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FTX debtors sue Sam Bankman-Fried's parents for misappropriation of funds

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(Kitco News) - The debtors for the bankrupt FTX cryptocurrency exchange have filed a lawsuit against the parents of FTX founder and former CEO Sam Bankman-Fried (SBF), alleging that they misappropriated millions of dollars through their involvement in the exchange’s business.

Court documents filed on Monday by the law firm Sullivan & Cromwell show that the FTX debtors and debtors-in-possession are seeking to recoup funds given to SBF’s parents, Joseph Bankman and Barbara Fried, arguing that they exploited their access to their son’s business to enrich themselves at the expense of the debtors in the FTX bankruptcy estate.

“As Bankman-Fried’s parents, Bankman and Fried exploited their access and influence within the FTX enterprise to enrich themselves, directly and indirectly, by millions of dollars, and knowingly at the expense of the debtors in these Chapter 11 Cases and their creditors,” the filing said.

“Despite presenting itself to investors and the public as a sophisticated group of cryptocurrency exchanges and businesses, the FTX Group was a self-described ‘family business,’” they said. “It has since been revealed to have been fueled by fraud, perpetrated by and for the benefit of a group of insiders, including: Bankman-Fried, Daniel Friedberg, Zixiao “Gary” Wang, Nishad Singh, and Caroline Ellison.”

The debtors alleged that Bankman and Fried “siphoned millions of dollars out of the FTX Group for their own personal benefit and their chosen pet causes,” and said, “This action seeks to hold them accountable for their misconduct and recover assets for the Debtors’ creditors.”

SBF has sought to shield his parents from the fallout associated with the FTX bankruptcy, repeatedly saying that they weren't really involved in the business or decisions that had a material impact on its operations, but the new lawsuit pushes back against that characterization.

“Although Bankman-Fried has asserted that his parents ‘weren’t involved in any of the relevant parts’ of the business, the truth is that Bankman and Fried were very much involved – from the founding of the FTX Group until its collapse,” the filing said. “As early as 2018, Bankman described Alameda as a ‘family business’ – a phrase he repeatedly used to refer to the FTX Group. Even as the FTX Group descended into insolvency, Bankman and Fried profited handsomely from this ‘family business.’”

The debtors argued that Joseph Bankman was a “de facto officer” for FTX Group, which gave him broad authority to make decisions, and he also held executive positions on FTX Group’s management team.

“Bankman used his status as an insider to funnel vast sums of FTX Group money to his chosen causes, including his employer, Stanford University,” they said. “Bankman also showered his friends and family with gifts, which were paid for by the FTX Group.”

Barbara Fried, who is also a Stanford Law School Professor, was actively involved in the political actions by FTX, the complaint alleged.

“Fried served as the single most influential advisor regarding Bankman-Fried’s and the FTX Group’s political contributions, and repeatedly ‘dunned,’ or called upon, Bankman-Fried and Singh to contribute millions of dollars directly to Mind the Gap, Inc. (“MTG”), a political action committee that she co-founded and for which she served as President and Chairwoman, or the organizations MTG supported,” the filing said.

“Together, Bankman’s and Fried’s influence and control over FTX Group funds expanded as the FTX Group plunged deeper into insolvency,” they said. “Despite knowing or blatantly ignoring that the FTX Group was insolvent or on the brink of insolvency, Bankman and Fried discussed with Bankman-Fried the transfer to them of a $10 million cash gift and a $16.4 million luxury property in The Bahamas.”

They also said Bankman and Fried “pushed for tens of millions of dollars in political and charitable contributions, including to Stanford University, which were seemingly designed to boost Bankman’s and Fried’s professional and social status at the expense of the FTX Group, and by extension, its customers and other creditors.”

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On the matter of violating federal campaign finance disclosure rules, the debtors said that Barbara Fried encouraged SBF and others in the FTX Group to utilize straw donations or otherwise conceal that the FTX Group was the source of the contributions.

Based on the statements above, the debtors filed the lawsuit against Bankman and Fried to recoup the funds they received.

“Plaintiffs bring this action against Bankman for intentional and constructive fraudulent transfer, breaches of fiduciary duties, aiding and abetting breaches of fiduciary duty, unjust enrichment, knowing assistance or knowing receipt, and disallowance of claims; against Fried for intentional and constructive fraudulent transfer, aiding and abetting breaches of fiduciary duties, unjust enrichment, and disallowance of claims; and against both Defendants for damages, as well as to avoid and recover from Defendants (or from any other person or entity for whose benefit the transfers were made or obligations incurred) all transfers of property of Plaintiffs and all obligations of Plaintiffs to Defendants made prior to the commencement of the Chapter 11 Cases by Plaintiffs,” the filing said.

The plaintiffs asked that the court award them “compensatory damages in an amount to be determined at trial resulting from defendants’ conscious, willful, wanton, and malicious conduct, which exhibits a reckless disregard for the interests of plaintiffs and their creditors,” and the “Disgorgement of all of Defendant Bankman’s compensation paid by Plaintiffs.”

Sean Hecker, counsel for Joe Bankman, and Michael Tremonte, counsel for Barbara Fried reached out to Kitco Crypto with the following statement in response to the lawsuit filed by FTX: “This is a dangerous attempt to intimidate Joe and Barbara and undermine the jury process just days before their child’s trial begins. These claims are completely false. Mr. Ray and his massive team of lawyers, who are collectively running up countless millions of dollars in fees while returning relatively little to FTX clients, know better."

Prior to its bankruptcy filing in November 2022, FTX was the third-ranked cryptocurrency exchange by volume. Following its collapse, SBF was arrested and charged with 13 counts, including fraud, money laundering, and bribing officials. His first trial is scheduled to start on Oct. 3 where he will defend against seven charges related to fraudulent activities involving user funds at FTX and Alameda Research.

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