FTX Sues Sam Bankman-Fried and Associates for $1 Billion

Overview

FTX, the currently insolvent cryptocurrency exchange, has filed a lawsuit against its founder, Sam Bankman-Fried, and three former executives. It is seeking the recovery of over $1 billion allegedly misappropriated in the months leading up to the exchange’s collapse last year.

Details of the Lawsuit

FTX exchange has been battling legal problems since the entity collapsed last year. Numerous reports indicate that the crypto-exchange has filed a lawsuit against Sam Bankman-Fried, its founder, and three other former executives. The lawsuit, under the direction of restructuring expert Jon Ray and his team, targets a range of share awards, cash transfers, real estate transactions, and other dealings that the company believes should be reversed under existing bankruptcy laws. 

The complaint also lists the former head of FTX’s trading arm, Alameda Research, Caroline Ellison, as one of the recipients of questionable transactions. This includes an instance where Ellison purportedly awarded herself a $22.5 million bonus. This was later transferred to a personal account and, subsequently, to a company focusing on researching artificial intelligence. 

The other two executives named in the lawsuit are Nishad Singh, a former employee of Alameda and FTX, as well as Zixiao “Gary” Wang, co-founder of FTX, both of whom are named as beneficiaries of potentially illicit transfers in the lawsuit. 

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Moving Forward with the Lawsuit

Ellison, Singh, and Wang have already pleaded guilty to charges including fraud in separate criminal cases that are unrelated to the current lawsuit. On the other hand, Bankman-Fried has pleaded not guilty to US criminal charges involving campaign finance violations, money laundering, and fraud.

The current lawsuit is the latest endeavour by John Ray on behalf of creditors to reclaim assets. Creditors include numerous individual customers who lost access to their funds when FTX halted withdrawals before its eventual bankruptcy in November. 

John Ray had previously expressed astonishment at the significant breakdown of corporate controls as well as the absence of reliable financial information during the Enron liquidation process, which is similar to the challenges in FTX’s case.

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The Growth of FTX

FTX was one of the largest cryptocurrency exchange platforms and provided a digital wallet to store cryptocurrencies directly in the user’s personal account. Soon after it launched, FTX quickly dominated the market by acquiring struggling competitors such as Blockfolio, LedgerX, and Liquid Global. 

It also used aggressive marketing campaigns such as naming rights to the Miami Heat’s arena, several celebrity endorsements, and Super Bowl commercials. This coincided with the cryptocurrency boom of early 2021, when the price of Bitcoin went from $10,000 to $64,000. It was at this point that customers began to take notice, and several venture capital groups invested almost $2 billion in the exchange.

Read More: Coinbase vs. Robinhood: Which Should You Choose?

The Collapse of FTX Exchange

FTX started to experience a prolonged collapse in November 2022, which lasted ten days. This was triggered by the publication of a tell-all article by CoinDesk, which disclosed the company’s balance sheet. Following this, Binance announced that it is divesting all FTT tokens, which is the native token of FTX, due to concerns about mishandled and obscured funds. 

With FTT’s token value declining, many FTX customers started withdrawing their funds. Investors started to really worry about the security of their investments when other cryptocurrency platforms, such as Voyager Digital and Celsius Network, also faced difficulties.

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Bankman-Fried’s Role in the Collapse

As more and more customers started withdrawing their funds, FTX suffered substantial financial losses. As a response, Bankman-Fried directed Alameda Research to liquidate assets in an effort to meet the capital requirements that resulted from the withdrawals. Additional efforts were made to secure external financing to address an almost $8 billion deficit between owed and available funds. 

On November 8th, 2022, FTX started blocking customers from accessing their funds by removing the online withdrawal option. This left hundreds of thousands of their users unable to access their funds. However, upon failing to address the $8 billion gap, it was ultimately forced to file for bankruptcy. 

There have been several reasons attributed to the collapse of FTX, including inadequate liquidity, mismanagement of funds, and a surge in requests for withdrawals. Binance, which initially showed interest in acquiring the failing cryptocurrency exchange, subsequently backed out as reports concerning the mishandling of customer funds were exposed.

Conclusion

The crypto community is starting to feel the broader consequences of the FTX fiasco which may further deter investors who are already cautious about cryptocurrencies as investments. International regulators may also use the example of FTX’s collapse to tighten regulatory scrutiny of digital assets. 

Frequently Asked Questions

Did FTX Get Hacked?

FTX announced that it was hacked within hours of filing for bankruptcy. It cited unauthorised transactions that have stolen almost $500 million in assets. The hacker drained wallets for several days using a tactic known as on-chain spoofing.

Did FTX’’s Collapse Affect the Cryptocurrency Market?

The collapse of FTX shook the already volatile crypto market. Since FTT was used as collateral for leveraged trading, its value plummeted from more than $50 to less than $1. Other cryptocurrencies also suffered losses as investors panicked and liquidated their positions.

What Happened to FTX’s Customer Funds?

FTX’s customers could not access their accounts or withdraw any funds after the exchange filed for bankruptcy. The exchange also got hacked, with $415 million being stolen. It has since recovered some of its assets, including $300 million in liquid securities, $3.5 billion in liquid cryptocurrency, and $1.7 billion in cash.