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FTX Digital Markets Was a Storefront for Fraud, Claim FTX Lawyers

3 mins
Updated by Ryan Boltman
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In Brief

  • In an adversary proceeding, lawyers for FTX debtors argued that FTX Digital Markets have no claim to FTX property, cryptocurrency, fiat, or user information.
  • Contrary to liquidators of FTX Digital Markets, FTX debtors argue that the entity was simply a way for Sam Bankman-Fried to perpetuate fraud and minimize exposure to prosecution.
  • Bankman-Fried had reportedly cozied up to several Bahamian and U.S. regulators to sway laws in favor of FTX.
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FTX lawyers ask the U.S. bankruptcy court in Delaware to deny FTX Digital Markets (DM) claims to the property of FTX Trading Limited.

They argue that FTX DM was a fraud haven to which former FTX CEO Sam Bankman-Fried transferred customer funds.

FTX Digital Markets Should Not Affect Creditor Claims

Lawyers say that FTX DM, which was placed into liquidation by Bahamian regulators on November 10, 2022, shortly before FTX Trading filed for bankruptcy, had falsely claimed that it owned cryptocurrencies, intellectual property, and customers of FTX. 

Contrary to liquidators, the lawyers said, “FTX DM was no more than a short-lived provider of limited “match-making” services for customer-to-customer transactions.” The liquidators had stated previously that FTX was “the center of the FTX Group.”

These claims followed attempts by the liquidators to move the FTX bankruptcy case from the United States to the Bahamas.

Furthermore, FTX lawyers said that FTX DM was a non-debtor that should not threaten creditor claims to the property of FTX Trading.

They also say that Bankman-Fried had exploited a close relationship with Bahamian regulators to move $143 million of FTX customer funds from and Alameda Research to FTX DM to enrich FTX employees.

FTX Debtors
FTX Trading Adversary Proceeding | Source: FTX Debtors

Furthermore, the attorneys want the bankruptcy judge to declare transfers to FTX DM fraudulent. They also seek judgments that FTX DM has no ownership of FTX’s intellectual property, customer information, cryptocurrencies, or fiat. 

The FTX Group, which includes crypto exchange, filed for bankruptcy on Nov. 11, 2023, amidst a flurry of withdrawals sparked by a confidence crisis in FTX’s native FTT token. FTX’s bankruptcy case is currently underway in Delaware.

Sam Bankman-Fried Deliberately Built Influence With Bahamian Regulators

According to the court filings, Sam Bankman-Fried had an “accommodating” relationship with Bahamian regulators. These regulators include the Securities Commission of the Bahamas, the Attorney General, and the Prime Minister of the Bahamas.

The Wall Street Journal reported in November 2022 that Bahamian Prime Minister Philip Davis had helped to break ground at FTX’s global headquarters.

“The arrival and presence of FTX underscore the readiness of the Bahamas to be a home for global leaders in the crypto space,” Davis said in a video released by the Office of the Prime Minister in April 2022.

The Bahamas was the first country to issue a nationwide digital currency, the Sand Dollar.

“Most likely FTX was hoping, or maybe even expecting, that the Bahamas would not partially implement its DARE [Digital Assets and Registered Exchanges Act, 2020],” said Bruce Zagaris, an expert on Caribbean financial services and white-collar crime. According to the WSJ, the Bahamas used FTX to justify the Act.

Bankman-Fried Also Held U.S. Regulators in Thrall

But Bankman-Fried had also tried to win approval from U.S. regulators, including the CFTC and the Federal Deposit Insurance Corporation (FDIC).

A recent report by the Washington Examiner suggested that Bankman-Fried had tried to woo the chairman of the FDIC with FTX’s risk framework by boasting that FTX was a “superior” cryptocurrency exchange.

Bankman-Fried faces twelve criminal charges in the U.S., including money laundering, wire fraud, and campaign finance violations.

“Perhaps we should consider ourselves fortunate because were it not for FTX’s precipitous collapse, the executives now facing federal indictments may have been the primary drivers of government oversight of themselves and their competitors,” said Michael Chamberlain of the Protect the Public’s Trust watchdog.

The watchdog pointed out that the government agency’s quick response to an email from Bankman-Fried proved that the former CEO wielded significant influence on U.S. regulators. 

Reports surfaced in December 2022 that he had treated the then-Commissioner of the Commodity Futures Trading Commission, Dan Berkowitz, to an extravagant meal. Berkowitz stepped down shortly after.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...