FTX Sues Genesis Digital for $1.15B Over Bankman-Fried Fraud

The FTX Recovery Trust has launched a monumental legal offensive, suing Bitcoin mining company Genesis Digital Assets (GDA) and its co-founders for a staggering $1.15 billion. The lawsuit, filed in a United States court, centers on allegations that the now-imprisoned Sam Bankman-Fried orchestrated a series of investments using funds that were not his to spend. The core accusation is that Bankman-Fried used ‘commingled and misappropriated funds, including those deposited by FTX.com exchange customers’ to purchase shares in the miner. The complaint starkly labels these purchases as ‘archetypical fraudulent transfers,’ setting the stage for a complex legal battle over the recovery of customer assets.

The lawsuit provides a damning narrative of the investment’s context, alleging that Bankman-Fried bought the GDA shares at ‘outrageously inflated prices.’ This claim suggests that the valuation was not based on market fundamentals but was instead a vehicle for moving and potentially obscuring the origin of the funds. The timing of these transactions in 2021 places them squarely in the period leading up to FTX’s catastrophic collapse in November 2022, a collapse precipitated by the very criminal mismanagement this lawsuit seeks to redress. For the victims of the exchange’s failure, this lawsuit represents a critical step in the painstaking process of asset recovery led by John J. Ray III.

Central to the lawsuit’s argument is the role of Alameda Research, FTX’s sister trading firm and the primary vehicle for Bankman-Fried’s alleged financial misconduct. The complaint details that the purchases of Genesis Digital Assets shares were executed through Alameda. This arrangement was particularly beneficial for Bankman-Fried personally, as he owned a 90% stake in Alameda Research. The lawsuit argues that ‘although Bankman-Fried paid for the GDA shares using commingled and misappropriated funds… he personally stood to benefit from the acquisition.’ This structure created a scenario where Bankman-Fried, as the complaint alleges, had ‘everything to gain and nothing to lose,’ using FTX customer deposits to enrich his own affiliated entity.

The use of Alameda Research as an investment arm highlights the deeply entangled and opaque corporate structure that characterized Bankman-Fried’s empire. This commingling of funds and blurring of lines between the exchange, its customers, and a proprietary trading firm is a recurring theme in the post-collapse analysis of FTX. The lawsuit against Genesis Digital Assets stands as a specific case study of this reckless investment strategy, which the complaint describes as ‘one of Bankman-Fried’s most reckless investments with commingled and misappropriated funds.’ The legal action aims to reverse these transfers, arguing they were fundamentally fraudulent from the outset.

The lawsuit unfolds against the backdrop of Sam Bankman-Fried’s dramatic fall from grace. Found guilty on seven federal charges in November 2023, he is now serving a 25-year prison sentence for masterminding one of the largest financial frauds in history. His criminal mismanagement, which primarily involved using customer cash to cover Alameda Research’s risky bets, vaporized billions in customer assets. The scale of the disaster was such that John J. Ray III, the seasoned lawyer overseeing the bankruptcy, publicly stated that FTX’s collapse was even more severe than the infamous Enron scandal.

For Genesis Digital Assets, the lawsuit presents a significant challenge. The company, which was based in Kazakhstan at the time of Bankman-Fried’s investment but has since expanded with data centers in the U.S. and Europe and a headquarters in Dubai, UAE, has declined to comment on the allegations. The case will likely scrutinize what Genesis Digital Assets knew about the source of the funds it received. For the FTX Recovery Trust, every lawsuit is a crucial component of repaying creditors. This $1.15 billion action against a Bitcoin miner demonstrates the global and complex nature of the asset hunt, as Ray’s team leaves no stone unturned in its mission to rectify the historic wrongs perpetrated by Sam Bankman-Fried.