Embattled FTX founder Sam Bankman-Fried and a who’s who of sports stars and celebrity promoters face a proposed class action that alleges the now-bankrupt cryptocurrency exchange was no more than a fraudulent scheme designed to take advantage of unsophisticated investors.
The 41-page complaint out of Florida contends that FTX, which filed for emergency Chapter 11 bankruptcy protection on November 11, was “truly a house of cards, a Ponzi scheme” whereby the exchange shuffled around investor funds between “opaque affiliated entities,” using new money to pay interest on older yield-bearing accounts (YBAs) in an “attempt to maintain the appearance of liquidity.” Importantly, the lawsuit points out that the YBAs taking center stage in the complaint are securities whose sale must be registered with the United States Securities and Exchange Commission (SEC).
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The suit’s filing on November 15 comes less than a week after FTX’s collapse, their more than $30 billion in value “evaporat[ing] almost overnight.”
“This action seeks to hold Defendants responsible for the many billions of dollars in damages they caused Plaintiff and the Classes and to force Defendants to make them whole,” the case reads, alleging consumers were misled into believing that their crypto assets held on FTX were safe and not being invested in unregistered securities. According to the suit, “false representations and deceptive conduct” by FTX caused American consumers to sustain more than $11 billion in damages.
Part of FTX’s scheme, the lawsuit explains, involved recruiting some of the biggest names in sports and entertainment to raise funds and drive consumers to invest in the YBAs offered by the exchange. According to the filing, however, the athlete and celebrity defendants tasked with hyping up FTX on television and social media—including, among others, Tampa Bay Buccaneers quarterback Tom Brady and ex-wife Gisele Bundchen, NBA hall of famer Shaquille O’Neal and Larry David, comedian, writer and co-creator of Seinfeld—failed to disclose the “nature, scope and amount of compensation” they personally received in exchange for aggressively promoting the company’s “deceptive” platform, in apparent violation of federal securities laws.
Further, the case contests that it seems that none of the athletes or celebrities who signed on to promote FTX “performed any due diligence” prior to marketing the platform to the public.
It’s always fun until it’s not
FTX was established by MIT-educated Bankman-Fried in 2019 as a digital asset trading platform and exchange designed to provide a better user experience while providing safe, innovative products, the suit begins. After its launch, FTX became extremely successful, and earlier this year the platform reportedly boasted around $15 billion in assets traded daily, or approximately 10 percent of the total global volume for crypto trading, according to the case.
By the time it filed for bankruptcy protection last week, FTX had been entrusted with anywhere from $10 billion to $50 billion from customers, the lawsuit says, noting that Bankman-Fried’s star (and net worth) rose almost simultaneously with that of his company.
At his peak, Bankman-Fried was worth $26 billion. At 30, he had become a major political donor, gotten celebrities like the Co-Defendants in this action to vociferously promote FTX, and secured the naming rights to the arena where the NBA’s Miami Heat play.”
Although Bankman-Fried positioned FTX as a beacon of stability amid a notoriously volatile crypto market, an early November report from CoinDesk called into question just how stable the defendant’s two-part “empire,” which included crypto trading firm Alameda Research, really was, the filing says. Specifically, CoinDesk highlighted that Alameda’s balance sheet was full of FTX’s proprietary FTT token, according to the suit.
Although there is “nothing per se untoward or wrong” about that, the case says, it revealed that Alameda’s heft rested on “a foundation largely made up of a coin that a sister company invented,” not an independent asset such as a fiat currency or other kind of crypto, the filing explains, calling the relationship between FTX and Alameda “unusually close.”
Upon this news, Binance CEO Changpeng “CZ” Zhao, the head of the largest crypto exchange in the world, made the call to liquidate roughly $530 million worth of FTT tokens, prompting customers to then race to pull their own money out, the suit says. Overall, FTX saw approximately $6 billion in withdrawals over 72 hours, which the exchange struggled to fulfill.
Though the value of FTT rallied briefly upon Bankman-Fried’s announcement on November 8 that Binance would bail out FTX by buying the platform, Binance revealed the next day that it was backing out of the deal, citing “findings during due diligence” and reports of “mishandled customer funds and the possibility of a federal investigation,” the case continues.
“The news sent FTT plunging even further – Bankman-Fried saw 94% of his net worth wiped out in a single day,” the suit reads, adding that Bankman-Fried, unable to obtain a bailout, resigned as FTX CEO on November 11.
Despite issuing a 22-tweet-long missive in an attempt to explain where FTX went wrong, a subsequent Reuters report shared that Bankman-Fried secretly transferred at least $4 billion in customer funds from FTX to Alameda without disclosure after the latter sustained a series of losses, the complaint says. Further, Reuters revealed that FTX entities lent “more than half of its $16 billion in customer funds to Alameda in total, with more than $10 billion in loans outstanding,” the filing states.
In addition to Brady, Bundchen, Shaq and Larry David, the case names as defendants Shark Tank personality Kevin O’Leary; NBA star Stephen Curry and his team, the Golden State Warriors; Miami Heat forward Udonis Haslem; MLB hall of famer David Ortiz; Jacksonville Jaguars quarterback Trevor Lawrence; Los Angeles Angels two-way phenom Shohei Ohtani; and tennis star Naomi Osaka.
According to the suit, Brady and Bundchen, then together, took equity stakes in FTX and appeared in the company’s $20 million “FTX. You In?” ad campaign in 2021. Haslem, captain of the Miami Heat, whose arena until recently bore the FTX logo, similarly starred in a “You In, Miami?” ad for FTX that launched at the start of the 2021-2022 basketball season, the case states.
Stephen Curry, the lawsuit continues, appeared in FTX’s “#notanexpert” campaign. Through the ad, Curry repeatedly denied being an expert at cryptocurrency, seemingly to convince consumers that FTX was a safe option as far as buying, selling and trading crypto.
The purpose of Curry being an ambassador is to expand the reach of the crypto firm and ‘tout the viability of cryptocurrency to new audiences around the world,’ FTX said in a press release. In other words, to drive adoption of the Deceptive FTX Platform and to facilitate the sales of unregistered YBAs to unsuspecting and unwitting retail consumers.”
Los Angeles Angels star Shohei Ohtani entered into a long-term partnership with the firm as a global ambassador and opted to receive all of his compensation from FTX in equity and cryptocurrencies, the filing continues.
Lastly, Larry David, of Curb Your Enthusiasm fame, appeared in an ad during the 2022 Super Bowl in which he portrayed someone who was notoriously skeptical on historically significant events such as the inventions of the wheel, the fork, the toilet, democracy, the light bulb and apparently FTX, per the complaint. Viewers were cautioned in the ad, “Don’t be like Larry,” the case says.
Noted early in the complaint is that the plaintiff’s counsel on December 24, 2021 filed a proposed class action against now-defunct cryptocurrency exchange Voyager, alleging the platform was essentially an unregulated and unsustainable fraud. In that case, the plaintiffs charged that Voyager CEO Stephen Ehrlich teamed up with the Dallas Mavericks and team owner Mark Cuban to promote the platform through “false representations” and “other means of deception,” allegedly causing consumers more than $5 billion in losses.
Once the case against Voyager was filed, the U.S. Securities and Exchange Commission (SEC) began an enforcement review focused on whether the company’s earn program accounts were unregistered securities, and seven state attorneys general found that Voyager had violated their states’ laws, the complaint shares. Shortly thereafter, Voyager Digital Holdings filed for Chapter 11 bankruptcy protection, the suit states, adding that in connection with the proceedings, the Director of Enforcement of the Texas State Securities Board filed a declaration explaining how YBAs are, in fact, “an offering of unregistered securities.”
On September 28 of this year, Voyager entered into an asset purchase agreement with FTX, agreeing to sell substantially all of its assets to the platform for roughly $1.4 billion. As the lawsuit tells it, those wrapped up in the Voyager bankruptcy saga thought at the time that FTX was essentially an unexpected knight in shining armor come to save their money in a seemingly hopeless situation. That’s not, however, what ended up happening, the suit states.
“Everyone involved in the Voyager Bankruptcy Cases thought that the FTX Entities were the deus ex machina come to save the day by bailing out Voyager and paying back at least some of the losses the Voyager customers sustained,” the case reads. “Instead … the FTX entities imploded, their over $30 billion in value evaporated almost overnight, and the FTX Entities found themselves filing their own emergency Chapter 11 bankruptcy petition in Delaware.”
Who’s covered by the lawsuit?
The proposed class action aims to represent all persons or entities in the United States who, within the applicable statute of limitations period, bought or enrolled in a yield-bearing account offered by FTX.
I had assets on FTX. What’s next? Will I get my money back?
The jury is still out, as they say, as far as whether consumers who held yield-bearing accounts will get any money back. At this stage in the legal process, it’s simply too early to tell. ClassAction.org will update this page as the suit progresses.
As for what FTX investors can do now, the good news is that there’s nothing you need to do to join, add your name to or make sure you’re included in a class action case when it’s initially filed. It’s only if and when a class action settles that the “class members,” i.e., the people who are covered by the lawsuit, will need to act, typically by filling out and filing a claim form online or by mail. Should this case settle, consumers who are covered will most likely be notified directly about the deal by mail and/or email.
If you bought or enrolled in a yield-bearing account offered by FTX, or simply want to stay in the loop on class action lawsuit and settlement news, sign up for ClassAction.org’s free weekly newsletter.