FTX Trust Alleges $1.15B Fraud Despite Red Flags in Genesis Deal

The FTX Recovery Trust has initiated a $1.15 billion lawsuit against Genesis Digital Assets (GDA), a Bitcoin mining firm, alleging fraudulent transfers of funds misappropriated from the collapsed cryptocurrency exchange FTX. The lawsuit, filed in the U.S. Bankruptcy Court for the District of Delaware, targets GDA, its affiliates, and co-founders Rashit Makhat and Marco Krohn. The FTX Trust claims that former CEO Sam Bankman-Fried orchestrated Alameda Research, FTX’s sister company, to purchase GDA shares at “outrageously inflated prices” between August 2021 and April 2022, using customer and creditor funds diverted from FTX. These transactions, totaling $1.15 billion across four funding rounds, allegedly benefited Bankman-Fried and Alameda while exacerbating FTX’s insolvency.

Court documents reveal that Bankman-Fried, as Alameda’s 90% owner, personally profited from GDA’s inflated valuation, while FTX customers and creditors bore the losses. The complaint highlights that Alameda’s investments in GDA—$100 million in August 2021, $550 million in January 2022, $250 million in February, and $250 million in April 2022—were made despite GDA’s unaudited financials and Kazakhstan’s energy crisis, which raised red flags about the mining firm’s viability. Makhat and Krohn received $470 million and $80.9 million, respectively, for their shares in February 2022, according to the filing.

The FTX Trust’s legal action is part of broader efforts to recover assets for creditors. Since February 2024, the trust has distributed $1.2 billion and $5 billion to claimants, with an additional $1.6 billion slated for September 30. These distributions, totaling $6.2 billion, aim to recoup a portion of the $16.5 billion owed to victims of FTX’s collapse. The lawsuit against GDA follows a $175 million settlement with Genesis Global Trading in 2023 and adds to 23 ongoing lawsuits targeting entities like Binance and Anthony Scaramucci.

The complaint argues that GDA’s U.S. subsidiaries, including Dog House TX-1 and Mother Whale LLC, operate as “alter egos” of the parent company, potentially exposing the entire corporate structure to clawback claims under federal and Delaware state laws. This legal strategy mirrors prior actions by the FTX Trust to recover funds from fraudulent transfers, leveraging U.S. bankruptcy laws that permit “avoidance actions” to reclaim pre-bankruptcy transactions.

The case underscores the systemic risks in the crypto industry, particularly the misuse of customer funds for speculative ventures. Bankman-Fried, currently serving a 25-year prison sentence, resigned from GDA’s board days before FTX’s November 2022 bankruptcy. The lawsuit also notes that GDA’s valuation reached $5.5 billion in April 2022, just before the crypto market crash, and that the firm had planned a U.S. IPO as of July 2024. The FTX Trust’s pursuit of GDA reflects a broader trend of regulatory scrutiny in the crypto sector, with Kazakhstan recently implementing stricter rules for digital asset trading.