The post-bankruptcy trust representing Prime Trust’s creditors has targeted Swan Bitcoin as a legal target, filing a lawsuit in Delaware Bankruptcy Court alleging that Bitcoin’s custodian used insider access to move about $1 billion of Prime Trust’s assets ahead of its August 2023 collapse.
The complaint filed by the Prime Trust Litigation Trust alleges that Electric Solidus, the company behind Swan Bitcoin, received more than $24.6 million in cash, 11,994 BTC (worth approximately $923 million at the time of filing), approximately $5 million in USDT, and small amounts of other digital assets before Prime Trust filed for bankruptcy. At the center of the allegations is a senior Prime Trust executive who, while employed at Prime, also acted as a paid advisor to Swann on the side since July 2019.
Four days before Prime Trust was scheduled to meet with Nevada regulators on May 26, 2023, the executive reportedly opened an encrypted chat with Swan CEO Cory Klippsten and set messages to automatically delete every 24 hours. The feature was reportedly turned off when Swan withdrew more than 10,000 BTC from Prime Trust the day after the regulatory meeting.
The lawsuit is part of a broader effort to recover assets transferred from trustees following Prime Trust’s bankruptcy in the weeks before the lawsuit trust collapsed. The filing alleges that Swan utilized insider access to move assets ahead of Prime Trust’s deteriorating financial condition, effectively prioritizing its own holdings over other clients.
“Swan knew to transfer fiat and cryptocurrency from Prime shortly before Prime filed for bankruptcy in order to avoid catastrophic losses,” the complaint states.
Cointelegraph reached out to Swann for comment but did not receive an immediate response.
relevant: A House committee urged Trump to fill the CFTC seat as cryptocurrency regulation tightens.
Key Takeaways
- Prime Trust Litigation The trust accuses Swan Bitcoin of using insider access to drain Prime Trust’s assets ahead of its bankruptcy.
- The assets allegedly moved include 11,994 BTC (about $923 million at the time of filing), cash and USDT, for a total value mentioned in the complaint of about $1 billion.
- An unnamed Prime Trust executive with ties to Swan reportedly orchestrated the pre-bankruptcy transfers, which included encrypted chats that automatically deleted messages for a period of time.
- The filing alleges that an internal ledger titled “PT FBO Swan Customers,” created just before a meeting of Nevada regulators, was designed to obscure that Swan’s funds were not actually held in a separate trust for Swan customers.
- The lawsuit seeks to recover assets under the bankruptcy code’s preferential transfer and fraudulent transfer provisions and seeks to disallow future claims until restitution is made.
Insider usage and timing of asset movements
The key accusations centered on Prime Trust executives who simultaneously acted as paid advisors to Swan, creating a potential conflict of interest as Prime Trust’s financial health weakened. The filing describes a sequence in which transfers were sped up over encrypted channels under Swan’s leadership just days before the restrictions took effect in Nevada. The purpose, according to the complaint, was to quickly reallocate assets to avoid losses as the Prime Trust faced mounting pressure.
These transfers culminated in a notable withdrawal of over 10,000 BTC shortly after the Nevada meeting, which the lawsuit characterizes as part of a broader evacuation of customer assets. Slack communications cited in the filing show Prime Trust staff struggling to follow requests or instructions on deadlines, highlighting the chaotic circumstances under which the move occurred.
Debate over internal ledgers and asset storage
At the core of the suspicion is the allegation that Prime Trust created an internal ledger called ‘PT FBO Swan Customers’, a record that did not exist before May 25th. The lawsuit alleges that this ledger creates the appearance that Swan’s assets are held in separate customer-specific trusts, complicating recovery efforts in the event of a future bankruptcy. Essentially, the complaint states that these assets were not actually held in trust for Swan’s clients and suggests an attempt to mislead creditors and regulators about the custody of the assets during a period of Prime Trust’s financial stress.
What the event seeks and its potential impact
Prime Trust Trust seeks relief under the preferential transfer and actual fraudulent transfer provisions of the Bankruptcy Code. The plaintiffs also request a court order barring any future claims Swan may have against the property until restitution is made. If successful, this move could set a precedent for how transfers involving cryptocurrency custodians are handled in the event of bankruptcy, with potential ramifications for other platforms that rely on custodian contracts in distress.
The case also highlights broader questions about governance, insider relationships, and the potential for rapid asset movement in cryptocurrency custody environments. As regulators increasingly scrutinize custody practices and the paths assets may take during financial stress, the outcome of this litigation could impact risk management standards and disclosure requirements across the sector.
closing perspective
As the case unfolds, observers will watch to see how the court addresses the credibility and scope of the transfers alleged in the lawsuit and whether compensation for Prime Trust creditors can be secured. This episode highlights the ongoing tension between rapidly evolving cryptocurrency custody models and traditional bankruptcy frameworks, and raises questions about best practices for protecting customer funds when custodians approach bankruptcy.