‘Wave’ of FTX Lawsuits Expected, With Investors Expected to Face Legal Challenges

A lawsuit filed by FTX account holders in the United States is likely to be the first of many over billions of dollars in losses on the cryptocurrency exchange.

Source: AP | Published on November 18, 2022

FTX Bankruptcy

A lawsuit filed by FTX account holders in the United States is likely to be the first of many over billions of dollars in losses on the cryptocurrency exchange, though the cases will face challenges such as proving that U.S. securities law applies to FTX’s products, according to experts.

The lawsuit, filed in federal court in Miami on Tuesday, alleges that FTX founder Sam Bankman-Fried, as well as celebrities such as NFL quarterback Tom Brady and basketball Hall of Famer Shaquille O’Neal, engaged in deceptive business practices by promoting unregistered securities.
While some courts have ruled that certain cryptocurrencies are securities under the law, the issue remains unresolved.

Cases against FTX, which is based in the Bahamas, will be complicated by the fact that U.S. securities laws generally apply only to domestic transactions, according to Yuliya Guseva, a professor at Rutgers Law School who directs the fintech and blockchain research program.

“It’s more complicated than your typical crypto exchange story,” she explained.

Bankman-Fried, O’Neal, and Brady representatives did not respond to requests for comment on the lawsuit.

FTX declared bankruptcy on November 11 and is being investigated by US authorities. According to Reuters, $10 billion in customer assets were transferred from FTX to Bankman-trading Fried’s firm Alameda Research, and more than $1 billion in customer funds are missing.

The lawsuit, filed on behalf of FTX yield-bearing account holders in the United States on Tuesday, claims the accounts were unregistered securities because they used investors’ pooled funds to engage in activities that generated the returns account holders received.

It is unclear whether US securities laws apply to interest-bearing crypto accounts such as those provided by FTX.

The Securities and Exchange Commission of the United States recently claimed that other yield-bearing accounts were unregistered securities. Similar allegations have been made in court against Voyager Digital Ltd and Celsius Network regarding their cryptocurrency accounts, but judges have yet to rule on those claims.

The lawsuit, which was filed on Tuesday, did not name FTX as a defendant, instead naming individuals.

Other investors are likely to file additional lawsuits as the details of FTX’s demise become public.

Guseva stated that a “wave” of litigation is the “expected result of such a large debacle.”
In bankruptcy filings on Thursday, FTX’s new CEO, John J. Ray III, stated that the company’s situation was “unprecedented” and involved a “complete failure of corporate controls.”

Cases against FTX and related companies will be halted during the bankruptcy proceedings, but cases against individuals who have not filed for bankruptcy may proceed, according to Guseva.

Several law firms have indicated that they are considering filing claims on behalf of investors in the FTX Token, or FTT, a cryptocurrency linked to the exchange whose value has fallen from around $25 per token to less than $2 in the aftermath of the FTX liquidity crisis.

New lawsuits may also be filed against celebrities who promote FTX crypto products.

According to the complaint filed on Tuesday, such promoters violated Florida consumer protection laws by failing to disclose how much they were paid to endorse the company.

Investors have filed similar claims against Kim Kardashian for her promotion of EthereumMax tokens. A judge has yet to rule on whether the case can proceed.
Kardashian has argued that the lawsuit should be dismissed because compensation details would have been irrelevant to token investors.

The SEC settled similar claims against her earlier this year for $1.26 million without admitting wrongdoing.

Future investor lawsuits arising from the FTX meltdown are likely to allege claims in addition to securities registration and consumer protection violations, according to plaintiffs’ attorneys.

According to Sean Masson, an attorney at law firm Scott+Scott who represents investors in the Kardashian case, Bankman-activities Fried’s at Alameda may give rise to potential market manipulation claims.

Masson did not provide any details. A trader or company attempting to secretly move or maintain the market price of a security or commodity is referred to as market manipulation.

“We believe that what has been revealed thus far is only scratching the surface of what truly occurred,” he said.

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