The bankruptcy custodians of defunct digital asset exchange FTX filed suit on Tuesday against former “insider” Daniel Friedberg, who paid to silence whistleblowers, wasted corporate funds, and neglected his responsibilities as an executive.
On June 27, FTX filed a lawsuit with the U.S. Bankruptcy Court for the District Of Delaware, claiming former executive Friedberg, who held multiple roles within the bankrupt company, breached his fiduciary duties, committed legal malpractice, and covered up illicit activities by paying off whistleblowers, among other allegations.
During his 22 months at the FTX Group, Friedberg held numerous titles, including Executive Vice President and Chief Regulatory/Compliance Officer of FTX.US and WRS, General Counsel of Alameda and Alameda Research Ventures Ltd., and Chief Regulatory Officer and General Counsel of FTX.
The 40-page lawsuit, filed on Tuesday, lodges 11 civil charges against Friedberg.
“From 2017 through FTX’s implosion in November 2022, Friedberg advised Bankman-Fried, his trusted inner circle, and the FTX Group on legal and compliance matters and significant transactions, ignored the FTX Group’s glaring lack of internal controls, and served as a ‘fixer’ tasked with, among other things, paying off whistleblowers who threatened to expose the true fraudulent nature of the FTX Group enterprise,” the suit claims.
Amongst the laundry list of charges FTX levels at its former exec is the allegation that Friedberg, along with Sam Bankman-Fried, Zixiao “Gary” Wang, Nishad Singh, and Caroline Ellison (collectively labeled the “FTX Insiders”), “orchestrated a vast fraudulent scheme to profit at the expense of the Debtors in these Chapter 11 Cases… and their creditors.”
One accusation involves excessive payments received by the defendant during his stint at FTX.
“Friedberg himself personally received millions of dollars in unjustified bonuses and other compensation.”
The suit claims that Bankman-Fried gave Friedberg an annual base salary of $300,000, a $1.4 million signing bonus, performance-based annual bonuses, and an 8% equity stake in FTX.US. On top of this, it notes a June 2021 cash bonus payment Friedberg received from Alameda—the notorious investment wing of FTX largely responsible for the exchange’s downfall—of $3,007,451.30.
FTX wants the court to award them compensatory damages, order the disgorgement of all compensation paid to Friedberg, order for the return of all fraudulently transferred property to or for the benefit of Friedberg, plus an order for punitive damages and legal costs.
Whistleblowing and ‘fixing’ allegations
Some of the most damning and detailed accusations relate to whistleblowing and Frieberg’s alleged role as a “fixer.”
One instance details how an attorney filed suit against FTX, Alameda, Alameda Research Ltd. (BVI), and the FTX Insiders, claiming they engaged in cryptocurrency price manipulation through pump and dump schemes, money laundering, operating an unlicensed money transmitter business, unfair business practices, and violations of the Commodity Exchange Act.
Friedberg allegedly bought the attorney’s silence by orchestrating a new engagement letter and agreeing to pay the attorney $1.6 million and $50,000 paid on a monthly basis. In total, the suit accuses Friedberg of paying the attorney $3,320,000 up to July 2022 without the attorney providing any legal services to the FTX Group after signing the engagement letter.
In another example, following her termination in December 2021, an FTX.US employee (named as “Whistleblower-1”) sent a demand letter claiming, first, “that Alameda [was] nothing more than an extension of FTX, used to bolster investor confidence in FTX projects, and in turn drive up the prices of projects FTX had developed or invested in itself”—a form of illegal market manipulation; and second, that “details regarding company fundraising and various projects were disclosed openly,” and on unsecured channels, which allowed “all employees present to make trades on the information prior to public announcements”—a form of insider trading.
In March 2022, Whistleblower-1 received what the suit describes as an “extraordinary settlement,” even though she had worked at FTX.US for less than two months at an annual salary of $200,000.
“Instead of investigating Whistleblower-1’s claims, Friedberg instead bought Whistleblower-1’s silence by paying her exorbitant hush money,” claims the filing.
Fiduciary duties
Another crux of the case relates to Friedberg’s alleged breaching of fiduciary duties.
Fiduciary duties involve a duty of care, loyalty, good faith, confidentiality, prudence, and disclosure that a certain party owes to another due to the nature of their relationship—such as an attorney and a client or a guardian and a ward.
According to the suit, Friedberg breached his fiduciary duties by, among other things:
- Failing to implement internal controls that would have prevented the wrongdoing.
- Actively contributing to a lack of internal controls that would have prevented the wrongdoing.
- Failing to investigate credible allegations of fraudulent and illegal conduct.
- Participating in and enabling a fraudulent scheme to commingle customer and corporate funds.
- Facilitating purported personal “loans” that could not be repaid and without due diligence as to whether the borrower had the ability or intent to repay.
- Abusing or allowing abuse of positions in various FTX Group entities for the personal gain of FTX Insiders.
- Failing to investigate and authorizing unreasonable settlements of, whistleblower complaints alleging serious misconduct.
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