FTX Customers Sue Sam Bankman-Fried as Part of Chapter 11 Case

Jef Feeley, Bloomberg News

Sam Bankman-Fried, co-founder of FTX Cryptocurrency Derivatives Exchange, departs from court in New York, US, on Thursday, Dec. 22, 2022. Bankman-Fried was released on a $250 million bail package after making his first US court appearance to face fraud charges over the collapse of FTX, the cryptocurrency exchange he co-founded. , Bloomberg

(Bloomberg) -- Customers of failed cryptocurrency exchange FTX sued in bankruptcy court in hopes of being first in line to recover some of the billions lost in the meltdown of Sam Bankman-Fried’s digital-asset empire.

A group of four FTX customers asked a bankruptcy judge Tuesday to rule their holdings in the Bahamas-based exchange belong to them, rather than FTX. They want the judge to give customers repayment priority over other FTX creditors, according to a Delaware bankruptcy court filing. The group is also asking to have the suit certified as a class-action case.

Authorities accuse Bankman-Fried – the exchange’s 30-year-old founder – of fraudulently raising $1.8 billion from investors and using FTX funds to make high-risk bets at his hedge fund, Alameda Research, and cover personal expenses. He’s facing federal criminal charges of wire fraud, securities fraud and money laundering. He’s currently free on bond and living with his parents in California.

“Cash and assets traceable to customers, which never belonged to FTX or Alameda and do not belong” to other bankruptcy creditors, “should be earmarked solely for customers,” according to the 63-page suit, known as an adversary proceeding in bankruptcy court.

Bankman-Fried’s spokesman didn’t immediately return an email for comment late Tuesday about the bankruptcy suit.

Federal prosecutors are investigating an alleged cybercrime that drained more than $370 million out of FTX just hours after the exchange’s Chapter 11 filing hit court dockets last month, Bloomberg News reported Tuesday.

The amount stolen is considerably less than the billions Bankman-Fried is accused of swindling while at the helm of FTX. He’s also accused of buying hundreds of millions of dollars’ worth of beach-front property in the Bahamas and making hefty political donations.

Bankman-Fried – known for his floppy hair, T-shirts and shorts – blamed FTX’s meltdown on his own sloppy management practices and wrong-way bets through Alameda. He has said he never intended to defraud investors.

The FTX customers suing Bankman-Fried and other FTX officials say they intentionally used customer holdings to wrongfully bolster Alameda and fund their own lavish lifestyles.

Customers “should not have to stand in line along with secured or general unsecured creditors in these bankruptcy proceedings just to share in the diminished estate assets of the FTX Group and Alameda,” the group said in the suit.

Besides Bankman-Fried, the customer group also sued Caroline Ellison, Alameda’s former CEO and an ex-girlfriend of the FTX founder. Customers say both should be held liable for breaching fiduciary duties to them and wrongfully converting their holdings.

Ellison didn’t immediately respond to a request for comment.

The bankruptcy case is FTX Trading Ltd., 22-11068, U.S. Bankruptcy Court for the District of Delaware.

--With assistance from Hannah Miller.