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FTX customers sue bankrupt crypto company, allege racketeering

The burnt customers say FTX founders used their money as a "slush fund" for their own investments until the crypto empire collapsed.

SAN FRANCISCO (CN) — A new federal lawsuit alleges that one of the world’s largest cryptocurrency exchanges, now going bankrupt, misappropriated millions of customers' funds and committed "one of the great frauds in history."

In a 45-page complaint filed Wednesday, depositor Stephen Pierce accuses FTX CEO Sam Bankman-Fried — who announced Friday he is resigning and filing for bankruptcy after failing to raise cash to solve liquidity issues — of violating the Racketeering Influenced and Corrupt Organizations Act (RICO). 

The RICO action says Bankman-Fried’s cryptocurrency empire has collapsed, “and it has become clear that Bankman-Fried and his lieutenants misappropriated billions of dollars of their customers’ assets.” Pierce plans to form a class action of other depositors to sue the company for damages. 

After the company's sudden collapse over just a few days, the money in customers’ accounts is now frozen. The CEO and his paid celebrity endorsers were handed two other lawsuits Tuesday in the Southern District of Florida, accusing FTX of devising a fraudulent scheme to "take advantage of unsophisticated investors from across the country," causing $11 billion in damages and committing securities fraud, conspiracy and unfair business practices.

Pierce wrote in the complaint that when asked whether he was running a Ponzi scheme, Bankman-Fried said “It is sort of like real monetizable stuff in some senses … like you’re the guy calling bullshit and saying this thing’s actually worthless but in what sense are you right?” 

He also quoted the CEO's tweets earlier in November telling customers the company was "fine" and claiming FTX had "enough to cover all client holdings" and does not invest client assets.

Bankman-Fried’s fortune was estimated around $17 billion this year according to Forbes, and his public image was part of it, Pierce said: “In an endless stream of tweets, interviews, and appearances, he touted a prosperous future powered by a crypto bull market that would never end.” But it crumbled earlier this month when Alameda Research’s financial troubles had investors withdrawing en masse. In nine days, Bankman-Fried’s companies went from collective valuations exceeding $40 billion to zero, and he tweeted that he had “fucked up” and was “sorry.” 

The filing adds that Caroline Ellison — then-CEO of Alameda Research and Bankman-Fried’s former partner — said she, Bankman-Fried, Gary Wang and Nishad Singh misappropriated FTX customer assets to cover Alameda’s trading losses and repay its outstanding debts. Bankman-Fried admitted to a pattern of “malfeasance and deception," Pierce said.

“Bankman-Fried’s cryptocurrency exchanges’ terms of service made clear that customers’ assets belonged at all times to customers, and would not be transferred to or used by Bankman-Fried’s companies,” Pierce wrote. “But Bankman-Fried and his inner circle treated those assets as a slush fund to fund their own proprietary investments and a variety of personal boondoggles.”

Pierce asks for a trial to find Bankman-Fried guilty of a RICO violation and conspiracy, as well as to put together a class action and grant injunctive relief and monetary damages. 

The SEC as well as the Justice Department and Commodity Futures Trading Commission have launched investigations into FTX to see if the exchange properly safeguarded consumer deposits and relationships with trading affiliates. On Wednesday, the House Financial Services Committee said they will be holding a hearing on the crash, where Bankman-Fried and other representatives from the company will testify before Congress. 

Court filings from FTX show $740 million in assets were recovered and secured by Nov. 16 — a fraction of the potentially billions of dollars likely missing from the company’s coffers, according to the Associated Press. California company BitGo, which provides qualified custodian fiduciary services, has likely recovered more than $1 billion since then and locked them in “cold storage” in South Dakota, on hard drives not connected to the internet. FTX is paying Bitgo a $5 million retainer and $100,000 a month for its services.

Cryptocurrency surged in popularity during the pandemic with millions of new investors. But as inflation intensified the cost of living and federal interest rates hiked over 2022, many investors have pulled their deposits out of the increasingly volatile industry. This has caused the value of bitcoin to fall significantly to about $17,000 from last year's $68,000.

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