Was There a Lawsuit Against FTX?
Yes. Lawsuits were filed against FTX, its executives, and other individuals responsible for the reckless mismanagement at the company, where billions of customer funds were funneled into its sister hedge fund, Alameda Research. Risky investments made through Alameda resulted in massive losses for investors.
FTX class action complaints alleged that the fraudulent use of client funds directly contributed to the liquidity crisis in November 2022. This ultimately led FTX to file for bankruptcy and freeze customer access to billions of dollars in assets that were supposed to be safely held in trust.
As a result of these actions, FTX crypto lawsuits sought to recover portions of investments that were lost or significantly diminished in value, totaling billions in financial harm.
Who was the FTX Crypto Lawsuit Against?
FTX crypto lawsuits were brought against multiple defendants, including FTX Trading Ltd., founder Sam Bankman-Fried, and various professional athletes and celebrities who endorsed or promoted the platform. The claims were filed by individuals who invested in cryptocurrency through FTX and suffered losses of $10,000 or more.
In addition to FTX, legal actions also examined potential liability involving other cryptocurrency platforms affected by the collapse, such as Gemini, BlockFi, Voyager, and Celsius.
Why Did FTX Collapse?
FTX collapsed due to a liquidity crisis, which occurred when the company lacked sufficient cash to meet its financial obligations. The crisis was triggered in November 2022, when a sudden surge in customer withdrawal requests exposed an $8 billion gap that FTX was unable to cover.
FTX’s origins trace back to 2017, when investor and entrepreneur Samuel Bankman-Fried founded Alameda Research, a cryptocurrency trading firm that profited by arbitraging crypto assets between platforms. In 2019, Bankman-Fried, along with Gary Wang and Nishad Singh, launched the FTX crypto exchange, allowing users to buy, sell, and trade digital currencies.
As part of its operations, FTX created its own digital token, FTT, which was promoted as a way to reduce trading fees and unlock platform benefits. However, in November 2022, the crypto news outlet CoinDesk published an investigative report revealing that a substantial portion of FTT tokens were held by Alameda Research, not widely distributed as previously believed. As of mid-2022, Alameda reportedly held $5.8 billion in FTT out of a total $14 billion in claimed assets.
The report highlighted that FTX had not disclosed the full extent of its financial ties with Alameda Research, despite both companies being under the control of Bankman-Fried. This revelation raised major concerns about the integrity of FTX’s balance sheet.
Shortly after the CoinDesk article was published, Binance announced it would liquidate $2.1 billion worth of FTT tokens, sparking panic and triggering a wave of investor withdrawals. Approximately $6 billion was pulled from FTX within 72 hours.
The company ultimately collapsed because it did not have the liquidity to honor these withdrawal requests, having diverted significant amounts of customer funds to Alameda Research for undisclosed investment activity.
FTX Misused Customer Funds For Alameda Research Investments
As the liquidity crisis unfolded, it was revealed that FTX lacked the cash to pay investor withdrawal requests because it had been transferring billions of dollars worth of client funds paid for FTT tokens into its sister company Alameda Research.
Put simply, FTX executives were promoting and selling their proprietary token as a physical asset to customers, while giving Alameda Research access to use customer funds to make risky bets on volatile cryptocurrencies, cover losses during a cryptocurrency bear market and finance the lavish lifestyles of FTX executives.
Lawsuits claim FTX executives used customer funds to purchase more than 35 properties in the Bahamas for more than $250 million, including luxury condos and vacation homes for management, and land for a future corporate headquarters.
According to allegations that were raised in cryptocurrency investor lawsuits, FTX executives exploited the lack of corporate controls under current regulation of the cryptocurrency industry, and made many of these transfers from FTX to Alameda “off the books,” without any accounting record or notice to customers.
Bankman-Fried and other FTX executives were able to maintain the financial relationship between FTX and Alameda Research as long as there weren’t too many cash withdrawal requests from FTX investors. However, when reports of the company’s financial issues went public, many investors demanded a lot of money at once. Neither FTX nor Alameda had enough cash on hand to fulfill those requests, which spiraled the companies into bankruptcy.
FTX Operated a Modern-Day Ponzi Scheme
Within weeks of FTX’s collapse, former investors began filing lawsuits accusing FTX of engaging in a Ponzi scheme.
Ponzi scheme: A Ponzi scheme is a type of investment fraud that pays profits to existing investors with funds from newer investors. Ponzi schemes typically lure investors with promises of quick, high-dollar returns and little financial risk. Ponzi scheme profits are not legitimate, because they are generated from new investor funds, not actual business dealings. In many Ponzi schemes, investor funds are also illegally funneled to the business owner for their personal use.
In the case of FTX, lawsuits claimed that the company’s founders knowingly operated it as a Ponzi scheme because they misrepresented its stability to investors. The lawsuits also alleged that FTX engaged in Ponzi activities because the founders illegally funneled customer funds into its sister company Alameda Research instead of legitimately investing them on the open market.
FTX Bankruptcy Filing
After FTX was unable to fulfill its customers’ withdrawal demands, Binance tentatively agreed to buy FTX for an undisclosed price, which may have prevented the FTX collapse and bankruptcy. However, Binance canceled all intentions of purchasing FTX within 24-hours of discussions, indicating it was unable to move forward following a corporate due diligence inquiry of FTX dealings.
When the buy-out failed, FTX filed for bankruptcy on November 11, 2022, in the U.S. District of Delaware, where the company is incorporated.
As part of Chapter 11 bankruptcy proceedings, companies are temporarily granted an automatic stay against action from creditors, including any investors. The stay is given so that companies have time to develop a debt repayment plan and negotiate repayment terms with creditors.
How long will FTX accounts be frozen?
Investors who have funds tied up in a FTX’s bankruptcy proceedings typically must wait until the business finalizes a repayment plan before they can attempt to recoup their money. In situations like the FTX bankruptcy filing, where a large company defaults on billions of dollars, finalizing a repayment plan can take years.
FTX froze most withdrawals before it filed for bankruptcy, as its funds quickly dwindled. When the company is officially undergoing the Chapter 11 process, all customer withdrawals ceased, and former investors were unable to access their investments.
The FTX bankruptcy proceedings are especially complicated because the company failed to keep detailed accounting records of its transactions. In addition, investigators still aren’t sure how much of FTX’s assets remain to pay back creditors since the company funneled so much of its funds to Alameda Research in the form of FTT tokens.
FTX Investor FAQs
How much in FTX customer funds are missing?
The total amount of missing FTX customer funds is estimated to be around $9 billion.
Has FTX recovered customer funds?
On March 13, 2023, FTX lawyers reported at a bankruptcy hearing that $7.3 billion in cash and liquid crypto assets have been recovered, which is an increase of more than $800 million since January 2023.
The recovery process is still ongoing, with liquidators recovering and securing approximately $1.4 billion of crypto-assets and identifying an additional $1.7 billion they are still working to recover.
Will FTX customers get their money back?
There is no guarantee that FTX will be able to repay customers their investment money back after creditors are paid out through the bankruptcy proceedings.
Will FTX’s FTT token still have value after bankruptcy?
Due to the volatility of the cryptocurrency market and the daily value of cryptocurrency fluctuating daily, it’s almost impossible to predict what, if any, monetary worth FTX’s FTT tokens will still have when bankruptcy proceedings are complete.
FTX Endorsements Manipulated Investors
FTX class action lawsuits were also filed against high-profile celebrities and internet “influencers” who allegedly engaged in deceptive marketing by endorsing FTX.
The lawsuits alleged that the celebrity endorsers failed to conduct proper due diligence on FTX before promoting it, and broke consumer protection laws by not publicly disclosing their financial arrangements with FTX, who paid endorsers handsomely to promote their platform.
Several of high profile celebrities that were named in lawsuits for deceptive marketing practices based on their endorsements of FTX include;
- NFL star Tom Brady
- Supermodel Gisele Bundchen
- NBA star Steph Curry
- Tennis star Naomi Osaka
- “Shark Tank” TV show star Kevin O’Leary
Cryptocurrency Exchange Bankruptcy Lawsuits
The collapse of FTX created an industry-wide crisis of confidence in the cryptocurrency space, which caused a contagion effect among various crypto platforms that were financially tied to FTX in one way or another.
Gemini Earn Lawsuits
Gemini’s lending partner, Genesis Global Capital, paused loan originations and froze roughly $900 million in Gemini Earn user funds on November 16 2022, citing “extreme market dislocation” following the FTX implosion. Genesis later disclosed it had about $175 million locked on FTX.
Genesis filed for bankruptcy in January 2023, leaving recovery prospects for Gemini Earn participants uncertain. Gemini advised users to file a master claim in the Genesis proceeding to preserve any potential recovery.
BlockFi Lawsuits
BlockFi froze customer withdrawals and halted platform activity before filing for bankruptcy on November 28 2022. The company had relied on a July 2022 financing package from FTX that included a $400 million credit facility.
When FTX entered bankruptcy, it could not honor the loan, exacerbating BlockFi’s own liquidity shortfall. Subsequent litigation and a securities class action targeted BlockFi’s founders and executives.
Voyager Lawsuits
Voyager suspended trading, deposits, and withdrawals on July 1 2022 after its customer Three Arrows Capital defaulted on a $650 million loan. Voyager filed for bankruptcy days later.
In September 2022, FTX won an auction for Voyager’s assets in a deal valued at approximately $1.4 billion, but court filings indicated the cash component was only $51 million, delaying consummation of the sale and reportedly costing Voyager about $10 million per month during the bankruptcy process.
Celsius Lawsuits
Celsius sought Chapter 11 protection in July 2022 after reporting a $1.2 billion balance-sheet shortfall. During the proceedings, an Official Committee of Unsecured Creditors alleged Celsius had misrepresented the safety of client deposits and asserted claims of fraud and negligent misrepresentation on behalf of account holders.
Bankruptcy filings also indicated that company co-founders withdrew millions in assets shortly before Celsius froze client withdrawals.
Cryptocurrency Lawyers
The legal landscape surrounding cryptocurrency remained complex and rapidly evolving during the time of the FTX collapse and related litigation. Saiontz & Kirk, P.A. previously helped individuals navigate the regulations governing digital assets and assess whether legal claims were appropriate following substantial investment losses.
Legal reviews included investigation of crypto transaction histories and consultation with financial experts to determine the cause and magnitude of losses linked to FTX and similar platforms. These services were provided under a contingency fee arrangement, where no fees were collected unless a recovery was secured.
