Cryptocurrency trading platform FTX used a Bahamas-based lender, Deltec Bank & Trust Ltd., to secretly create and sell Tether (USDT) stablecoins as part of a profit-making scam, according to a new lawsuit reported by Bloomberg.
Alameda Research, FTX’s sister firm, was also named in the lawsuit, which was filed Friday, in a Florida court.
Caroline Ellison, former CEO of Alameda Research, was quoted in the filing explaining how the scheme worked.
Alameda created Tether, or USDT, on credit through the unofficial Deltec Line of Credit.
The firm, under the direction of then-FTX CEO Sam Bankman-Fried, then sold that USDT for a profit — all before having to fund the purchase by depositing U.S. dollars in Tether’s Deltec account.
The lawsuit also asserts that Deltec aided Bankman-Fried in misappropriating customer funds by facilitating transfers between accounts for FTX and Alameda Research.
Lawyers for victims of Bankman-Fried’s filed the complaint on Friday, Feb. 16, in a Florida federal court.
Venable LLP, the law firm representing Deltec, maintains that the bank was not aware of any wrongdoing on FTX’s part.
Tether, the issuer of USDT, grew as a result of the ploy but was not named as a defendant in this case.
Lawyers for victims of Bankman-Fried’s fraud worked with Ellison, Bankman-Fried’s ex, who turned over 7,000 pages of Telegram chats as evidence.
After FTX’s collapse
When FTX went bankrupt, it released a statement affirming that the collapse posed no risk to Tether, as Alameda Research always paid for its tokens with U.S. dollars.
But the Friday lawsuit alleges that Deltec received deposits from FTX’s customers and, despite knowing that these funds belonged to customers, improperly transferred them to Alameda.
Deltec purportedly granted Alameda exemptions from certain regulations and, during the cryptocurrency market crash in 2022, gave priority to Alameda’s withdrawals over those of other customers.
A subsequent investigation into FTX’s practices led to the conviction of its 31-year-old founder, Bankman-Fried, on seven counts of fraud and conspiracy. His sentencing is scheduled for next month.
Sam Bankman-Fried’s legal woes
Bankman-Fried is embroiled in several legal disputes, including a $1 billion lawsuit filed by FTX against him and three other former executives.
FTX has also initiated lawsuits against Binance, the world’s largest cryptocurrency exchange, alleging breaches of contractual obligations and unfair competition.
Furthermore, the SEC and CFTC have filed lawsuits against Bankman-Fried and Alameda Research, accusing them of fraudulent and manipulative practices in commodity interest offerings.
In December, a federal judge rejected the plea to prolong the sentencing process of Bankman-Fried and postpone a pre-sentencing interview with the U.S. Probation and Pretrial Services System.
Despite his attorneys’ request for an extension, citing a potential second trial on additional charges scheduled for March 11, the judge denied the motion. The judge underscored that the defense had not raised objections when his hearing, slated for March 28, was initially set.
Additionally, the judge indicated that if the Department of Justice opts for a second trial, it could potentially delay the sentencing proceedings. These legal proceedings carry significant implications for the cryptocurrency industry, as regulatory authorities aim to establish clear regulatory frameworks.