Court bans FTX, Almeda from trading crypto, to pay $12.7 billion to customers

Defunct crypto exchange FTX and trading firm Alameda Research have been banned from trading digital assets and acting as intermediaries in the market. A New York District judge, Peter Castel, yesterday, also ordered both companies to pay $12.7 billion to creditors, thus ending a 20-month lawsuit from the Commodity Futures Trading Commission.

The judgement did not seek a civil monetary penalty but bans FTX and Alameda from trading digital assets and acting as intermediaries in the market. The CFTC settlement requires FTX to pay $8.7 billion in restitution and $4 billion in disgorgement to compensate victims for losses suffered during the exchange’s collapse.

The repayment order implements a settlement between the CFTC and the bankrupt crypto exchange. FTX has said that its customers will receive 100% recovery on their claims against the company, based on the value of their accounts when it filed for bankruptcy.

The agreement also creates a path for the sale of assets purchased with misappropriated customer funds, including real estate and investments in crypto and other tech companies.

Also, the CFTC agreement resolves a potential roadblock to that repayment by ensuring that the government’s lawsuit against FTX will not reduce the funds available to its customers. The CFTC agreed not to collect any payment from FTX until all its customers are repaid, with interest.

Recall that FTX filed for bankruptcy in late 2022 following an episode that led to the loss of billions of dollars in investor wealth. Subsequently, the CFTC filed a lawsuit against FTX and Alameda, claiming both committed fraud and misrepresentations by publicizing FTX as the digital commodity asset platform.

Consequently, Sam Bankman-Fried, who founded both companies, was sentenced to 25 years in prison and ordered to forfeit $11 billion in March for stealing $8 billion from customers. He was earlier convicted of seven counts of fraud, conspiracy, and money laundering.

Sam Bankman-Fried’s crimes each carry a maximum sentence of between five and 20 years in prison with the wire fraud, wire fraud conspiracy and money laundering conspiracy carrying a maximum 20-year sentence.

Currently, SBF is back in his federal prison cell in Brooklyn but will return to court for sentencing by New York District Judge Lewis Kaplan on March 28, 2024. Government prosecutors will recommend a sentence, but Judge Kaplan will have the final say.

If Bankman-Fried served the maximum sentences for his crimes back-to-back he would be in jail for 110 years. 

He has appealed the conviction.

The FTX showdown: Going forward

FTX is currently soliciting votes on its bankruptcy proposal but faces opposition from some customers who feel short-changed by the decision to repay them based on lower cryptocurrency prices from what they lost in November 2022.

FTX approached a U.S. court in June to stop outside litigation against company insiders and venture capital firms accused of playing a role in the bankrupt crypto exchange’s collapse, saying the lawsuits undermine FTX’s effort to repay customers.

Three of the largest cryptocurrencies held by FTX customers — Bitcoin, Ether and Solana — have substantially increased in price since FTX’s bankruptcy. The price of Bitcoin has risen to about $60,000 from its November 2022 price of $16,871.63, and Solana has risen to about $98 from $16.25. Ether has nearly doubled in price over the same period. For each cryptocurrency, FTX’s bankruptcy plan would pay customers a percentage of the November 2022 price.

Some FTX customers have also opposed the company’s decision to value its equity shares and its proprietary crypto token, FTT, at $0. FTX customers held over $700 million in FTT and FTX equity, which would be wiped out under the bankruptcy plan.

The votes are due on August 16 and FTX intends to seek final approval of its wind-down plan on October 7.

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