FTX takes legal action over alleged use of ‘hush money’ to conceal wrongdoing

FTX has filed a lawsuit claiming that a former executive engaged in unethical practices using “hush money” to silence employees who could expose potential wrongdoing.

According to the complaint, the former compliance officer allegedly offered whistleblowers bribes to prevent them from disclosing what FTX called the exchange’s “true fraudulent nature.”

The legal action targets Daniel Friedberg, the chief regulatory officer and compliance officer for FTX and its U.S. division. Friedberg also served as the general counsel for Alameda Research.

FTX alleges that Friedberg acted as a “fixer” for the family of Sam Bankman-Fried, one of the exchange’s co-founders. Bankman-Fried’s father, Joe Bankman, advocated for Friedberg to be placed in a prominent position and requested that he be informed about company affairs.

According to the lawsuit, two potential whistleblowers claimed that Friedberg paid them “hush money” to remain silent about “regulatory issues” and the alleged close relationships between FTX and Alameda.

The complaint further accuses Friedberg of hiring the lawyer of one of the whistleblowers and subsequently making payments to ensure their silence.

In a comprehensive declaration, FTX outlined 11 civil complaints, including allegations of fraudulent transfers and loans to former FTX executives and breaches of legal obligations by Friedberg.

The complaint asserts that Friedberg received a significant compensation package during his 22-month tenure at FTX, including a $300,000 salary, a $1.4 million signing bonus, a $3 million cash incentive, an 8% stock in FTX US, and cryptocurrency holdings worth tens of millions. FTX is now seeking to recover these amounts.

Certain sensitive information, such as the sums received by the whistleblowers, was redacted in the complaint to protect confidentiality. However, it is revealed that Friedberg settled in March 2022 with one of the whistleblowers, “Whistleblower-1,” who had worked for FTX US for less than two months on a $200,000 salary.

Following the settlement, FTX claims that the whistleblower’s attorney was retained for $12 million at FTX’s behest.

More on FTX’s legal woes

In a separate incident, an attorney from Alameda Research, identified as “Whistleblower-2,” alleges that Friedberg terminated their employment due to concerns about governance and regulatory issues within the company. FTX states that despite the employee’s brief tenure of less than three months, they were still provided a severance payout.

Recently, John Ray III, FTX’s restructuring head, issued a report implicating a senior attorney in facilitating and concealing the commingling of customer funds. Sources familiar with the matter cited by The Wall Street Journal identified the anonymous lawyer as Daniel Friedberg. The U.S. Attorney’s office also referenced Friedberg as a source of information.

Furthermore, Friedberg reportedly submitted data that may challenge key defenses presented by several defendants in a class-action lawsuit involving celebrities accused of promoting FTX. However, Friedberg could not be reached for immediate comment regarding these allegations.