The collapse of FTX was, in part, a follow-on effect of the continuing drop in crypto prices that began earlier this year. After seeing the likes of Celsius and Three Arrows fall apart this year, it should not have been a surprise when FTX ran into trouble, and yet it did come as a shock to the crypto world. The fall began when another major crypto firm known as Binance pulled FTX’s FTT token, following allegations the company improperly shared funds with its sister hedge fund Alameda Research. Customers rushed to withdraw funds, which FTX was unable to cover, and then Binance backed out of a deal to acquire FTX after getting a look at the books. When it all came tumbling down, FTX froze customer accounts, and multiple parties are now litigating over who should get what’s left.
It’s now looking like FTX CEO Sam Bankman-Fried inappropriately took funds from customer accounts to use in other trading activities, leaving little in its accounts after the company fell apart. This entirely believable presumption is at the heart of the new legal action, which was filed in Delaware bankruptcy court by four individuals who claim to represent the entire class of former FTX customers, which could include up to 1 million people. When financial firms go under, non-corporate customers are usually last in line to get reimbursed, and that means they don’t get everything they are owed. The lawsuit asks the courts to put customers at the front of the line.
Bankman-Fried was recently released from custody on a $250 million bond pending trial. (Credit: Cointelegraph/CC3.0)
According to the filing, FTX’s terms did not allow it to “comingle” customer funds with investments, nor to use those funds for general operating expenses. Thus, the frozen cryptocurrency “never belonged to FTX or Alameda” and should be returned to customers before the company’s debts are paid. It’s unclear if this lawsuit has any chance of success, but it will certainly muddy the waters of an already messy bankruptcy. FTX was based in the Bahamas, and recent allegations suggest the company’s leadership misappropriated funds to purchase extensive real estate holdings, as well as stakes in other crypto firms like Robinhood.
Bankman-Fried is facing multiple felony charges for his mishandling of FTX. If convicted, he could face more than 100 years in prison. Several other FTC and Alemeda leaders have already pleaded guilty to lesser charges and are cooperating with investigators.
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