On July 20, FTX, the now-bankrupt crypto exchange, filed a lawsuit in a United States Bankruptcy Court against its former CEO, Sam Bankman-Fried, and other key executives, seeking to recover over $1 billion in allegedly misappropriated funds. The complaint named former Alameda Research CEO Caroline Ellison, FTX co-founder Zixiao “Gary” Wang, and former FTX engineering director Nishad Singh as defendants, in addition to Bankman-Fried.
FTX accused the former executives of breaching their fiduciary duties by continuously misappropriating customer funds to finance personal endeavors, including luxury condominiums, political and “charitable” contributions, speculative investments, and other projects. The lawsuit further alleged that the defendants abused their control over FTX and related companies, resulting in one of the largest financial frauds in history.
The lawsuit claimed that a few employees had excessive power over fiat and crypto asset transfers, as well as the hiring and firing of employees, with little oversight on how they exercised these powers. FTX also asserted that the former executives issued more than $725 million worth of equity to themselves without providing any value in return to the debtors.
Specifically, Bankman-Fried and Wang were accused of misappropriating an additional $546 million to purchase shares in the trading platform Robinhood. Ellison allegedly paid herself $28.8 million in bonuses and used $10 million of the funds to buy a stake in an artificial intelligence company.
The filing also revealed that Bankman-Fried transferred $10 million as a “gift” from his FTX US account to his father’s account on the same exchange, after which his father made six transfers totaling $6.75 million to his personal accounts at Morgan Stanley and TD Ameritrade. FTX claimed that this “gift” is being used to fund Bankman-Fried’s legal defense.
Many of the alleged fraudulent transfers occurred while the exchange was insolvent, with the defendants being aware of the situation. The filing mentioned that FTX initially prohibited accounts with negative balances, but Bankman-Fried allegedly instructed his associates to modify the exchange’s code, allowing the exchange to maintain standard operations while running significant deficits. By March 2022, Ellison privately estimated that the FTX exchange had a cash deficit of over $10 billion.
FTX and its subsidiaries are currently under the leadership of restructuring chief and CEO John Ray after filing for Chapter 11 bankruptcy on November 11, 2022. The lawsuit represents a significant attempt by the crypto exchange to recover allegedly misappropriated funds and address the financial misconduct of its former executives.
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