Bahamas-based FTX Cryptocurrency Derivatives Exchange, one of the world’s biggest digital asset exchanges, filed for Chapter 11 bankruptcy on November 11 after the value of the native FTX token (FTT) crashed.
The FTX collapse has prompted FTX investors to file lawsuit after lawsuit against the crypto exchange and its former CEO Sam Bankman-Fried in the weeks that followedover the next couple of weeks. NowAnd just today, November 23, two more class action lawsuits were filed against FTX, Bankman-Fried, and this time, including its chief backers and endorsers.
In December 2021, the National Basketball Association’s (NBA) Golden State Warriors announced its “first-of-its-kind partnership” with FTX, naming the crypto exchange as its official cryptocurrency platform and NFT marketplace. Likewise, many celebrities have endorsed FTX, even appearing in primetime TV commercials. Because of this, the reigning NBA champion has been named as one of the defendants in two new class action lawsuits.
British tech investor Sunil Kavuri, et al. filed a class action lawsuit on November 21 at a South Florida court, against Bankman-Fried, the Golden State Warriors, Tom Brady, Gisele Bundchen, Stephen Curry, Shaquille O’Neal, Udonis Haslem, David Ortiz, William Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Lawrence Gene David, and Kevin O’Leary. They are named as “all parties who either controlled, promoted, assisted in, and actively participated in” FTX Entities.
The plaintiff alleged that after the defendants “aggressively marketed the FTX platform” and after Kavuri and others were exposed to misrepresentations and omissions regarding the deceptive FTX platform” they invested their money in a yield-bearing account (YBA). This fact, then, makes the defendants liable for damages.
Charges include violations of the Florida Statute Section 517.07 (the Florida Securities and Investor Protection Act) and the Florida Deceptive and Unfair Trade Practices Act, civil conspiracy, and declaratory judgment. Although the amount of damages demanded was not declared in the suit, the court document stated that damages are over $5 million.
On the same day, Elliot Lam, a Canadian citizen based in Hong Kong who also bought a YBA from FTX and lost $750,000, filed a similar class action lawsuit at a San Francisco court against Bankman-Fried, FTX trading firm Alameda Research CEO Caroline Ellison and the Golden State Warriors.
Calling what transpired as a “Ponzi-scheme-like fraud,” the defendants are being charged with violations of California’s Unfair Competition Law and California’s False Advertising Law, as well as fraudulent concealment, civil conspiracy and declaratory judgment. Both lawsuits, the plaintiffs of which are global/transnational classes representing people outside of the United States, are demanding for a jury trial.
“I think the real problem is that they’re keeping money on each other’s exchanges, and everybody is promising each other 10, 15% yields on holding stablecoins. And I think they’re really playing a lot of crazy games. I actually think the worst of this news probably hasn’t come out yet,” Chief Bitcoin Historian for CoinGeek Kurt Wuckert Jr. said in an interview with Fox News.
The FTX Collapse
The FTX collapse was like dominoes falling—it was quick and encompassed everyone related to the former $32-billion crypto empire. On November 2, an exposé published by Coindesk stated that a financial review of Alameda Research’s balance sheet showed that its $14.6 billion in assets is mostly composed of FTT. “There are more FTX tokens among its $8 billion of liabilities: $292 million of ‘locked FTT.’ (The liabilities are dominated by $7.4 billion of loans.)”
This opened a can of worms, and crypto exchange Binance CEO Changpeng Zhao announced on Twitter that it would be liquidating its FTT on November 6. This set off a panic, and people and businesses also began selling off their FTT. The price of FTT crashed by 80% the next day. Currently, FTT is priced at only $1.30.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
As if the FTX collapse was not shocking enough, the exchange was allegedly hacked hours after the declaration of bankruptcy, and hundreds of millions worth of Ethereum (ETH) coins were stolen from FTX wallets.
According to blockchain forensics firm Chainalysis, some of the FTX ETH coin transfers were legitimately done, but most were stolen and “on the move.” Hence, it has advised exchanges to be on the lookout for said coins and to be prepared to freeze the accounts once they encounter them.
Freezing the accounts would serve to protect FTX users who lost their ETH coins by illegal means. Some of the missing ETH coins, however, were transferred to Bahamian regulators for “safekeeping.”
Why So Many Were Fooled
At the heart of the FTX collapse is 30-year-old Bankman-Fried, whose net worth was once valued at $17.2 billion. This young billionaire, whose parents were Stanford University Law School professors, graduated from the prestigious Massachusetts Institute of Technology (MIT). He established FTX in 2019, and has since achieved somewhat of a hero status for rescuing crypto companies in distress.
Bankman-Fried seems to be the golden boy of crypto—a philanthropist who practices “effective altruism”—definitely someone people thought could who can be trusted with billions of dollars. HIn fact, he donated the second biggest amount to the presidential campaign of United States President Joe Biden. Bankman-Fried created this image of trust and embarked on a mainstream marketing campaign composed of top celebrities.
It is because people believed in the billionaire, believed in the celebrity endorsers, believed in the hype, and believed that they, too, can amass more money that Bankman-Fried was able to fool them all. Above all, it was because they did not do due diligence before investing.
“We think they’re billionaires, but they’re paper billionaires. We don’t know that they ever actually have those billions of dollars in the first place. They were largely printing tokens out of thin air,” Wuckert explained.
“The collapse at FTX came from the collapse of the FTT token. So, this was money that they printed out of nowhere, and then it wasn’t worth anything. That really shouldn’t shock anybody,” Wuckert added.
Even with global businesses, investors and users suing FTX, its backers and brand ambassadors, it would be a long while before any of the victims would ever get their money back—if they do at all.