FTX sues Binance and its ex-CEO Changpeng Zhao

The insolvency administrator of the bankrupt crypto exchange FTX filed a multi-billion dollar lawsuit against Binance and its founder and former CEO Changpeng "CZ" Zhao at a court in Delaware on Sunday. Among other things, FTX is demanding 1.76 billion US dollars from the defendants.

In November 2019, FTX founder Sam Bankman-Fried sold 20% of FTX's shares to Binance for BNB 1,002,739, which was worth USD 18.3 million at the time.

In February 2020, Binance also acquired 18.4 percent of the shares of West Realm Shires (WRS), which acted as the parent company for FTX's US operations, for just two US dollars. Bankman-Fried held 52.9 percent of WRS.

Due to personal resentment, Binance and the employees involved sold back all shares in FTX in July 2021. The buyback of the shares was paid for by FTX's sister company Alameda Research in FTT (FTX's token), BNB (Binance's token) and BUSD (Binance's stablecoin). The value of BNB and BUSD alone amounted to at least USD 1.76 billion.

However, as FTX and Alameda Research were already insolvent at the time, the buyback was secretly financed with FTX customers' money, according to FTX employee Caroline Ellison, while Bankman-Fried publicly asserted the solvency of the companies in order - as he himself believed - not to unsettle the market. According to the indictment, the repurchase of the shares was a "constructive fraudulent transfer".

After the then CEO of Binance, Changpeng "CZ" Zhao, sold his stake in competitor FTX, a feud broke out between Zhao and Bankman-Fried. CZ began to "destroy" FTX, according to the indictment.

On November 1, 2022, confidential data about Alameda's financial situation was transmitted to CoinDesk. FTX already suspected internally at the time that the Binance CEO could be responsible for the leak. This was followed shortly afterwards by tweets from CZ and the Binance account with allegedly deliberate misrepresentations regarding the sale of FTT held by Binance, the aid for FTX or the alleged planned takeover of FTX.

Beginning on November 6, 2022, Zhao sent a series of false, misleading, and deceptive tweets maliciously intended to destroy his competitor FTX without regard to the harm that would be caused to FTX's customers and creditors.
_{Excerpt from the indictment}

Zhao allegedly knew that the tweets were intended to lead to mass withdrawals by FTX's customers and make alternative financing options for FTX more difficult, ultimately resulting in FTX's collapse. The FTX insolvency administrator therefore accuses Changpeng Zhao of knowingly and fraudulently destroying the assets of FTX customers while enriching himself.

Due to the financial damage caused by the share buyback in 2021 and the impact of Zhao's false tweets, FTX's insolvency administrator is seeking to recover at least USD 1.76 billion paid in the fraudulent transaction for the benefit of FTX's creditors - plus damages. Binance and Changpeng Zhao are also accused of fraud, intentional misrepresentation and unjust enrichment.

Back in October, a court approved the repayment plan of 16 billion US dollars to FTX creditors. With the lawsuit against Binance, the FTX insolvency administrator hopes to obtain further funds to compensate FTX creditors. However, Binance is not the only company that has been sued recently. In total, the insolvency administrator has filed 25 lawsuits against various individuals and companies.

According to media reports, Binance denies the allegations. The lawsuit is unfounded and the company will "vigorously defend itself", according to a statement. It therefore remains to be seen how the court will rule and what consequences, if any, the lawsuit will have for Binance and Changpeng Zhao. CZ recently completed a 4-month prison sentence for, among other things, violations of the US Anti-Money Laundering Act, while Sam Bankman-Fried is currently serving a 25-year prison sentence for fraud in connection with the downfall of his exchange.