industry without fear or bias, just as they always have. Ugh, when I read that, I could absolutely taste the betrayal, because unfortunately, I know exactly what that tastes like right now. But like, how did this happen? When you hear about $43 million in loans that just weren't disclosed, you have to start scratching your head and saying, wait a second, what? So let's turn to the medium note by Bobby Moran, who's the new CEO of the company.

Moran writes, just before Thanksgiving, Mike McCaffrey told me that in early 2021, he was evaluating ways to merge, sell, or restructure the block. Mike decided to restructure the block by obtaining financing in the form of loans from Sam Bankman-Fried to LLCs that Mike owns and controls. Those loans amounting to $27 million were made by Alameda research and the funds were used to affect the restructuring and provide working capital directly to the block. As many of you know, the restructuring was announced in April of 2021. End quote. So I think a fair question is, wouldn't someone ask where this money came from? Apparently the assumption was that McCaffrey's family was super wealthy and it was personal money. That restructuring involved purchasing shares from investors as well as founder Mike Dutas,

and at the time McCaffrey said that the goal was to move the company to being 100% employee-owned. He wrote at the time, we believe employee ownership best drives value in long-term alignment for our readers, members, and sponsors, and it positions the block to continue attracting top-notch talent in the space. Dutas and other current employees have said that McCaffrey's buyout didn't raise their suspicion because they assumed that he was making the purchase using family wealth from his father's successful career as a major pension fund manager. Now, importantly, although these loans and the restructuring did allow for a pool of shares to become available for other employees, it also allowed McCaffrey to purchase a majority stake in the company and become the sole member of the board of directors. Guys, if we take anything away from this year, single member board of directors for major companies is not an acceptable way to run a company. Dutas tweeted, I was told and had sources close to Mike verify that the loan was coming from what I understood to be wealthy family members.

Mike evidently used his own family's wealth and reputation to perpetuate his eventual disgraceful and seemingly fraudulent transfer to the block. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight. Nexo is a company that has never put the safety of clients' funds in question. With over 50 global licenses, $775 million in insurance, and a real-time audit of custodial assets, Nexo sets an example for security standards in the industry. Apart from keeping their 5 million clients safe, has kept building, they've just announced their non-custodial smart wallet.

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or visit crackin.com slash breakdown to join. Now, employees are rightly pissed. I read you Frank's take. Ryan Weeks wrote depressing, baffling news. What angers me most is that we are now forced to defend our work, which I've been particularly proud of this year because of the actions of one person, bitterly disappointing. Larry Sirmak, who's the head of research at the block, said last few months really can't get much worse. Got f***ed by FtX after naively trusting them like a complete idiot, and now also got f***ed by the CEO.

Just like everyone else at the block, I just found out about this. Needless to say, I didn't benefit from Mike's personal loans in any way. In fact, I lost roughly the same amount on FTX as I made from the block's compensation and bonuses since joining four years ago. I never borrowed money from anyone either. I am proud of the 30-plus-person research team I built and we'll keep going with the new the block leadership. It all really fucking sucks and I'm completely exhausted. We'll be doing what truly matters and that's less Twitter and more time with my four-month-old

daughter and my wife. Now, by and large, the community is taking Frank, Larry, and others at the block at their were that they knew nothing about it. That's certainly my take. And to the extent that there's any head scratching left, it's really summed up well by DC investor, whose main question is what was Sam looking for out of this? D.C. writes, I do believe many employees at the block are good, talented folks. The best path forward for them, in my opinion, is radical transparency, ruthlessly investigate and publish info in this matter

first party, disclose any and all editorial input the CEO had and process for how it was issued. It's hard for me to believe SBF gave McCaffrey money expecting absolutely nothing, and kept giving him money in exchange for nothing. If there is a story there, it will be found. The best thing to do would be for employees of the block to find it first. I do not have reasons to doubt that statements of employees who said they were in the dark about this. And I did not ever feel the coverage of the block was obsequious to SBF. However, I felt it was pretty much like all the other outlets and not hitting him hard enough and early enough. And in saying that, SBF had his tentacles deep and most of the crypto media was afraid to cross him for various reasons. That is scary. It produced

real harmful consequences, and we all need to do a lot better with encouraging true crypto-investigative journalism. Now, Frank engaged with this thread saying, based on my sourcing, Mike was very close with SBF and other members of the FTX Bahamas community, played paddleboard with SBF. I'm pretty sure SBF expected something, but maybe not explicit editorial oversight. Maybe he hoped if shit hit the fan one day, M.M. would defend him to the Hilt. Mike's involvement in news from an editorial management perspective was minimal. He didn't have a sense of what anyone on the team was working on, sourcing of stories, etc.

But he did ask questions, was picky on grammar, clarity of headlines. Honestly, I would find myself asking him more questions on specific stories than the other way around, since he had such a strong banking and finance background. He had story ideas from time to time, but they were always thematic, never about a specific company, product, etc. D.C. responds, what were his responsibilities as CEO? Did he ever provide unexpected direction on which leads or topics the team should pursue? If so, was this done on an ongoing basis or ad hoc, where he'd say, this isn't worth our time or look into this instead?

To which Frank responded, he wouldn't have visibility into stories to weigh in on them, say something that wasn't worth our time or not. Mike, in addition to our sales and research teams is not in the channels where we pitch stories, craft headlines, and debate framing. Now, the only thing that I'll add here to what is basically just speculation about what Sam's motivations might have been is there is something that people haven't discussed very much, which is just Sam's long-term desire to own the media establishment. In other words, there are two ways to look at this. Sam was spending tens of millions of dollars to get preferential coverage in the short term, or Sam was spending tens of millions of dollars in loans that

theoretically he could call due, to have an option to buy out the actual media apparatus if and as it was relevant and at a time that suited him. Given the extensiveness of Sam's media judgments, I don't think it's insane to think that that's more what he was looking for, not to own the block's coverage of FTX in the short term, but to just straight up own the block in the long term. Speaking of which, there is a lot of chatter about the next phases for the block. The main issue appears to be that Mike McCaffrey, although having stepped down as CEO, doesn't want to give up his majority stake in the company. There are some interesting machinations around that. Mike Dutas, the original founder, is potentially interested in getting involved again.

On December 10th, he tweeted, I've informed the new CEO of the block, Bobby Moran, that I would like to speak with him imminently. There's a large group of honest people with capital, connections, and a deep interest in crypto research and journalism who would like to ensure the block's continued success. Ryan Selkis, the founder at Masari writes, if Dutus really wants to buy back the block, I'll support him if I can, or pursue the business myself. The top news desks serve as critical checks on industry excess and entities that provide oxygen to all of the good in crypto. Good journalism is undervalued. Now this sent Ryan on a

what if journey. He later tweeted, buy used or open up a Masari media arm with 50 open job requests. And then later, it would cost $10 million a year to run an all-star crypto media Dow with 50 of the top researchers than journalists globally. If you're a cryptojournalist and want a 20% raise from a Dow, DM me. I will keep your note in confidence and execute on the Dow once we have a critical mass. Who knows if that comes to pass, but there's certainly going to be a lot more discussion about crypto media going forward. Now, one set of folks who are not ready to let this go is Sue and Kyle from Three Arrows Capital. I've mentioned before that they are intent on using the collapse of FTX as the key lever to drive their own redemption arc. And they're hammering the reaction to the block story

is part and parcel of that. Kyle Davies writes, I don't care who at the block knew about the SBF bribe your CEO was in his pocket. The crew trims the sales, but the CEO sears the ship. I'm sure there are some good but naive journalists at the block. The direction of the entire ship was compromised. Neutrality was never possible. Suu wrote the idea that the CEO of the block has been bribed massively, that the company has been de facto wholly owned by SBF for years now, yet the underlying reporting was solid is mind-boggling. SBF was solo source for many of their scoops.

He ran the entire editorial direction. Larry has lots of fun stuck on FTX, tweets about actively trading on news and exchange listings while having zero disclosure on those. Stephen has Angel investor in his profile while having zero disclosure on those. Frank's podcast was literally sponsored by FTX. Now, listen, I don't think there is anything mutually exclusive about one, assuming that Frank and Larry and the people who said they didn't know genuinely didn't know, while also two, asking like DC Investor did, what was Sam's endgame with those donations? I will, however,

caution against taking blindly the words of two people who have more incentive than just about anyone else to make the rest of this industry look like shit to bring it down to their level, making them look less bad by a comparison. I will also note that in those few lines, there are untruths. For example, Frank's podcast was literally sponsored by FTX is simply not true. It never was. Anyway, I've tweeted it before and I'll say it here again. No redemption arcs. So let's wrap today with a bit of a preview of the rest of the week.

Obviously, the big-ticket items are the hearings in the House and Senate over the next couple of days. The House hearing investigating the collapse of FTX Part 1 starts at 10 a.m. Eastern time tomorrow, Tuesday, December 13th. It's broken into two separate panels. Panel 1 is John J. Ray, who's the new CEO in charge of overseeing the bankruptcy, and panel 2 is Sam. Sam has at this point confirmed that he'll be testifying remotely, with a joke of an excuse for

why, saying it's the paparazzi effect. Now, if you're looking for the hearing where you might get some real answers, this is your best bet. First of all, Congress versus the Senate has, in my experience, a higher proportion of people who actually want to understand and dig in, but it also has the principles involved in this case right now. However, if on the other hand, you're looking for a complete and utter fucking goat rodeo, as Ryan Selk has called it, might I interest you in the Wednesday hearing? Wednesday is the Senate hearing Crypto Crash, why the F-TX bubble burst and the harm to consumers. The witnesses are two academics, Professor Hillary J. Allen, and Ms. Jennifer J. Shulp,

then FTX spokesperson Kevin O'Leary, an actor-turned-critic Ben McKenzie, who you may remember from the O.C. I genuinely do not know what the hell the Senate thinks they're going to learn from this. In fact, it's so preposterous that it's hard to imagine they think they're going to learn anything at all. Instead, this sounds like a kangaroo court trial of crypto in general, with no regard for actually uncovering what happened. Even the name is misleading as there was no FTX bubble.

It was an FTX fraud or more specifically an SBF fraud. So if I don't have a lot of faith or excitement in that particular hearing to reveal the truth, you'll understand why. Now, at the same time, all of that is going down across town in D.C. The FOMC meeting will be happening. To get a sense of where that conversation might be, let's look to Fed Whisperer, the Wall Street Journal's Nick Timrose, for guidance. His piece about it today was how long should Powell keep raising interest rates, Fed officials are divided. And basically the main theme of this is that there are really now two sets of Fed officials, hawks and doves. This is the normal state of things, but for most of this year, we've seen

everyone align behind Powell and lockstep. At this point, however, doves are urging patience. They're worried that the Fed has not given ample time to see the effects of these interest rate raises on the real economy, while hawks are incredibly worried about taking their foot off the break. Anyways, most of the market still seems to be pricing in a 50 basis point hike, but we will see. Last thing to note, there is a lot of chatter about Binance right now. A ton of people have spent the weekend being skeptical of the proof of reserves they've done, and a Reuters piece came out today about how the Department of Justice is divided on whether or not to file criminal money laundering charges against them.

I'm still sorting out what's fud and natural nervousness post-FTX versus what's real, but that's something I'm sure we're going to be talking about this week. So there you have it, guys. We are in for another extensive, exhausting few days. but I will be here covering it all as best as I can. So for now, I want to say thanks again to my sponsors, nexus.com, Io, Circle, Cracken, and Galaxy. And thanks to you guys for listening.

Until tomorrow, be safe and take care of each other. Peace.