FTX Customers File Class Action to Claim Assets Within Bankruptcy Case

A group of customers are now suing FTX in an attempt to become the first to recover funds from the insolvent cryptocurrency exchange. The lawsuit, filed as part of the bankruptcy case in Delaware, seeks a court ruling recognizing that their holdings with the trading platform belong to them rather than the failed company.

Four FTX customers have filed a lawsuit on Tuesday against the crypto exchange and its former executives, including founder and ex-CEO Sam Bankman-Fried (SBF). They want the court to declare that the digital assets held with the platform belong to its customers rather than FTX or its other creditors.

The group also asks their suit to be accepted as a class action as part of the case in Delaware, according to reports published by Reuters and Bloomberg. The Bahamas-based FTX filed for Chapter 11 bankruptcy protection in the state on Nov. 11 as traders and investors rushed to withdraw their money.

Amid a number of legal efforts to lay claim to the assets of FTX, its new management pledged that customers will be repaid first. The latest complaint insists that “customer class members should not have to stand in line along with secured or general unsecured creditors in these bankruptcy proceedings just to share in the diminished estate assets of the FTX Group and Alameda.”

Following his resignation as chief executive and after his extradition from the Bahamas, Bankman-Fried is facing charges in the U.S. related to a “fraud of epic proportions,” as a federal prosecutor put it. Among them, an allegation that customer deposits, in both fiat and crypto, were used to support his crypto trading platform Alameda Research.

Besides Bankman-Fried, the customers are also suing Caroline Ellison, his ex-girlfriend and former CEO of Alameda. They say both should be held liable for breaching fiduciary duties to them and wrongfully converting their holdings. Ellison pleaded guilty to fraud charges. In her testimony, she admitted that Alameda had access to a special borrowing facility which was FTX customer funds.

The proposed class action lawsuit asks the court to determine that “cash and assets traceable to customers, which never belonged to FTX or Alameda and do not belong” to other bankruptcy creditors “should be earmarked solely for customers.” It aims to represent over a million FTX customers in the United States and around the world.

And if the court decides that the holdings are property of FTX, then the customers seek a ruling from the judge granting them the priority right to repayment over other creditors of the exchange, which was the second largest in the crypto industry before it collapsed last month.

In a separate report quoting a source familiar with the case, Bloomberg revealed that the U.S. Justice Department has launched an investigation into an alleged cyberattack on FTX that led to the loss of over $370 million, mere hours after the bankruptcy court filing in November. It’s still unclear if that was an inside job or a hacking incident.

Do you think FTX customers will be granted priority right to repayment over other creditors? Share your expectations in the comments section below.