In a lawsuit filed in Delaware’s bankruptcy court, the liquidators of the now-bankrupt cryptocurrency exchange FTX are seeking to recover $1.8 billion from rival Binance, claiming a major transaction was fraudulent.

According to court documents, the case centers around FTX’s July 2021 decision to repurchase a 20% stake in the company from Binance for $1.76 billion. Binance, led at the time by CEO Changpeng Zhao (commonly known as CZ), had originally acquired this stake in FTX in 2019 for $18.3 million.

However, FTX’s founder and CEO, Sam Bankman-Fried, allegedly saw the buyback as a strategic move to project confidence to the market, despite FTX’s precarious financial state.

FTX now alleges that the buyback was a “constructive fraudulent transfer” because the company was insolvent at the time, meaning it lacked the financial stability and resources to legally or responsibly carry out such a large transaction.

The lawsuit asserts that FTX was effectively insolvent when it undertook the $1.76 billion transaction, with its sister firm, Alameda Research, in an alarming financial position. As former Alameda executive Caroline Ellison testified in court, Alameda’s balance sheet showed $9.4 billion in liabilities and a net asset deficit of $2.7 billion. Ellison also disclosed that nearly $1 billion of customer deposits on FTX’s platform were diverted to finance the Binance buyback, allegedly without the knowledge or consent of those customers.

“We don’t really have the money for this; we’ll have to borrow from FTX to do it,” Ellison reportedly told Bankman-Fried, according to her testimony.

The lawsuit contends that Bankman-Fried was intent on completing the transaction regardless of FTX’s liquidity constraints, partly to bolster his own reputation and conceal the firm’s financial weaknesses.

“The transaction was an attempt to signal strength, even though it was funded with customer assets,” Ellison’s testimony reveals, underscoring what FTX liquidators argue was a willful disregard for the company’s solvency.

Binance’s Tweets

Beyond the alleged fraudulent transaction, the suit also claims that Binance’s Zhao played a pivotal role in accelerating FTX’s downfall. A sequence of tweets from Zhao in early November 2022, cited in the lawsuit, raised concerns about FTX’s solvency and signaled Binance’s intent to liquidate its remaining FTT holdings—the native token of the FTX platform.

On November 6, Zhao tweeted about Binance’s plan to sell its FTT holdings, suggesting that FTX was financially unstable. This announcement triggered panic in the market, resulting in a massive surge in customer withdrawals from FTX. According to court filings, FTX processed roughly $6 billion in customer withdrawals over the next 48 hours, with some customers withdrawing over 90% of their account balances.

A few days later, Zhao announced a non-binding letter of intent (LOI) to acquire FTX, ostensibly to provide liquidity relief. However, on November 8, Zhao tweeted a warning that Binance could walk away from the deal, citing concerns uncovered during due diligence. FTT’s value plunged from $24.36 to $2.30 within hours, exacerbating FTX’s liquidity crisis and forcing the company to halt withdrawals.

“Zhao’s tweets created a market frenzy,” the complaint alleges, “which resulted in an overwhelming surge of withdrawals and ultimately led to FTX’s collapse.”

FTX filed for bankruptcy on November 11, 2022, amid mounting concerns about its financial practices and the security of customer deposits. On that same day, John J. Ray III was appointed CEO of FTX to oversee its bankruptcy process. Under Ray’s leadership, FTX has been actively pursuing legal actions to recover funds for creditors and to address alleged wrongdoing by former executives.

The unraveling of FTX revealed a nearly $9 billion shortfall in customer deposits. In October 2024, a federal judge approved a liquidation plan for FTX’s remaining assets to help compensate affected creditors. This lawsuit against Binance is part of FTX’s broader efforts to reclaim assets that could potentially restore some of the lost funds to creditors.

The lawsuit arrives amid ongoing legal challenges for Binance and its former CEO, Changpeng Zhao. In November 2023, Zhao pleaded guilty to violating U.S. anti-money laundering laws. As part of his plea agreement, he agreed to step down from his role at Binance and served a four-month prison sentence, concluding his detention in September 2024.

Binance, which remains one of the largest cryptocurrency exchanges in the world, is also under scrutiny from regulators globally, who have raised concerns about the platform’s adherence to financial regulations and anti-money laundering protocols.

A spokesperson for Binance responded to the FTX lawsuit, stating, “The claims are meritless, and we will vigorously defend ourselves.”

Crypto analysts suggest that this case may establish a legal precedent for future disputes over asset recovery and corporate misrepresentation in the crypto space. The lawsuit also reflects a broader reckoning within the industry, as regulatory bodies worldwide push for tighter controls to protect investors from fraud and financial manipulation.

Information for this story was found via AFP and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.