FTX Recovery Trust has taken legal action against Genesis Digital Assets, a Bitcoin mining company, in an attempt to recover $1.15 billion in allegedly fraudulent transfers. The lawsuit, filed in the US Bankruptcy Court for the District of Delaware, targets Genesis Digital, its affiliates, and co-founders Rashit Makhat and Marco Krohn.
The trust alleges that Sam Bankman-Fried, co-founder of the collapsed FTX exchange, fraudulently transferred funds through commingled and misappropriated assets from the FTX business, with a significant portion of the money originating from customer deposits at the FTX.com exchange. This lawsuit is part of the ongoing efforts to recover funds for creditors following the exchange’s collapse in 2022.
The complaint highlights Bankman-Fried’s use of his personal hedge fund, Alameda Research, to invest in Genesis Digital at inflated prices between August 2021 and April 2022, despite the insolvency of the broader FTX business. The trust claims that Alameda received far less value than what was reasonable for its investment.
Genesis Digital, a Bitcoin mining firm based in Kazakhstan, faced challenges throughout 2021 due to China’s crackdown on Bitcoin mining, which prompted miners to relocate to Kazakhstan and strain the country’s electric grid. The lawsuit points out warning signs that preceded Bankman-Fried’s investment, including Kazakhstan’s energy crisis, lack of interest from major investors, unaudited financial records, and reports linking Genesis Digital to illicit activities.
Despite these red flags, Bankman-Fried proceeded with the investment, leading to a dramatic increase in Genesis Digital’s valuation from $3.25 billion in July 2021 to between $8.3 billion and $12.2 billion by November of the same year. One board member described this valuation surge as “insane and off-market.”
Bankman-Fried’s visit to Kazakhstan in December 2021 to meet with President Kassym-Jomart Tokayev failed to address the regulatory and energy challenges facing the crypto mining industry. The investment allowed Genesis Digital founders Makhat and Krohn to sell nearly $551 million of their personal shares to Alameda Research, enabling them to profit from a failing company.
The lawsuit characterizes Genesis Digital as one of Bankman-Fried’s reckless investments involving commingled and misappropriated funds. This legal action underscores the complexities and risks involved in the cryptocurrency industry and the importance of due diligence and transparency in investment decisions.