This article was originally published in German and has been automatically translated.
The imploded cryptocurrency exchange FTX and its associated crypto speculation company Alameda Research are to pay 8.7 billion dollars in damages for deceiving their customers and lenders. An additional four billion dollars is to be paid as compensation for unjust enrichment from these activities. A US federal district court has issued a corresponding ruling on the joint proposal of the regulatory authority CFTC (Commodities Futures Trading Commission), which brought the case, and the bankruptcy trustees of FTX and Alameda Research. However, the authority will forfeit the money to the extent that it goes to victims.
The ruling states that Alameda Research, a company controlled by Sam Bankman-Fried, and FTX, a network of companies controlled by him, systematically misled both depositors and lenders and manipulated information. For example, FTX clients were assured, both in statements and in terms and conditions, that their deposits would only be held in custody and segregated from other assets. In fact, the deposits were commingled with other customer deposits and company assets; then the other people's money was spent, for example, on advertising, campaign contributions, the extension of unsecured loans, aircraft rentals, real estate, acquisitions of other cryptocurrency companies and, in particular, Alameda's bets on cryptocurrencies.
Alameda Research was able to make unlimited use of FTX customers' deposits and did not even have to cover high losses. The speculation did not work out, so that Alameda ended up with debts to FTX of at least eight billion dollars. Bankman-Fried hid this problem in the accounts in an incorrectly named account, which he allegedly referred to as "our Korean friend's account".
Air assets lead to bankruptcy
At the same time, a significant proportion of Alameda's alleged assets consisted of virtual FTT tokens, a "means of payment" issued by FTX itself. The FTT were booked at the current market value, which was pure waste, however, because Alameda held a significant proportion of all FTT tokens in circulation. Due to a lack of demand for FTT, an attempt to sell the holdings would have triggered an enormous price slide.
When Coindesk reported on this unholy overvaluation of Alameda's assets on November 2, 2022, FTX customers began to call in their supposed balances. However, the money was speculated, so FTX was unable to service the withdrawals and plunged into bankruptcy. Bankman-Fried, majority owner of FTX and 90 percent owner of Alameda, has since been sentenced to 25 years in prison (not legally binding) for fraud and conspiracy to commit money laundering, among other things. Other managers of FTX and Alameda Research have also been convicted under criminal law.
Partial judgments obtained, proceedings continue
Parallel to the criminal proceedings, the capital market authorities SEC (Securities Exchange Commission) and CFTC are conducting civil proceedings against the companies and their managers. The CFTC supervises trading in commodity futures, i.e. contracts for the future delivery or purchase of goods and other values as well as the determination of indices of all kinds, except onions and the sale of movie tickets. In addition to FTX Trading, Alameda Research and Sam Bankman-Fried, the authority has also sued his fellow managers Caroline Ellison, Zixiao "Gary" Wang and Nishad Singh. About the liability issues, the CFTC has already obtained consent judgments against Ellison, Wang and Singh, and against Singh for some of the conditions demanded by the authority.
The consensual judgment against FTX and Alameda Research is new. It contains comprehensive injunctions and prohibitions of activity for the two companies, the obligation to support official proceedings, as well as to pay 8.7 billion dollars in damages and surrender four billion dollars in enrichment. However, the total of 12.7 billion dollars is not to go to the state, but to the victims. All payments from the bankruptcy estate to customers of FTX.com and FTX.US and to the lender Alameda Researchs will be offset against the claim for damages. All authorized payments from the bankruptcy estate will be applied to the enrichment claim.
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The case is CFTC v Samuel Bankman-Fried, FTX et al and is pending in the United States District Court for the Southern District of New York in Docket No. 1:22-cv-10503. The case is ongoing as the CFTC is still seeking monetary penalties, injunctions and disqualifications against the defendants.
- Konsensurteil CFTC gegen FTX Trading und Alameda Research
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