FTX Sues Former CCO

FTX Corp., the now-bankrupt cryptocurrency platform that swindled billions from its customers, has filed a lawsuit against its former chief compliance officer, claiming that he acted as a “fixer” for FTX’s former management, paid off whistleblowers to keep quiet, and reaped millions in unwarranted compensation as he turned a blind eye to FTX’s many problems. 

The lawsuit was filed by FTX’s new management team in federal bankruptcy court on Tuesday. The 40-page document paints a blistering picture of Daniel Friedberg, who served as FTX’s chief compliance officer from January 2020 until its implosion in November 2022. Prior to joining FTX full-time, Friedberg advised the company as far back as 2017 while he was a lawyer at law firm Fenwick & West. 

The accusations against FTX itself, and its former CEO Sam Bankman-Fried, who is under criminal indictment, are both extensive and astonishing. Federal prosecutors say Bankman-Fried essentially treated FTX and its customer assets as his personal plaything, and that FTX had no internal controls whatsoever: no control over cash, no reliable financial reporting, no personnel oversight, no books and records. 

Current FTX management is still trying to trace what happened to roughly $8 billion in customer assets that had vanished by the time FTX went belly up. At least some of that money is believed to have propped up Alameda Research, a hedge fund that Bankman-Fried had co-founded so he could dabble in cryptocurrency trading. Other money was probably just stolen.

Friedberg reportedly flipped on FTX pretty much as soon as he resigned from the firm last November. He has not been criminally charged in the case, which is more than we can say for numerous former FTX and Alameda executives. But current FTX management still needs to recoup as much money as it can so it can make aggrieved FTX customers whole — which brings us back to the lawsuit filed against Friedberg the other day. 

A Long List of Accusations

So what are the specific allegations against Friedberg? Sit down and take a deep breath…

First, the lawsuit says, Friedberg received millions in compensation, far out of proportion to any “services” (the complaint even used air-quotes around the word services) that he provided to FTX. For example, Friedberg had an annual salary of $300,000, plus a signing bonus of $1.4 million when he joined the firm in 2020. He also received an 8 percent equity stake in FTX (at the time, the company was worth roughly $30 billion), and in July 2020 received a grant of cryptocurrency tokens known as Serum that was worth $33 million. Today those holdings are worth only about $12 million. Friedberg also received another cash bonus in 2021 of $3 million.

Second, the lawsuit says Friedberg paid off whistleblowers who had tried to raise alarms about FTX’s misdeeds. In one case, a whistleblower filed a lawsuit in 2019 accusing FTX of running a crypto pump-and-dump scheme. Friedberg supposedly arranged for FTX to pay off that whistleblower (we don’t know how much; that part of the suit is redacted) and then gave the whistleblower’s lawyer a $3.3 million retainer, even though lawyer “provided no actual legal services to the FTX Group after signing the engagement letter.” 

In a second case, Friedberg allegedly met with another whistleblower who had begun asking questions about FTX mixing customer funds with Alameda Research. Rather than investigate the complaint, the lawsuit says, Friedberg fired the person and sent him away with a fat severance package. 

Third, the suit accuses Friedberg of setting up shell companies to help FTX conduct financial transactions without attracting the extensive due diligence that most banks would require. For example, in 2019 he directed two lawyers at Fenwick & West to create a shell company called North Dimension Inc., which purported to be a seller of electronic goods. The shell was actually a subsidiary of FTX and Alameda Research.

And fourth are more generic allegations that as FTX’s chief compliance officer and Alameda’s general counsel, Friedberg should have been busy implementing the usual suits of corporate governance procedures and internal controls — none of which were found to exist when current FTX management arrived last November.

“Instead of fulfilling his duties,” the lawsuit says, “Friedberg actively participated in the misconduct, aiding others’ misconduct, and placing the interests of himself and the other FTX Insiders ahead of the plaintiffs’ interests.”

Even More Backstory

Friedberg’s lawyers have not yet commented on this lawsuit against him. He apparently lives in Seattle and it isn’t clear what he’s doing these days other than laying low and cooperating with the feds. 

That said, this is not Friedberg’s first brush with corporate misconduct! Back in the 2000s he was involved with an online poker outfit called Ultimate Bet, where he and other executives at that company were caught manipulating its software code to view players’ cards and cheat them out of roughly $50 million. Friedberg was one of several executives secretly recorded talking about the scam. Eventually gambling authorities in Canada sanctioned the company and ordered it to refund the players’ money. Friedberg himself was never charged in connection with that scandal.