Users of the defunct FTX cryptocurrency exchange have launched a class action lawsuit against the business and its founder Sam Bankman-Fried (SBF). They seek the return of their crypto that was on the exchange when it went under.
According to Reuters, this action is the most recent attempt to assert legal ownership over FTX’s locked and eroding assets. The plaintiffs claim that FTX misappropriated and obfuscated the source of customer funds.
The lawsuit was filed in the United States Bankruptcy Court in Delaware. It called for FTX customers to be paid off first.
“Customer class members should not have to stand in line along with secured or general unsecured creditors in these bankruptcy proceedings just to share in the diminished estate assets of the FTX Group and Alameda,” the suit reads.
Many customers flocked out of the struggling cryptocurrency exchange when concerns about its financial solvency surfaced. On Nov. 11, the Bahamas-based exchange filed for Chapter 11 bankruptcy protection days after halting withdrawals.
Sam Bankman-Fried faces several criminal charges, including fraud and misappropriation. He allegedly used customer funds to promote his own quantitative crypto trading business, Alameda Research.
Although Sam Bankman-Fried conceded that FTX had poor risk management, he insisted that he holds no criminal liability. He was released on a $250 million bond last week, just days before Christmas, and has not yet entered a plea.
FTX Customers Must Be Priority
This class action complaint attempts to establish that customer assets do not belong to FTX and should be returned in full. The class action suit comprises more than 1 million FTX customers in the U.S. and overseas.
Additionally, the complainants argue that the property traced back or linked to Alameda is not Alameda’s property. Similarly, the complaint asks the court that funds stored in FTX U.S. accounts for U.S. customers and FTX.com accounts for non-U.S. customers be returned.
If the court decides differently, the lawsuit wants the judge to establish that the customers are prioritized in regards to getting paid back before other creditors.
It’s important to understand that most cryptocurrency businesses are unregulated and frequently headquartered in nations with lax regulations. Unlike traditional bank or stockbroker deposits, deposits in cryptocurrency exchanges are typically not guaranteed. It will be challenging to prove who owns the deposit—the crypto firm or the customer.
Caroline Ellison Admits Guilt and Apologizes
Caroline Ellison and Gary Wang entered guilty pleas on Dec. 21 per the filing by the U.S. attorney for the Southern District of New York. Wang co-founded the FTX exchange, and Ellison served as Alameda Research’s former CEO.
Ellison, who pleaded guilty to fraud and other offenses, also underlined that the top executives knew of the ongoing financial fraud. The executive added that they squandered consumer funds.
“I am truly sorry for what I did. I knew that it was wrong.” Ellison said in a federal court in New York, USA.
During the trial, Ellison admitted to conspiring to use billions in FTX customer accounts to repay loans. Alameda allegedly took out these borrowings to make risky investments.
FTX executives have enacted a special code that gave Alameda Research access to unlimited lines of credit without submitting collateral, paying interest on negative balances, or being subject to margin calls.
“I also understood that many FTX customers invested in crypto derivatives and that most FTX customers did not expect that FTX would lend out their digital asset holdings and fiat currency deposits to Alameda in this fashion,” said Caroline Ellison.
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.