FTX Recovery Trust sued Bitcoin mining company Genesis Digital Assets, seeking to recover $1.15 billion in allegedly fraudulent transfers made by the co-founder of the fallen exchange, Sam Bankman-Fried.
As Bloomberg Law reported on Sept. 23, the trust filed the lawsuit on Sept. 22 in the US Bankruptcy Court for the District of Delaware. It targets Genesis Digital, its affiliates, and co-founders Rashit Makhat and Marco Krohn.
The trust claimed that Bankman-Fried fraudulently transferred funds through commingled and misappropriated assets from the FTX business, with most of the money coming from customer deposits at the FTX.com exchange.
The lawsuit represents part of ongoing efforts to recover funds for creditors after the exchange’s historic 2022 collapse.
According to the complaint, Bankman-Fried used his personal hedge fund, Alameda Research, to invest in Genesis Digital at “outrageously inflated prices” between August 2021 and April 2022 while the broader FTX business was insolvent.
Alameda received much less than reasonably equivalent value for its investment, the trust alleges.
Kazakhstan operations and warning signs
Genesis Digital operated as a Bitcoin mining firm based in Kazakhstan, benefiting from political connections to former president Nursultan Nazarbayev and access to inexpensive energy.
The company faced mounting challenges throughout 2021 as China’s crackdown on Bitcoin mining drove miners to Kazakhstan, straining the country’s electric grid.
The lawsuit alleged that multiple warning signs preceded Bankman-Fried’s investment, including Kazakhstan’s energy crisis, lack of interest from other major investors, unaudited financial records, and reports linking Genesis Digital to money laundering and tax evasion.
Additionally, the filing stated that Bankman-Fried ignored these red flags while proceeding with the investment. Genesis Digital’s valuation increased dramatically from $3.25 billion in July 2021 to between $8.3 billion and $12.2 billion by November of the same year.
According to the filing, one board member described the valuation surge as “insane and off-market. ”
Bankman-Fried traveled to Kazakhstan in December 2021 to meet President Kassym-Jomart Tokayev in an attempt to address concerns about crypto mining operations. The diplomatic effort failed to resolve the industry’s mounting regulatory and energy challenges.
The investment allowed Genesis Digital founders Makhat and Krohn to sell nearly $551 million of their personal shares directly to Alameda Research, enabling them to “cash out of a failing company,” according to the complaint.
The lawsuit characterized Genesis Digital as “one of Bankman-Fried’s most reckless investments with commingled and misappropriated funds.”