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Collapsed crypto exchange FTX is suing Binance and its former chief executive Changpeng Zhao for $1.8bn over an allegedly “fraudulent” share deal that it says was funded mostly by customers’ stolen money.
The dispute relates to a July 2021 deal in which Binance, Zhao and two other executives sold their roughly 20 per cent stake in FTX back to the company in exchange for crypto tokens valued at $1.76bn.
The transaction, part of a repurchase deal agreed with founder Sam Bankman-Fried, should not have taken place, according to the lawsuit, which seeks to claw back the tokens for the FTX bankruptcy estate.
The dispute marks the latest chapter in the tensions between two of the world’s best-known crypto exchanges, as FTX seeks to repay its debts following its dramatic collapse two years ago. Its failure sparked a crash in the price of crypto tokens and pushed other companies into bankruptcy.
In a lawsuit filed in Delaware on Sunday, the administrators of the FTX estate said the exchange and its sister trading house Alameda Research “may have been insolvent from inception and certainly were balance-sheet insolvent by early 2021”.
The $1.76bn payment by FTX was “largely funded” by “secretly and unlawfully” using customers’ money and so should not have taken place, the lawsuit said. It pointed to testimony from Caroline Ellison, former boss of Alameda and Bankman-Fried’s on-off romantic partner, who said the founder directed her to use about $1bn of customer deposits to fund the deal.
Bankman-Fried lied in order to “conceal his companies’ insolvency and send a false signal of strength to the market”, the lawsuit alleged.
Therefore, the transfer of cryptocurrency to Binance and its executives “was a constructive fraudulent transaction”, it added.
Bankman-Fried is in prison, having earlier this year been sentenced to 25 years for fraud, in what prosecutors described as “one of the biggest financial frauds in American history”.
Zhao stepped down from Binance last year after he and the company pleaded guilty to criminal charges relating to failing to establish proper money laundering controls. US authorities hit Binance with a $4.3bn penalty and Zhao spent four months in jail.
He was released in September and is writing a book. He retains about 90 per cent ownership of Binance, according to the lawsuit.
The two men were the world’s most well-known crypto executives, who also became fierce rivals as they sought to exert their own influences on the industry.
Ellison was sentenced to two years in prison for her role in the failure of FTX, which collapsed in part because of the misuse of customer funds.
The lawsuit also names as defendants Dinghua Xiao, who worked at Binance from 2017 to September 2019, and Samuel Wenjun Lim, Binance’s head of compliance from 2018 to 2022. Xiao and Lim could not be contacted for comment. Lim was charged by US regulators last year for “wilfully evading US law” in his work at Binance, and ordered to pay $1.5mn.
Binance and its executives held a 20 per cent stake in FTX’s international business and an 18.4 per cent stake in its US business, according to the lawsuit. They sold their shares back to FTX in exchange for a mix of FTX’s own token FTT, Binance’s native BNB coin and another Binance token which is pegged to the US dollar.
The FTX estate discounted the value of FTT as “likely zero” in 2021, but said the BUSD and BNB used to repurchase the shares had a market value of £1.76bn at the time.
The price of crypto tokens has surged this week as investors celebrate the victory of Donald Trump in the US presidential election, betting that he will usher in more crypto-friendly attitudes in Washington. The price of BNB has rocketed from about $300 in July 2021 to $627 on Monday. Meanwhile, bitcoin hit a record high of more than $83,000 on Monday.
In its lawsuit against Binance, FTX administrators pointed to a series of tweets posted by Zhao and his company in the days before FTX collapsed, describing them as an effort “to destroy FTX”.
“The claims are meritless, and we will vigorously defend ourselves,” Binance said in a statement. Zhao did not immediately respond to a request for comment.
The FTX estate is seeking to recoup billions of dollars that Bankman-Fried and his executives recklessly spent, including on “exorbitant political donations” that helped to bolster the group’s image “as a healthy, trustworthy” set of companies, lawsuits allege.
On Friday, financier Anthony Scaramucci and his company SkyBridge Capital were sued for more than $100mn over sponsorships and investments made by FTX that involved using customer funds “to prop up Bankman-Fried’s standing in the worlds of politics and traditional finance”, the lawsuit said. SkyBridge did not respond to a request for comment.
Over the weekend the FTX estate also sued exchange Huobi for $27mn worth of assets that it says are trapped on the venue. Huobi did not respond to a request for comment.
It also sued a Chinese “international criminal syndicate” that used FTX to launder billions of dollars in criminal proceeds, for more than $468mn, which the estate said was withdrawn from the venue at the expense of other customers.