The US government is launching a contentious, multi-jurisdictional legal battle to own hundreds of millions of dollars worth of assets linked to the collapse of Sam Bankman-Fried’s crypto empire.
The Justice Department said on Wednesday that it has seized millions of shares of the popular stock trading app Robinhood, whose ownership is disputed by several parties, including Bankman-Fried himself, bankrupt cryptocurrency exchange FTX and another bankrupt crypto company.
“We believe that these assets are not property of the bankruptcy estate or that they fall within the exemptions of the bankruptcy code,” Justice Department attorney Seth Shapiro said during a bankruptcy hearing in Delaware on Tuesday.
Four separate entities claimed about 56 million shares worth about $460 million. Seeking to recover funds for investors and clients of the bankrupt platform, the new management of FTX tried to take control of the shares of the Antigua-based holding company, which is 90% owned by Bankman-Fried.
In May 2022, months before his company collapsed and was accused of defrauding its customers and investors, Bankman-Fried acquired a roughly 8% stake in Robinhood through a holding company he formed with FTX co-founder Gary Wang. That company, Emergent Fidelity Technologies, borrowed more than $546 million from cryptocurrency hedge fund Alameda Research, according to Bankman-Fried’s filing in December.
According to the FTX, Bankman-Fried is claiming ownership of the shares, seeking a source to cover legal costs. They also claim that Robinhood shares bankrupt cryptocurrency BlockFi and private lender FTX.
According to competing claims, FTX filed a motion in Delaware bankruptcy court earlier this month to freeze assets until the court “can resolve matters fairly for all of the debtor’s creditors.”
At Wednesday’s hearing, FTX attorney James Bromley said that “while we certainly believe we have rights to these assets, we are now in agreement with the US government and law enforcement in taking these steps.”
Robinhood declined to comment Thursday. Vlad Tenev, the company’s CEO, told CNBC last month that he was “not surprised” that the stake was one of the more valuable assets on FTX’s books because it is a public company’s stock.
“We don’t have much information that you don’t have,” Tenev told CNBC. “We’re just watching it happen and … it’s likely going to be locked in the bankruptcy process for a while.”
The collapse of FTX caused panic in the digital asset ecosystem, prompting some firms to stop withdrawing and in some cases declare bankruptcy themselves.
More evidence of contagion emerged Thursday when Silvergate Capital, a cryptocurrency-focused bank, said total deposits from its digital asset clients fell 68% to just $3.5 billion in the final quarter of 2022. As of Dec. 31, about $150 million of Silvergate was from customers who filed for bankruptcy.
Shares in Silvergate were down nearly 40% on Thursday morning. The bank said it would lay off 40% of its employees, or about 200 people.
“During the fourth quarter, in response to the rapid changes in the digital assets industry, we took commensurate steps to ensure that we maintain cash liquidity to support potential deposit flows,” CEO Alan Lane said on Thursday’s earnings call.
Lane said the bank sold $5.2 billion in debt securities, resulting in a $718 million loss for the quarter.
US prosecutors accuse Bankman-Fried of stealing client funds from FTX to cover losses at Alameda, as well as to invest in other companies, subsidize a luxury lifestyle and make large campaign donations to Democrats and Republicans across the US.
He pleaded not guilty Tuesday to eight federal wire fraud and conspiracy charges and is being held under house arrest at his parents’ home in Palo Alto, California.
Two of his former partners emerged as star witnesses for the prosecution. Both pleaded guilty to wire fraud, in direct contradiction to Bankman-Fried, and are cooperating with prosecutors in the Southern District of New York.