A ‘wave’ of FTX lawsuits expected, but investors will face legal hurdles

Nov 17 (Reuters) – A lawsuit filed by FTX account holders in the United States is likely the first in a long series that will result in billions of dollars in losses on the cryptocurrency exchange, although the cases face hurdles, including proving that US securities law applies. to FTX’s products, the experts said.

The lawsuit, filed Tuesday in federal court in Miami, alleges that FTX founder Sam Bankman-Fried and celebrities including NFL quarterback Tom Brady and Basketball Hall of Famer Shaquille O’Neal, engaged in deceptive marketing practices by promoting unregistered titles.

While some courts have ruled that certain cryptocurrencies meet the legal definition of securities, the question remains unresolved.

Cases against FTX, which is based in the Bahamas, will be made more complex by the fact that US securities laws generally apply only to domestic transactions, said Yuliya Guseva, a professor who leads the research program on fintech and blockchain at Rutgers Law School.

“It’s more complicated than your simple vanilla crypto exchange story,” she said.

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

FTX filed for bankruptcy on November 11 and is under intense scrutiny from US authorities. Sources told Reuters that $10 billion in client assets had been transferred from FTX to Bankman-Fried’s trading company, Alameda Research, and more than $1 billion in client funds were missing.

Tuesday’s lawsuit, a proposed class action lawsuit filed on behalf of FTX yield carrier account holders in the United States, claims the accounts were unregistered securities because they used investors’ mutual funds to engage in activities that generated the returns that account holders received.

Whether US securities laws apply to interest-bearing crypto accounts like those offered by FTX remains open.

The United States Securities and Exchange Commission recently alleged that other yield-bearing accounts constitute non-registered securities. Investors have made similar claims in court against Voyager Digital Ltd and Celsius Network over their crypto accounts, but judges have yet to rule on those claims.

The lawsuit filed Tuesday did not name FTX as a defendant, but instead targeted individuals.

Other investors will likely bring more lawsuits as details of FTX’s collapse are revealed.

Guseva said a “surge” of litigation is the “expected outcome of a big debacle like this.”

New FTX CEO John J. Ray III said in bankruptcy filings Thursday that the company’s situation was “unprecedented” and involved a “complete failure of corporate controls.”

Cases against FTX and related companies will be stayed pending bankruptcy proceedings, but cases against individuals who have not filed for bankruptcy may be allowed to proceed, Guseva said.

Several law firms have said they are considering filing claims on behalf of investors in the FTX Token, or FTT, an exchange-linked cryptocurrency that has plummeted in value from around $25 per token to less than $2 following the FTX liquidity crisis.

New lawsuits may also target famous promoters of FTX crypto products.

Tuesday’s complaint alleges that these promoters violated Florida consumer protection law by failing to disclose what they were paid to endorse the business.

Investors have filed similar claims against reality TV star Kim Kardashian for her promotion of EthereumMax tokens. A judge has yet to decide whether the case can go forward.

Kardashian argued that the lawsuit should be dismissed because compensation details would not have mattered to investors in the token.

She settled similar claims earlier this year by the SEC for $1.26 million without admitting wrongdoing.

Future investor lawsuits over the FTX collapse are likely to allege claims beyond securities registration and consumer protection violations, plaintiffs’ attorneys said.

Sean Masson, an attorney with the Scott + Scott law firm who is representing investors in the case against Kardashian, said there could be potential market manipulation allegations based on Bankman-Fried’s activities at Alameda.

Masson did not provide details. Market manipulation involves a trader or company attempting to secretly move or maintain the market price of a security or commodity.

“We think what’s come out so far only scratches the surface of what actually happened,” he said.

(This story has been reclassified to correct a typographical error in paragraph 13)

Reporting by Jody Godoy in New York; Editing by Noeleen Walder and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

Jody Godoy

Thomson Reuters

Jody Godoy reports on banking and securities law. Contact her at jody.godoy@thomsonreuters.com

About Charles D. Goolsby

Check Also

The Rise and Risks of Legal Technology

Legal technology refers to the application of technology and innovation within the legal services industry, …