Bankrupt cryptocurrency exchange FTX has sued the parents of founder and former CEO Sam Bankman-Fried (SBF), Joseph Bankman and Barbara Fried, in order to recover millions of dollars in misappropriated and fraudulently transferred funds, the company said in a filing.
The filing made by FTX's bankruptcy estate in a Monday court has asked the court to award the FTX estate damages, the return of any property given or payment made to the parents by the now-defunct company in the past, and punitive damages resulting from “conscious, willful, wanton, and malicious conduct.”
The document asserted that SBF's parents played a key role in his business, with Bankman calling Alameda Research a “family business” as early as 2018 and mentioning it as such repeatedly. Alameda is the trading firm and hedge fund SBF founded that was connected to FTX and played a central role in the exchange's demise.
Both Bankman and Fried are tenured professors at Stanford Law School. According to Fried's Stanford profile, she has written extensively on distributive justice in the field of political theory and tax policy. Her recent Bloomberg profile noted that Fried is a philosopher interested in consequentialism, or ‘the ends justify the means.' She also ran a donor network for Democratic candidates. Meanwhile, Bankman has gained attention for his work on how the government might control the use of tax shelters and has testified on tax compliance problems posed by the cash economy.
The filing alleges that both the parents “exploited their access and influence” within the company to enrich themselves, both directly and indirectly. FTX also alleged that either or both parents may have expensed $1,200-per-night hotel stays, plane tickets, and salaries.
“Bankman and Fried deployed their decades of experience as sophisticated law professors and veneer of legitimacy not to help the FTX Group, but rather to plunder it in order to enrich themselves and their pet causes,” reads the filing.
The lawsuit further claimed that SBF's parents knew or simply “ignored bright red flags” that their son, along with other company insiders, were involved in a fraud “to profit and promote their personal and charitable agendas at (FTX's) expense.”
The FTX estate is also accusing Bankman of trying to help cover up FTX mismanagement and fraud by portraying himself “as the proverbial adult in the room.” The father was working alongside “inexperienced” fellow managers, directors, and executive officers responsible for safeguarding billions of dollars, said the filing.
Attorneys of Bankman and Fried called these claims “completely false,” further saying that this is just “a dangerous attempt to intimidate” the couple and “undermine the jury process just days before their child's trial begins.” The joint statement added that FTX's current CEO, John J. Ray III, who is an expert in helping companies recover after bankruptcy, along with his massive team of lawyers, “are collectively running up countless millions of dollars in fees while returning relatively little to FTX clients, know better.”
All that Bankman & Fried Benefitted from FTX
While the filing, which was redacted in parts, does not mention the total amount Bankman and Fried may have misappropriated, it does provide certain line items and examples.
As per the filing, FTX Trading paid over $18.9 million, inclusive of taxes, fees, and costs, for Blue Water, to which the couple received the title. Meanwhile, various expenses related to Blue Water totaled more than $90,000.
The filing further pointed out that Bankman used his experience in tax law as well as his unique understanding of the FTX Group's muddled corporate structure to facilitate the transfer of a cash gift totaling $10 million that consisted of Alameda's funds.
It then went on to say that Bankman “knew or should have known” FTX Group's dangerous financial state while he moonlighted as an actor in a Super Bowl commercial and extracted millions of dollars from the company. According to the filing, Bankman also helped FTX Insiders distribute the company funds on donations and even covered up a whistleblower complaint from 2019.
Bankman further played a part in attempting a last-ditch effort to sell FTX to Binance, the filing alleges. The filing stated that Bankman was part of the small group that received the Letter of Intent from the largest cryptocurrency exchange, Binance, and a calendar invitation for a meeting with it scheduled for Nov. 9, 2022. Bankman was allegedly scheduled to meet with the Prime Minister of The Bahamas the very next day, on Nov. 10, which was the day before the company's Chapter 11 filing.
Bankman received an annual salary of $200,000 from FTX's US division for his role as a senior adviser to the FTX foundation, along with nearly $19 mln to purchase a 30,000 sq ft luxury residence in the Bahamas.
In a Jan. 12, 2022, message to his son, Bankman complained about the salary and that he was supposed to get $1 million annually starting the previous month. “Gee, Sam I don't know what to say here,” wrote Bankman in his email to SBF, as per the filing. “This is the first [I] have heard of the 200K a year salary! Putting Barbara on this.”
“Bankman's influence paid off, not only for him, but for Fried too,” said FTX's bankruptcy estate in the filing, which stated that within two weeks, SBF gifted Bankman and Fried together $10 million in funds originating from FTX's sister company Alameda and within three months, SBF “caused the couple to be deeded a $16.4 million property in The Bahamas” which was paid by the funds provided by FTX Trading.
These lavish gifts were enjoyed “despite knowing or blatantly ignoring that the FTX Group was insolvent or on the brink of insolvency,” the filing alleges.
But There's More: Charities & Political Campaigns
In addition to all this, $5.5 million was made in FTX Group donations to Stanford University, which the complaint describes as “naked self-dealing” in an attempt to “curry favor with and enrich” its own employers at the company's expense.
As per the latest reports, Stanford University will return the “gifts” it received from FTX, which SBF's parents allegedly orchestrated.
“We have been in discussions with attorneys for the FTX debtors to recover these gifts, and we will be returning the funds in their entirety,” Bloomberg reported a Stanford University spokesperson as saying, who added that these gifts received from the FTX Foundation and FTX-related companies were largely for pandemic-related research and prevention.
Meanwhile, when it comes to the company's political contribution strategy, SBF's mother, Barbara Fried, was the “point person.” She also masked SBF's identity as a political donor and regularly raised the issue in email communications with him, advising him on “avoidance of such disclosure,” according to the lawsuit.
Fried used her “access and influence to benefit MTG.” MTG, or Mind the Gap, is an independent expenditure-only political action committee (PAC) she co-founded in 2018 and served as President and Chair. According to the filing, “tens of millions of dollars” were contributed to MTG or its supported causes at the explicit request of Fried.
The lawsuit then goes on to allege that Nishad Singh, the former FTX engineering chief, was used as a channel to use Alameda funds to make political contributions. The recipients for such contributions were “hand-selected” by Fried and “rubber-stamped” by SBF.
Back in February this year, Singh already pleaded guilty to charges including conspiracy to make unlawful political contributions as well as to defraud the Federal Election Commission (FEC). According to FEC records, Singh contributed roughly $9.7 million to various candidates and committees.
The DOJ dropped its campaign finance charge against SBF in July due to treaty obligations with the Bahamas but said he would still be “charged with conducting an illegal campaign finance scheme.”
Other former FTX executives meanwhile have pleaded guilty to criminal charges and are cooperating with investigators. Earlier this month, Ryan Salame, the former co-chief executive of FTX's Bahamas entity, FTX Digital Markets, pleaded guilty to making multi-million dollars in illegal campaign contributions to US politicians and engaging in a criminal conspiracy to operate an illegal money-transmitting business.
The Alameda transfers were “categorized as loans,” but “it was understood that they would not be repaid,” Salame told Judge Lewis Kaplan, who is also overseeing SBF's trial, as he entered his guilty plea.
As part of his plea agreement with the government, Salame could also forfeit over $1.5 billion. He has already agreed to hand over $6 million before his sentencing, which is scheduled for March of next year, along with a “2021 Porsche automobile” and multiple properties.
Salame was the fourth member of SBF's inner circle to reach a deal with prosecutors after Singh, Gary Wang, and Caroline Ellison entered guilty pleas. All are expected to serve as witnesses for the government's case against SBF, who prosecutors say conducted one of the largest financial crimes in US history.
According to the bankruptcy filing, FTX, once valued at $32 billion, has $8 billion of liabilities and 1 million creditors.
The Bankruptcy Proceedings
Separately on Tuesday, a federal appeals court in New York heard arguments from lawyers for SBF, who claim he was unlawfully incarcerated last month. Mark Cohen, who represents SBF, said his client was unable to prepare for trial properly and that arrangements by the government for him to access an internet-enabled laptop were “not happening” because the connection was “so slow as to be meaningless.” The panel, however, seemed unsympathetic, with Judge William Nardini saying, “At a certain point, he makes his own bed, he sleeps in it.”
SBF has been under house arrest for months in his parents' home in Palo Alto before being sent to a Brooklyn jail in August after a judge ruled he had tampered with witnesses. SBF had leaked the writing of his former romantic partner and former CEO of Alameda Research, Ellison, to the New York Times.
NYT recently also got hold of SBF's writings, supposedly from when he was under house arrest. His writing shows no responsibility for the loss of $8 billion in customer funds as he wrote, “I'm broke and wearing an ankle monitor and one of the most hated people in the world,” and reportedly, “the truth is that I did what I thought was right.”
While this is ongoing, last week, the US Bankruptcy Court for the District of Delaware ruled that FTX can sell its crypto holdings worth more than $3.4 billion to pay back creditors. At $1.16 billion, Solana (SOL) makes up for the biggest FTX holding besides having about $560 million in Bitcoin, $192 million in Ethereum, and the rest in lesser-known illiquid tokens.
As of early this month, tens of thousands of customer claims worth billions of dollars have been filed against FTX and FTX US.
The court filing by FTX lawyers states that the exchange requested permission to sell or invest in August, arguing that hedging its crypto assets would allow FTX to limit the potential downside risk prior to the sale of crypto assets like Bitcoin and Ethereum. Meanwhile, staking certain crypto will help the estate and creditors “by generating low-risk returns on their otherwise idle digital assets,” it said.
According to the lawyer, the recovered assets are all in one pool and “not traceable to the individual customer.” The estate has also asked to hire Mike Novogratz's Galaxy Digital as an advisor to help sell, stake, and hedge its holdings.
Amidst all this, three celebrity promoters of the failed crypto exchange have opted to settle the case, according to court filings. NFL team Jacksonville Jaguars' quarterback Trevor Lawrence and YouTube influencers Tom Nash and Kevin Paffrath have agreed to settle the case on undisclosed terms. The final court order that acknowledges the settlement and removes them from the case is awaiting a sign-off from Judge K. Michael Moore.
Other celebrities who have been sued for promoting FTX include the likes of Shaquille O'Neal, Steph Curry, Tom Brady, and Gisele Bundchen. Lawyers leading the case against these celebrities said they are engaged in confidential discussions, and there is a “likelihood that other FTX settlements will be reached,” as per court filings.
Court filings also show that crypto influencer Ben “BitBoy” Armstrong has been dismissed from the case as he “has not served an answer or motion for summary judgment.”
Now, SBF is facing seven counts of federal charges, including fraud and money laundering, and preparing for a trial next month on Oct. 3 in Manhattan from behind bars.