FTX Sues Binance and CZ in $1.8 Billion Lawsuit Over Alleged Fraudulent Stake Buyback and Collapse

• FTX alleges CZ’s tweets triggered mass withdrawals, worsening the exchange’s financial crisis in November 2022.
• FTX’s lawsuit claims a $1.8 billion buyback used customer funds, despite Alameda’s deep insolvency at the time.
• FTX accuses Binance of damaging its reputation through misleading acquisition claims and market manipulation.

Bankrupt crypto exchange FTX is suing Binance and its former CEO, Changpeng “CZ” Zhao, for $1.8 billion. The case centers on FTX’s alleged fraudulent repurchase of its shares from Binance in 2021. 

The lawsuit claims that Binance’s 20% stake in FTX, acquired for $18.3 million in November 2019, was bought back by FTX’s then-CEO, Sam Bankman-Fried, using customer deposits, despite FTX being insolvent at the time.

Alameda’s Insolvency Complicates FTX’s 2021 Buyback

In July 2021, Bankman-Fried allegedly used FTX’s native token, FTT, along with Binance’s BNB and BUSD tokens, to repurchase Binance’s stake in FTX. This transaction, worth $1.8 billion, was reportedly funded by Bankman-Fried’s trading firm, Alameda Research. According to recent court filings, however, Alameda was already insolvent, with liabilities totaling $9.4 billion and a negative $2.7 billion balance sheet.

Caroline Ellison, Alameda’s then-second-in-command, warned Bankman-Fried of the firm’s financial state, indicating that customer deposits from FTX would be needed for the repurchase. This alleged use of customer funds raised concerns about fraud, as filings claim the FTT token held “no real market value” during the transaction. FTX’s lawyers argue that this situation deems the buyback as a “constructive fraudulent transfer.”

Binance’s Impact on FTX’s 2022 Collapse

According to FTX’s lawsuit, Zhao’s public statements on Twitter triggered FTX’s rapid collapse in November 2022. Zhao’s tweets, notably on November 6, 2022, allegedly caused panic among FTX users, escalating withdrawals from $18 million per hour to as high as $150 million per hour. As a result, FTX processed $6 billion in withdrawals within a short period, leading to a liquidity crisis.

Zhao also revealed his intentions to liquidate Binance’s FTT holdings, sparking further market panic and causing FTT’s value to plummet from $24.36 to $2.30. FTX’s lawsuit claims that Zhao’s actions and comments were intended to damage FTX’s reputation, which undermined the company’s ability to secure funds.

Misleading Acquisition Proposal and Chapter 11 Filing

To stabilize the crisis, Zhao signed a non-binding letter of intent (LOI) to acquire FTX. However, FTX claims this gesture was misleading as Zhao had no intention to complete the deal. Shortly after, FTX appointed John Ray as CEO, and the exchange filed for Chapter 11 bankruptcy in Delaware.

FTX contends that Zhao’s actions, including his tweets and sale of FTT, harmed its financial health, reducing the recoverable value for stakeholders. The legal battle adds another chapter to FTX’s downfall, which saw Bankman-Fried sentenced to 25 years for fraud earlier this year.