Key Insights
FTX filed a clawback lawsuit against Binance seeking $1.76 billion.
As per FTX, Binance sold FTX shares to FTX via a buyback, which was not legal.
The now-jailed former CEO Sam Bankman-Fried executed the buyback when the exchange was already bankrupt.
In what seems to be a desperate attempt to pay its creditors, FTX has now sued Binance for over $1.8 billion via the clawback mechanism, a method used to enforce recovery of funds due to contract breach or fraud discovered after the payment has been made.
The clawback mechanism (in this case) is a fully legal way of recovering money from customers, creditors, and other transactional parties based on preset conditions.
In this case, FTX is trying to recover money from Binance by claiming that the share buyback of FTX (done by Sam Bankman-Fried), which was executed in May 2021 (worth around $1.75 billion), was done using FTX tokens claiming that Sam Bankman-Fried acted with the wrong intent.
FTX lawyers now claim that both FTX and Alameda were bankrupt from the beginning and were certainly so during this buyback periodHence, they could not issue a buyback; if they did, their actions were fraudulent.
Currently, Sam Bankman-Fried and Caroline Ellison (Alameda) are serving 25-year and 2-year prison sentences, respectively.
Further, FTX also accused Binance of fraudulent tweets before the exchange collapsed. In the first week of November 2022, Binance dumped FTX Token into the markets, which could have accelerated the exchange's collapse.
Law firm Morris James and a few others predicted this case in 2023, estimating it to be a $4 billion case.
Currently, there seems to be little relief for the defunct exchange, as the courts might listen to this issue around May 2025. Until then, there will hardly be any notable development here.
The clawback mechanism is a legal process for recovering money already paid based on a false promise, non-fulfillment of contract terms, fraud, or any purposefully hidden fact that could jeopardize the payment.
This law is backed by the Sarbanes Oxley Act of 2002 in the United States.
Based on the readings of the case documents and all the publicly available information, we conclude that in the current case, FTX seeks to apply this law on the pretext that Binance and Sam Bankman-Fried colluded to a share buyback, both knowing that the exchange was, in some form, bankrupt. This is the basis for FTX filing this lawsuit.
Legally, this claim sits on very shaky ground, i.e., on the ability to prove that Binance had some actionable insider knowledge of FTX's bankruptcy in May 2022.
There is a substantial reason FTX may never be able to prove this: In November, Binance reportedly talked with Sam Bankman-Fried to lift FTX from its dire financial conditions.
However, Binance held FTT tokens until 3 days before the exchange filed bankruptcy. This means that Binance had no knowledge of FTX's situation. CZ claimed that their exit from the FTT token was because they doubted "something wrong."
Binance holding FTT token from May till November, even though knowing that this exchange was already bankrupt, seems far too stretched to be true.
Even if the share buyback was done when FTX was "supposedly" insolvent, there is a very low chance that Binance and Changpeng Zhao knew about this. The proof of this statement lies in CZ's tweets during the days leading to the FTX bankruptcy.
Experts argue that FTX creditors and bankruptcy courts, which officially control FTX now, might be going too far in recovering funds from impossible sources.
If the above statement is true, then FTX has already exhausted all its methods of salvaging company assets. After paying $12.7 billion to its customers (claims below $50k), it might be unable to pay large creditors and authorities, some of whose claims run in millions.
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