The bankruptcy estate for FTX has filed a lawsuit against Binance seeking to recover $1.76bn in funds over an alleged fraudulent transfer between the two cryptocurrency exchanges.
Filed on 10 November, the lawsuit states that Changpeng Zhao, former Binance CEO, and other executives at the crypto exchange facilitated a fraudulent transaction performed in July 2021.
Allegedly it involved both Zhao and disgraced former FTX CEO Sam Bankman-Fried, who is currently serving a 25-year prison sentence, as part of a repurchase deal where Bankman-Fried sold off 20% of FTX stock under the business FTX US.
The lawsuit states: “In one sense, the story of FTX is well known. Once a rising star in the crypto universe, FTX collapsed under the weight of many material errors committed by its founder, Sam Bankman-Fried, and other FTX insiders, ultimately filing for bankruptcy protection in November 2022.
“Less well known, however, is that Bankman-Fried’s pervasive malfeasance began long before it was discovered. Indeed, unbeknown to its customers and creditors, based on a proper accounting of its assets and liabilities, the debtors in these chapter 11 cases may have been insolvent from inception and certainly were balance-sheet insolvent by early 2021.
“Because of its insolvency, the Debtor Plaintiff’s July 2021 transfer of at least $1.76bn worth of cryptocurrency to its equity holder Binance and certain Binance executives, in the form of a share repurchase, was a constructive fraudulent transfer based on a straightforward application of Section 548(a)(1)(B) of the Bankruptcy Code.
“Moreover, because the transfer was made in the furtherance of Bankman-Fried’s scheme described herein, it was also an intentional fraudulent transfer under Section 548(a)(1)(A) of the Bankruptcy Code.”
Bankman-Fried is accused of performing the transaction with Binance through a mix of cryptocurrencies, the FTX native token FTT, Binance’s BNB token and Binance USD, all totalling at a value of $1.76bn at the time.
Zhao, who has been released from jail himself after serving a four month stint this year, had a tumultuous relationship with Bankman-Fried, with both being the heads of two of the largest crypto exchanges at the time.
The former Binance boss had acquired 20% in shares of FTX in 2019, followed by the repurchase of the stake in 2021 which the suit alleges was fraudulent, which on the face presumed the relationship was healthy, but a series of events over the course of two weeks in 2022 led to the collapse of FTX.
Zhao would sell off all his holdings of FTT following a CoinDesk article reporting Alameda Research’s liquidity issues connected to FTX, which would then ultimately see the downfall of FTX with billions of customers’ funds lost.
With John J. Ray III taking over as FTX CEO during its bankruptcy, he has been able to recover $16.3bn as part of its restitution plan, looking to recover more funds if it is successful in its lawsuit against Binance.
