Customers File Lawsuit to Recover Assets from Bankrupt FTX

Customers File Lawsuit to Recover Assets from Bankrupt FTX

FTX customers have sued the bankrupt cryptocurrency exchange in an attempt to recover funds. The lawsuit has been filed as part of the bankruptcy case in Delaware, which seeks a court ruling recognizing the customer holdings on the trading platform as belonging to them and not the company.

FTX Customers Sue for Priority Rights to Repayment over Other Creditors

Four FTX customers filed a lawsuit on Tuesday against the crypto exchange and its former executives, including founder and former CEO Sam Bankman-Fried (SBF). They want the court to announce that the digital assets held by the platform belong to its customers rather than FTX or its other creditors.

According to reports published by Reuters and Bloomberg, the customers have filed the lawsuit to be accepted as a class action within the bankruptcy case in Delaware. The Bahamas-based FTX filed for Chapter 11 bankruptcy protection in the state on November 11 as traders and investors rushed to withdraw their money.

The new management of FTX has pledged that customers will be repaid first, amid several legal efforts to lay claim to the assets of the crypto exchange. The latest complaint insists that "customer class members should not have to stand in line along with secured or general unsecured creditors in the bankruptcy proceedings just to share in the diminished estate assets of the FTX Group and Alameda."

Following his resignation as chief executive and his extradition from the Bahamas, Bankman-Fried is facing charges in the US related to a "fraud of epic proportions," the federal prosecutor has said. There is also an allegation that customer deposits, in both fiat and crypto, were used to support Alameda Research.

SBF and Ellison Liable for Converting Customer Holdings

Besides Bankman-Fried, the customers are also suing Caroline Ellison, his ex-girlfriend and former CEO of Alameda. Customers insist that both should be held liable for breaching fiduciary duties and wrongfully converting their holdings. Ellison has pleaded guilty to fraud charges. In her testimony, she admitted that Alameda had access to a special borrowing facility from FTX customer funds.

The proposed class action lawsuit has requested the court to determine that "cash and assets traceable to customers that never belonged to FTX or Alameda and do not belong" to other bankruptcy creditors "should be earmarked solely for customers." It aims to represent over a million FTX customers in the United States and around the world.

The customers are seeking a ruling from the judge granting them the priority right to repayment over other creditors of the exchange, in case the court decides that the holdings are the property of FTX. It was the second-largest crypto exchange in the industry before it collapsed last month.

Bloomberg revealed that the US Justice Department has launched an investigation into an alleged cyberattack on FTX that led to the loss of over USD 370 million, mere hours after the bankruptcy court filing in November. It is not clear if it was an inside job or a hacking incident.

Do you think FTX customers will be granted priority rights to repayment over other creditors? Please post your comments.