Swan Bitcoin Faces $1B Lawsuit Over Pre-Bankruptcy Transfers
Swan Bitcoin is facing a nearly $1 billion lawsuit filed by the post-bankruptcy litigation trust of Prime Trust, a crypto custodian that collapsed in 2023. The lawsuit, filed in Delaware bankruptcy court, accuses Swan of leveraging insider access to withdraw substantial assets ahead of Prime Trust's financial downfall. This case could set a significant precedent for how crypto firms handle custodial relationships during financial crises.
According to the complaint, Swan Bitcoin’s withdrawals included $24.6 million in cash, 11,994 Bitcoin (currently worth around $923 million based on Bitcoin's May 19 price of $76,892), 5 million USDT, and other digital assets. These transfers reportedly occurred just days before Prime Trust’s liquidity crisis became public and the company filed for Chapter 11 bankruptcy in August 2023.
Allegations of Insider Knowledge
The suit alleges that a senior executive at Prime Trust, who also served as a paid advisor to Swan Bitcoin since 2019, facilitated the withdrawals by providing advance notice of Prime Trust’s deteriorating financial position. Encrypted communications between this executive and Swan CEO Cory Klippsten allegedly began on May 22, 2023, just four days before Prime Trust met with Nevada regulators. Notably, these messages were set to auto-delete, a feature that was reportedly disabled after Swan’s significant asset withdrawals were completed.
On May 25, 2023, a day before the meeting with Nevada regulators, Swan expanded an earlier partial transfer into a full evacuation of assets from Prime Trust. The custodian’s staff reportedly scrambled to comply with the request, creating an internal account labeled "PT FBO Swan Customers" to suggest the funds were held in trust—a claim now disputed in court filings. The litigation trust argues Swan acted in bad faith, moving ahead of other customers to avoid losses as Prime Trust faced insolvency.
Prime Trust’s Collapse
Prime Trust’s downfall began in June 2023 when Nevada regulators identified a significant shortfall in the firm’s customer funds. The company owed over $85 million in fiat currency but held only $3 million in cash, along with a $69.5 million crypto asset liability backed by just $68.6 million in holdings. After a cease-and-desist order on June 21, 2023, and a failed acquisition by BitGo, Prime Trust entered receivership, eventually filing for bankruptcy in August 2023.
The lawsuit against Swan Bitcoin is part of Prime Trust’s broader effort to claw back assets transferred before its collapse. The litigation trust is pursuing claims under the Bankruptcy Code’s provisions on preferential and fraudulent transfers, aiming to recover funds for the benefit of creditors.
Market Implications
This case highlights the risks associated with centralized crypto custodians, particularly during periods of financial distress. Swan’s alleged actions, if proven, could raise questions about the ethics and legality of insider-driven transfers in the crypto industry. Additionally, the lawsuit underscores the importance of regulatory oversight for custodians, as crypto investors increasingly seek assurance that their funds are protected during crises.
Bitcoin’s price, which currently stands at $76,892, has shown remarkable stability despite such controversies. However, cases like this could influence investor sentiment toward custodial services and highlight the need for due diligence when selecting trusted platforms.
Swan has not yet commented on the allegations. The case is likely to attract significant attention as it unfolds, given the high stakes and potential implications for the broader crypto market.