FTX Takes Aim at Binance in $1.76 Billion Fraud Lawsuit

In a recent development, FTX’s legal team has filed a major lawsuit against Binance and its co-founder, Changpeng ‘CZ’ Zhao, for alleged fraud. The lawsuit centers around a $1.76 billion buyback deal that FTX claimed was deceptive and harmful to the exchange. 

According to the filing, Binance engaged in high-stakes tactics, creating a complex network of transactions to strain FTX’s finances.FTX alleges these maneuvers left the exchange in financial peril, directly impacting their customers’ and creditors’ financial well-being.

The Genesis of a Controversial Deal that Linked Binance and FTX

In late 2019, Binance acquired a significant stake in the FTX Derivatives Exchange. The filing revealed that Binance’s initial investment included over one million BNB tokens in exchange for a 20% ownership stake in FTX.com. This stake quickly rose in value as FTX grew, positioning Binance as a prominent shareholder.

FTX claimed that by 2021, Binance sought an exit, and FTX agreed to repurchase Binance’s stake for $1.76 billion, a sum it could barely afford. The lawsuit alleged that FTX, already experiencing financial strain, used its FTT tokens alongside BNB and Binance’s stablecoin BUSD in this buyback. 

FTX argued that the transaction was constructively fraudulent since it was financed by an insolvent Alameda Research relying on customer deposits. This claim suggests that customer funds were misused to support the deal, adding to FTX’s financial distress.

Involvement of Alameda’s Funds Raises Questions

Caroline Ellison, former CEO of Alameda Research, reportedly testified that $1 billion of FTX’s buyback capital originated from customer deposits held by FTX. This transfer raises a significant red flag. The filing claimed that both Alameda Research and FTX were financially unstable at the time of the transaction. 

FTX’s legal team argued that Binance knew about these risks but accepted the payout. The legal team alleged this allowed Binance to profit while worsening FTX’s financial issues, ultimately harming FTX’s customers.

Ellison accused Zhao of spreading false information on social media, sparking panic that worsened FTX’s crisis. In November 2022, Zhao’s tweet about Binance liquidating its FTT holdings triggered a sell-off, causing a wave of withdrawals that drained FTX’s liquidity.

Binance Responds with Firm Denial and Robust Defense

Binance has rejected these accusations as meritless and pledged to defend itself vigorously in court. Although the exchange has yet to specifically address each claim, it insisted it operated within legal bounds and that FTX’s downfall was the result of its own mismanagement, not Binance’s actions.

In its efforts to recover lost funds, the FTX estate has filed over twenty lawsuits, targeting prominent figures and companies it holds responsible for the financial downfall. Among the defendants are Anthony Scaramucci of SkyBridge Capital and the creators of the game Storybook Brawl.

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