FTX sues Binance, CZ to reclaim $1.76B in fraudulent transfers

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The remnants of the FTX digital asset exchange are trying to claw back billions it claims to be owed by a number of individuals/entities, including the Binance exchange and its founder Changpeng ‘CZ’ Zhao.

Late last week and through this weekend, the website of the FTX Debtors group was flooded with filings of new lawsuits targeting individuals/entities that allegedly owe money to the FTX exchange, which collapsed in November 2022 following revelations of massive fraud and embezzlement.

The fraud was intended to cover up billions of dollars’ worth of losses at FTX’s affiliated market maker, Alameda Research, following a series of ill-advised trades and investments made with FTX customer funds. FTX founder Sam Bankman-Fried (SBF) is currently serving a 25-year sentence for his role in the fraud, while Alameda’s final CEO, Caroline Ellison, began her two-year sentence last week.

We’ll get to some of the other suits in a moment, but for now, let’s focus on the headline suit seeking to claw back $1.76 billion that FTX sent Binance/CZ in July 2021. The suit (click here to download) calls this “a constructive fraudulent transfer” due to it being made “in furtherance of Bankman-Fried’s scheme” to defraud FTX customers.

The July 2021 transfer came after FTX forcibly bought out Binance/CZ’s 20% stake in FTX. This buyout stemmed from Binance/CZ’s unwillingness to cooperate with regulators in numerous jurisdictions where FTX attempted to obtain operating licenses. However, the highly public buyout, along with reports that SBF was privately dissing CZ/Binance to regulators, apparently convinced CZ that two could play that game.

In early November 2022, a leaked balance sheet revealed FTX’s unhealthy reliance on its illiquid in-house FTT token. Panicked customers deluged FTX with withdrawal requests, but with no real cash to honor these requests—and Binance rejecting pleas to ride to FTX’s rescue—FTX filed for bankruptcy protection only a week or so later.

Once FTX’s goose was officially cooked, CZ began portraying himself as the good ‘crypto’ CEO. However, Binance reached a record $4.3 billion criminal settlement with U.S. federal authorities only a year later. CZ himself was sentenced to four months in prison for his role in Binance’s money laundering escapades. CZ was released in September with the understanding that he will have no operational role in Binance going forward, although he retains majority ownership of the exchange.

CZ nudges FTX over the edge

Getting back to the FTX lawsuit, it notes that the $1.76 billion Binance buyout—which was directly funded by Alameda—was done with a mix of FTT, Binance’s in-house BNB token and BUSD, a dollar-denominated stablecoin issued by Binance in partnership with Paxos Trust (that was shut down on the order of New York regulators in 2023).

The suit alleges that Alameda “was insolvent at the time of the share repurchase and could not afford to fund the transaction.” The suit quotes Ellison telling SBF then, “We don’t really have the money for this, we’ll have to borrow from FTX to do it.” Undeterred, SBF told Ellison that the buyout was “really important, we have to get it done.”

The suit alleges that said importance hinged on SBF’s desire to hide FTX/Alameda’s insolvency. A reporter asked at the time if the buyout was funded solely via Alameda, and SBF said it was and that Alameda “had a good last year.” SBF knew this was a lie and that the buyout was actually funded by raiding FTX customer deposits.

The suit claims CZ was fully aware of FTX’s financial house of cards and issued “a series of false, misleading and fraudulent tweets that were maliciously calculated to destroy his rival FTX, with reckless disregard to the harm that FTX’s customers and creditors would suffer.”

CZ also issued false tweets “calculated, in part, to prevent FTX from seeking and obtaining alternative financing to cauterize the run on the institution by customers deceived by the tweets.” Taken together, CZ’s “false public statements destroyed value that would have otherwise been recoverable by FTX’s stakeholders.”

The suit seeks to claw back this $1.76 billion in fraudulent transfers, as well as compensatory and punitive damages to be determined at trial. In addition to various Binance entities, former execs Dinghua Xiao and Samuel Lim are named in the suit as having taken personal stakes in FTX and thus benefited from the fraudulent transfers.

Binance issued a statement saying the suit’s allegations are “meritless” and declared the exchange’s intention to “vigorously defend” itself in court.

Déjà vu all over again

We can’t help but notice that the suit’s allegations regarding CZ/Binance’s role in FTX’s demise closely resemble the U.K. class action suit spawned by CZ’s anti-competitive attack on the BSV blockchain token in April 2019.

That attack, ostensibly targeting a lone BSV supporter, had the effect of collectively causing billions of pounds in damages to all BSV holders, given Binance’s delisting of BSV and the copycat delistings by rival exchanges Bittylicious, Kraken, and Shapeshift (all of which are named in the suit) that followed.

Much like CZ’s tweets are alleged to have put the knife in FTX’s side, CZ got the BSV delisting ball rolling with a single threatening tweet. The CEOs of the other exchanges issued similar tweet-threats, and the delistings officially got underway. These actions appear motivated by the same type of allegations in the FTX suit, including the desire to torpedo a rival, in this case, BSV.

While BSV isn’t an exchange, the BSV blockchain nonetheless represented an existential threat to the ‘crypto casino’ model on which most exchanges rely. Namely, the speculative flipping of utility-free tokens, which generate lucrative commissions for the exchanges and which the exchanges actively promote as a method by which retail traders might ‘get rich quick.’

The BSV blockchain’s focus on utility—made possible by its commitment to scaling its individual blocks to permit an unmatched volume of transactions and data-management possibilities—was the antithesis of the ‘digital gold’ mantra put forward by the developers behind BTC and the venture capital groups pushing tokens related to ‘projects’ that don’t actually do anything beyond issue tokens.

Simply put, BSV had to be put in its place before the rest of the world realized there was more to enterprise blockchain technology than ‘number go up.’ And if countless BSV holders had to suffer in the process, so be it.

Know your scofflaws

Looking at the over two dozen FTX/Alameda-originated lawsuits that surfaced last week, there is, of course, the $99 million clawback suit aimed at former FTX Digital Markets CEO Ryan Salame, who is currently serving 90 months in prison for violating U.S. campaign finance rules and conspiring to operate an unlicensed money-transmitting business.

Another politics-themed suit (download here) was filed against FWD.us, the lobbying group supported by several prominent U.S. tech founders, including Meta’s (NASDAQ: META) Mark Zuckerberg. FWD.us received around $1.8 million from Alameda entities between September 2021 and June 2022, funds that FTX Debtors claim weren’t Alameda’s to give.

A far larger claim was filed against Anthony Scaramucci and his Skybridge Capital hedge fund, from which FTX Debtors hopes to recover “in excess of $100 million.” FTX’s venture capital division acquired a 30% stake in Skybridge in September 2022, not long after the fund suspended redemptions amid that summer’s early onset of ‘crypto winter.’ Prior to that investment, Alameda invested $10 million in the SkyBridge Coin Fund, and FTX also agreed to pay $12 million to sponsor another Scaramucci-affiliated firm’s “conferences and podcast episodes.”

The suit (download here) claims these deals were part of SBF’s “campaign of influence-buying” that “served only to prop up Bankman-Fried’s standing in the worlds of politics and traditional finance.” The investments “made no economic sense from FTX’s perspective,” instead fulfilling SBF’s goal of “working his new connections for potential sources of equity investment in FTX to fill the hole in the balance sheet and, therefore, keep his scheme afloat.”

The FTX Debtors also sued Foris Dax, parent company of the Crypto.com exchange (download here), seeking possession of $11.4 million contained in an account that Alameda opened on Crypto.com. However, Crypto.com “has refused to cooperate with the Debtors’ requests and continues wrongfully to withhold the Debtors’ property.”

A similar suit was filed (download here) against the parents of the KuCoin exchange in late October, seeking to recover nearly $30 million in digital assets that KuCoin has refused to turn over “or even to meaningfully engage with the Debtors.” Ditto for Justin Sun’s HTX (then-Huobi) and Poloniex exchanges (download here), which FTX Debtors accuses of sitting on $27.5 million in cash held in accounts opened by Alameda.

Whither Trabucco?

Among the more jaw-dropping suits are the ones against multiple members of “an international criminal syndicate who used FTX to launder billions of dollars in criminal proceeds” (download here). Then there’s the suit against Nawaaz Mohammad Meerun (download here), a whale who “orchestrated a series of massive market manipulation schemes and defrauded hundreds of millions of dollars from FTX.”

However, perhaps the most intriguing item in this deluge of legal filings is a sealed motion regarding a proposed “Settlement Agreement with John Samuel Trabucco.” Trabucco was the former co-CEO of Alameda alongside Ellison but sailed off into the sunset mere months before FTX’s bankruptcy filing.

Not long after this filing came reports that Trabucco’s settlement would see him surrender his infamous 53-foot yacht, for which Trabucco used $2.5 million in FTX customer cash to purchase. Trabucco will also surrender two San Francisco apartments that he purchased for a combined $8.7 million. Finally, Trabucco has agreed to relinquish his absurd claim to be owed $70 million by the company he helped destroy.

A hearing on the settlement is scheduled for December 12 in a Delaware bankruptcy court. Given his exit timeline, Trabucco would have been all too aware of FTX/Alameda’s financial house of cards, yet he has so far eluded the criminal charges filed against his peers in this former gang of thieves.

In addition to the sentences imposed on SBF, Ellison, and Salame, FTX’s former director of engineering, Nishad Singh, was sentenced on October 30 to time served and several years of supervised release for his role in FTX’s downfall. In March 2023, Singh pleaded guilty to six criminal charges and cooperated with prosecutors in the case against SBF.

Next up is FTX co-founder/CTO Zixiao ‘Gary’ Wang, who also pleaded guilty and cooperated with prosecutors. Wang will learn his fate on November 20, but recently entered a request for no jail time, based on Wang’s claim that he “did not have full visibility” on the crimes that brought FTX to its knees.

Trabucco can’t claim to have been blind to FTX/Alameda’s crimes, which would make it all the more galling should he never see the inside of a jail cell. At the very least, impose a financial penalty that truly fits the crime and make CZ pay the true cost of his underhanded antics while you’re at it.

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