(Law360) Former Binance CEO Changpeng Zhao asked a Delaware bankruptcy judge to dismiss him from a clawback suit filed by the estate of bankrupt crypto exchange FTX seeking to recover $1.76 billion it says FTX illegally transferred before its collapse two years ago, saying the transaction was outside the court’s jurisdiction.
Zhao, who served four months in prison last year after pleading guilty to a money-laundering-related charge, said in a motion Monday that the fraudulent transfer claims made in the complaint related to a share repurchase do not apply to the foreign transfer and “improperly demand the extension of bankruptcy law abroad.”
In the suit launched in November, the FTX estate said the company fraudulently transferred almost $2 billion in cryptocurrency to Binance in 2021 to repurchase shares that the rival exchange acquired starting in 2019. The FTX unit that funded the share repurchase was insolvent at the time of the deal and relied on FTX customer deposits to support it, furthering the fraud committed by FTX founder Sam Bankman-Fried, according to the complaint.
FTX and Bankman-Fried pursued the share repurchase deal while knowing the exchange lacked the money to fund it, according to the complaint. Caroline Ellison, the former CEO of FTX affiliate Alameda Research, testified that she told Bankman-Fried that Alameda would have to tap customer funds to complete the deal, and Bankman-Fried dismissed her concerns, FTX said.
But Zhao said Monday that the cryptocurrency was exchanged on global exchanges, and even if the bankruptcy code could be applied, the plaintiffs still could not bring a claim against him because they have not plausibly alleged he received the transfers.
“Plaintiffs do not allege that Mr. Zhao received or possessed dominion over the exchanged cryptocurrency,” the motion states. “Plaintiffs in fact show that Mr. Zhao was not a transferee. They allege he was merely a ‘nominal counterparty’ in the transfer of [Binance stablecoin] from Alameda LTD to Binance.”
The FTX estate alleged in the complaint that Zhao took actions and made false and misleading statements that were “maliciously calculated to destroy his rival FTX” following the share repurchase deal.
Zhao tweeted in November 2022 that Binance would liquidate its holdings of FTX token FTT in light of “recent revelations,” a deliberate attempt to destroy FTX and elevate Binance’s own market position, according to the complaint. His tweets and public statements were intended to sow doubt about FTX’s financial position and spark a wave of customer withdrawals, FTX said.
Zhao said on Monday, however, that his tweets did not contribute to the bank run.
“Even on plaintiffs’ own terms, the false statements do not support the injurious falsehood claim. … The ‘run on the bank’ would have followed all the same,” he said. “The complaint alleges that it was the fact of the publicizing of the liquidation that ‘trigger[ed]” the run on the bank.'”
Representatives of the parties did not immediately respond to requests for comment on Tuesday.
The FTX plaintiffs are represented by J. Christopher Shore, Brian D. Pfeiffer, Colin West, Ashley R. Chase and Brett L. Bakemeyer of White & Case LLP and Kevin Gross, Paul N. Heath, Brendan J. Schlauch and Robert C. Maddox of Richards Layton & Finger PA.
Zhao is represented by Teresa Goody Guillén, Katherine L. McKnight and Jeffrey J. Lyons of BakerHostetler.
The case is FTX Recovery Trust et al. v. Binance Holdings Ltd. et al., case number 1:24-ap-50222, in the U.S. Bankruptcy Court for the District of Delaware.