Binance and CEO Changpeng Zhao Face Class-Action Lawsuit Over Alleged Market Manipulation Targeting FTX

On October 2, 2023, plaintiff Nir Lahav filed a class-action lawsuit in the District Court of Northern California against Binance Holdings Limited, BAM Trading Services Inc., BAM Management US Holdings Inc., and CEO Changpeng Zhao. The lawsuit accuses Binance and Zhao of unfair competition and violations of Security Exchange Commission (SEC) laws. The plaintiff alleges that Binance's actions were aimed at monopolizing the cryptocurrency trading platform market at the expense of competitor FTX.

The lawsuit is detailed, citing multiple instances of alleged misconduct. It claims that Binance intentionally acted to harm FTX by liquidating its holdings in FTX's utility token, FTT, and then misleading the public about it. The suit also accuses Binance of bait-and-switch tactics, stating that Zhao tweeted about Binance's intent to acquire FTX but retracted the statement a day later, causing market instability.

The Role of Social Media

Central to the lawsuit are tweets made by Zhao on November 6, 2022. In these tweets, Zhao announced the liquidation of Binance's holdings in FTT. According to the lawsuit, this tweet was misleading because Binance had already liquidated its FTT holdings the day before. The tweet allegedly led to a 14% decline in FTT's price within 24 hours, causing significant market disruption.

Zhao's subsequent tweet about Binance's intent to acquire FTX, only to retract it a day later, is also under scrutiny. The plaintiff claims that these actions were calculated to harm FTX and led to its "rushed and unprecedented collapse," affecting thousands of traders and investors.

SEC's Regulatory Framework

The lawsuit delves into the SEC's role in regulating cryptocurrency trading platforms. It argues that the SEC's broad definitions of securities are deliberately designed to capture new financial instruments, including cryptocurrencies. The suit cites the Howey Test, a legal standard used to determine what constitutes a security, as a basis for its allegations against Binance.

The plaintiff is seeking monetary damages, court costs, and disgorgement of ill-gotten gains. The lawsuit states that there are potentially thousands of class members affected by Binance's actions. Both Binance and FTX are currently subject to SEC actions, adding another layer of complexity to the case. If the allegations are proven, it could set a precedent for how cryptocurrency exchanges are regulated and could potentially reshape the competitive landscape of the industry.