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FTX’s new management attempts to settle an old score with Binance, FTX’s co-founder may be spared prison, and a Chinese national pleads guilty to laundering $73m using Tether.
A new legal battle between two former crypto rivals is underway, as the bankruptcy estate of FTX attempts to recoup misspent funds on behalf of its former customers.
On Sunday (November 10), FTX filed a new lawsuit against Binance that seeks to recover almost $1.8bn that was used as part of a share repurchase agreement between the two exchanges.
In July 2021, FTX repurchased $1.76bn of its own shares, which at the time were held by Binance. FTX did not pay for these shares in hard currency, however.
According to the lawsuit, the share repurchase was funded using a combination of FTX Tokens (FTT), Binance exchange tokens (BNB) and Binance’s US dollar stablecoin (BUSD).
The lawsuit claims that this was a “fraudulent transfer” by FTX, as FTX was already insolvent, and around $1bn of the funds were taken directly from FTX’s customer accounts.
Caroline Ellison, former CEO of FTX sister company Alameda Research, testified as to the share repurchase agreement during the criminal trial of her former boss, Sam Bankman-Fried.
“We don’t really have the money for this,” she told the FTX CEO at the time. “We’ll have to borrow from FTX to do it.”
Ellison further testified that Bankman-Fried dismissed her concerns, telling her that it was “really important” to get the deal done, to send a false signal of strength to the wider market.
Bankman-Fried later lied to a reporter, the lawsuit adds, when he said that the share repurchase was funded “entirely” by Alameda Research.
Binance founder plots 'destruction' of FTX
Following the share repurchase agreement, the lawsuit claims that Changpeng Zhao, founder and then-CEO of Binance, set out to "destroy" his now-unaffiliated rival.
It argues that in November 2022, Zhao posted a series of “false, misleading, and fraudulent” tweets that were “maliciously calculated” to ruin FTX, with “reckless disregard” to the harm that FTX’s customers and creditors would suffer.
Specifically, Zhao disclosed that Binance was paid partly in FTT for the share repurchase, but that, due to “revelations” about FTX’s balance sheet, Binance had decided to liquidate all remaining FTT on its books.
The tweet triggered panic among FTX customers, who rushed to withdraw their deposits from the exchange. It also led to a collapse in the price of FTT and other crypto-assets that made up a large proportion of FTX’s balance sheet.
“Collectively and individually, these false public statements destroyed value that would have otherwise been recoverable by FTX’s stakeholders,” the lawsuit notes.
The plaintiffs seek to recover at least $1.76bn that was fraudulently transferred to Binance at the FTX creditors’ expense, in addition to compensatory and punitive damages to be determined at trial.
FTX co-founder could be spared jail
Also this week, US prosecutors submitted a sentencing memo which indicates that Gary Wang, co-founder of FTX, could be spared a custodial sentence.
The memo highlights Wang’s “outstanding cooperation” with the Department of Justice (DOJ), which allowed prosecutors to file criminal charges within a month of the FTX bankruptcy.
Wang’s cooperation is also said to have been a “significant” factor in helping to convict Bankman-Fried, who was sentenced to 25 years in prison in March this year.
According to the memo, Wang was the first of the FTX defendants to begin cooperating with the DOJ, and the first to testify against his former boss.
“Wang provided crucial testimony about the special privileges that had been granted to Alameda Research on the FTX exchange, and how Bankman-Fried and others abused those features to steal billions of dollars in customer funds,” the prosecutors wrote.
“Prior to and at trial, Bankman-Fried had falsely suggested that he was unaware of Alameda’s special privileges and did not know how to do computer coding. Wang proved those assertions to be lies.”
The prosecutors further note that Wang has helped to preserve $800m in assets for the FTX bankruptcy estate, and has provided other forms of “substantial assistance” to the government.
These include the building of a tool that the US government is now using to detect potential fraud in publicly traded companies, and the development of a similar tool for the crypto-asset markets.
Wang will be sentenced on November 20, 2024. He is the only FTX co-conspirator whose guidelines are not life imprisonment.
Chinese national pleads guilty in $73m crypto money laundering bust
A dual citizen of China and St. Kitts and Nevis has pleaded guilty to US federal criminal charges for his role in laundering the proceeds of cryptocurrency scams.
Daren Li, 41, a resident of China, Cambodia and the UAE, pleaded guilty to one count of conspiracy to commit money laundering.
According to court documents, Li admitted that he conspired with others to launder funds obtained from victims through cryptocurrency scams and related fraud.
To conceal or disguise the source and ownership of the illicit funds, Li instructed his co-conspirators to open US bank accounts on behalf of shell companies.
He would then order the scammed funds to be sent via interstate and international wire transfers to these accounts.
Following receipt of the funds, Li and his co-conspirators would convert them into the Tether stablecoin (USDT), which was then distributed to wallets controlled by Li and his co-conspirators.
