FTX Files Lawsuit Against Binance Seeking Nearly $1.8 Billion

Binance co-founder and CEO Changpeng Zhao speaks during a press conference at the Europe's largest tech conference, the Web Summit, in Lisbon, Portugal, on Nov. 2, 2022. Patricia de Melo Moreira/AFP via Getty Images

Bankrupt trading company FTX is suing cryptocurrency exchange Binance and its executives for more than $1 billion for allegedly having taken part in a fraudulent transaction with the now-defunct entity.

FTX filed for bankruptcy back in November 2022 after concerns about the company’s financial position triggered a frenzy of customer withdrawals. In a Nov. 10 lawsuit filed at the U.S. Bankruptcy Court for the District of Delaware, FTX sought to recover at least $1.76 billion from Binance and some of its executives that were allegedly paid in a “fraudulent transfer.”

The issue stems from Binance acquiring a 20 percent stake in FTX in 2019. A year later, Binance executives acquired an 18.4 percent stake in a company called West Realm Shires (WRS) that was set up by FTX founder Sam Bankman-Fried.

In July 2021, FTX bought back Binance and its executives’ shares in FTX and WRS. FTX’s Alameda Research division funded this share repurchase using digital tokens that had a fair market value of at least $1.76 billion, according to the lawsuit.

However, Alameda was insolvent at the time and could not afford the transaction, it claimed. As such, Caroline Ellison, a former executive at Alameda Research, used $1 billion of FTX’s capital received from depositors to fund the share repurchase.

“The need to borrow funds received as customer deposits held at FTX Trading was problematic for two reasons. First, Alameda’s inability to fund the transaction using its own balance sheet was indicative of Alameda’s insolvency,” the lawsuit alleged.

“Second, and worse still, the use of funds from the trading platform to fund the repurchase left the platform in an even greater imbalance, which Bankman-Fried attempted to cover up in a pervasive fraud that infected virtually all aspects of FTX’s business.”

FTX was insolvent at the time of the share repurchase, meaning the shares bought back were “actually worthless,” the complaint said. After divesting his interest in FTX, Binance co-founder Changpeng Zhao allegedly “set out to destroy” FTX.

From Nov. 6, 2022, Zhao sent a series of allegedly “false, misleading, and fraudulent tweets,” which the lawsuit alleged were “maliciously calculated” to destroy FTX without regard for the harm FTX customers and creditors would suffer as a result.

“Zhao’s false tweets triggered a predictable avalanche of withdrawals at FTX—the proverbial run on the bank that Zhao knew would cause FTX to collapse,” the lawsuit said. The Binance founder’s statements allegedly “destroyed value that would have otherwise been recoverable by FTX’s stakeholders.”

On Nov. 6, 2022, Zhao announced that Binance received around $2.1 billion by exiting FTX and that it was looking to liquidate all holdings of FTT, which was FTX’s exchange token.

Shortly after Zhao’s social media posts, FTX wound up and filed for bankruptcy. The lawsuit seeks to recover at least the $1.76 billion alleged to be “fraudulently transferred to Binance and its executives at the FTX creditors’ expense.”

Binance spokesperson Jessica Jung said in an emailed statement to The Epoch Times that “the claims are meritless, and we will vigorously defend ourselves.”

FTX Repaying Creditors

The lawsuit follows court approval for FTX’s bankruptcy plan last month.

“Under the terms of the plan, 98 percent of the creditors of FTX by number will receive approximately 119 percent of the amount of their allowed claims,” the company said in an Oct. 7 statement. FTX expects to have $14.7–16.5 billion for distribution to creditors.

According to John J. Ray III, CEO and chief restructuring officer of FTX, distributions will be made to creditors in more than 200 jurisdictions worldwide.

Meanwhile, some customers opposed the deal, arguing it would be a loss for them. FTX will repay the funds based on cryptocurrency prices from November 2022.

However, crypto prices were lower at that time. For instance, Bitcoin, which was then valued at $20,500, is now priced at more than $86,000.

Meanwhile, Bankman-Fried, founder of FTX, was sentenced to 25 years in prison back in March. Before handing down the punishment, U.S. District Judge Lewis Kaplan said that Bankman-Fried “knew it was wrong,” referring to the FTX founder’s actions at the company.

“He knew it was criminal. He regrets that he made a very bad bet about the likelihood of getting caught. But he is not going to admit a thing, as is his right,” the judge said.

In late October, Nishad Singh, the company’s former engineering director who testified against Bankman-Fried last year, was spared jail term by the court. The judge credited Singh for cooperating with authorities.