FTX Bahamas subsidiary branded a ‘front’ for fraudulent transfers in court filings

FTX Bahamas subsidiary branded a ‘front’ for fraudulent transfers in court filings
FTX logo is seen in this illustration taken, November 8, 2022. REUTERS/Dado Ruvic/Illustration

NASSAU, BAHAMAS — Lawyers for FTX have filed a complaint in a US bankruptcy court claiming that the company’s Bahamian subsidiary FTX Digital Markets is a legal and economic ‘nullity,’ which had been merely created as a ‘front’ to facilitate fraudulent transfers.

In the complaint filed against FTX Digital Markets and its joint provisional liquidators Brian Simms, Kevin Cambridge and Peter Greaves on Sunday, lawyers for FTX claim that the action was in response to serial threats by the JPLs to attempt to relocate the bankruptcy case to The Bahamas. 

FTX Digital Markets (FTX DM), was placed into liquidation by the Bahamas courts on November 10th, 2022 by the Securities Commission while the wider corporate group filed for bankruptcy in Delaware the following day igniting a jurisdictional battle.

FTX’s lawyers in the recent court filings contend that FTX Digital Markets was nothing more than a short-lived provider of limited “match-making” services for customer-to-customer transactions, on the cryptocurrency exchange built, owned, and operated by FTX Trading, its immediate corporate parent. Over 90 percent of customers who used the FTX.com exchange were customers before FTX DM even became operational in May 2022.

FTX also contended that its Bahamas-domiciled subsidiary has never earned a dollar of third-party revenue. 

“FTX DM was an economic nullity within the FTX Group. FTX DM was a legal nullity as well,” FTX lawyers claim in court filings.

“The peculiar history of FTX DM is a classic example of abuse of the corporate form. It was created as a front to facilitate a conspiracy to defraud the Debtors’ customers—a conspiracy to which three individuals have already pled guilty and for which a fourth, Mr. Bankman-Fried, is under indictment—rendering any and all transactions related to FTX DM avoidable. FTX DM was part of the mature phase of that conspiracy.

“It was formed and functioned as an offshore haven for a continuous fraudulent scheme, as well as a conduit through which the fruits of that fraudulent scheme could be channeled to insiders and third parties outside of the reach of any independent and effective regulatory authority,” FTX lawyers claim in court filings. 

According to court filings, FTX’s lawyers assert that the joint provisional liquidators inherited a “corporate shell” which FTX founder Sam Bankman-Fried and his co-conspirators built to “harbor their fraudulent enterprise in The Bahamas” and now use it to continue the jurisdictional battle.”

Sam Bankman-Fried

“In doing so, they continue to cast confusion over the true ownership of the Debtors’ property and waste the Debtors’ assets in the process. Most recently, the JPLs have insisted on filing in The Bahamas an application that seeks “binding directions and declarations” from a Bahamian court that the FTX Debtors and their global stakeholders do not own core assets—in advance of this Court deciding the same issues.”

According to the court filings, after founding FTX DM, Bankman-Fried (and/or others acting at his direction) transferred approximately $143 million of fiat currency belonging to FTX Trading and Alameda into accounts in FTX DM’s name at Farmington State Bank, once known as Moonstone Bank and Silvergate Bank. 

“Mr Bankman-Fried and those acting on his behalf obtained no reasonably equivalent value for FTX Trading or Alameda in exchange for these transfers. And the transfer of such a significant sum to a shell entity was not within the ordinary course of business for FTX Trading or Alameda. The true purpose of the transfers were to defraud creditors of FTX or Alameda and to benefit insiders, including the co-conspirators themselves,” court filings stated.