FTX Exchange Lawsuit Overview

The FTX cryptocurrency exchange, which was launched in May of 2019 by Sam Bankman-Fried and Gary Wang, quickly gained popularity, becoming the third largest crypto exchange by volume as of June 2021, with a valuation of approximately $32 billion.

Only three years after the exchange’s launch, FTX was exposed for using billions of dollars of customer investments to fund its sister company, Alameda Research, which was also owned by Sam Bankman-Fried.

Investigations revealed that FTX’s executive Sam Bankman-Fried intentionally misused FTX customer funds for his personally owned hedge fund, Alameda Research, to place risky bets in the cryptocurrency market for personal gain, and to purchase more than $250 million is luxury real estate for its executives use.

When customers learned of the company’s commingling of funds between FTX and Alameda Research, investors withdrew billions within several days, causing FTX to go bankrupt and freeze customer’s access to their digital assets.

FTX investors were left unable to access billions of dollars worth of digital assets that are tied up in the platform’s bankruptcy proceedings.

Lawsuits were filed against FTX and its founder, Sam Bankman-Fried, raising allegations that FTX illegally used customer funds that are now subject to third party creditors to pay off FTX’s debts. Individuals claimed that FTX broke its customer service terms of agreement by shuffling investors’ money between affiliated entities, and failing to hold customer investments safely in accounts on their behalf.

Latest FTX Cryptocurrency Settlement and Lawsuit Updates

June 2023 Update: The U.S. JPML issued a transfer order (PDF) on June 5, establishing a FTX multidistrict litigation (MDL) before U.S. District Judge Michael Moore in the Southern District of Florida for coordinated pretrial proceedings. The formation of the FTX MDL comes in response to a growing number FTX crypto lawsuits being filed by customers who claim the now bankrupt exchange stole their digital assets and blocked them from making withdrawals.

May 2023 Update: A panel of federal judges heard oral arguments on May 25, 2023, to determine whether to centralize FTX cryptocurrency exchange lawsuits brought before the federal court system. If an FTX lawsuit MDL is established, the claims will all be transferred to one court for discovery and a series of bellwether trials, as well as any settlement negotiations.

March 2023 Update: With a growing number of FTX class action lawsuits and individual investor lawsuits being pursued against a number of different entities, a motion has been filed with the U.S. Judicial Panel on Multidistrict Litigation, seeking to consolidate and centralize the cases before one U.S. District Judge for coordinated pretrial proceedings.

Ties Between FTX and Alameda Research Exposed

FTX customers first became concerned about FTX’s stability after a CoinDesk report was published on November 2, 2022. The report stated that Alameda Research, also owned by Sam Bankman-Fried, held a significant proportion of FTX’s native FTT token in its portfolio.

Specifically, the CoinDesk report stated that as of June 30, 2022, Alameda’s total company assets amounted to $14.6 billion, with its largest portion of assets being $3.66 billion unlocked FTT. CoinDesk reported Alameda’s third largest asset on its books consisted of $2.1 billion of FTT collateral.

The findings raised liquidity concerns and allegations of misused funds between FTX and Alameda. Investors quickly realized that much of Alameda’s assets were made up of FTX’s proprietary FTT token, which is a made-up token, and not backed by any real currency, whether flat or digital.

FTX Liquidity Crisis Leads To Bankruptcy

After the release of the CoinDesk report on November 2, investors became concerned that their funds were not being held on the open crypto marketplace as previously agreed upon, leading investors to make a “run on the bank”.

By November 6, 2022, investors had withdrawn approximately $6 billion from FTX within 72 hours, leaving the company unable to fulfill demands due to their shortage of funds.

When FTX could not cover the withdrawal requests or finalize a proposed buyout plan with Binance, the company froze customers’ access to the platform to prevent any further withdrawal requests. FTX filed for Chapter 11 bankruptcy on November 11, 2022. Bankman-Fried’s Alameda Research would also go on to file for bankruptcy.

FTX Violated Its Customer Agreement By Misusing Funds

With billions of dollars now tied up in FTX’s bankruptcy proceedings, investors are claiming FTX’s use of customer funds for separate business ventures violated the FTX Terms of Service Agreement. .

In a complaint (pdf) filed against Samuel Bankman-Fried by the U.S. Securities and Exchange Commission (SEC), officials stated that FTX’s Terms of Service Agreement specifically state that;

• Customers control the Digital Assets held in Accounts
• Customers Digital Assets shall at all times remain with you and shall not transfer to FTX
• None of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading
• You may redeem all or part of any E-Money held in your Account at any time

Separately, FTX advertised on its website under its Key Principles for Ensuring Investor Protections on Digital-Asset Platforms, that FTX “segregates customer assets from its own assets across our platforms.”

The document further claimed that “liquid assets for customer withdrawals…[to] ensure a customer without losses can redeem its assets from the platform on demand”.

Timeline of FTX Collapse

Was there a FTX Class Action Lawsuit?

Yes, a number of former investors joined a FTX class action lawsuit, demanding priority access to their funds, which were frozen while FTX undergoes bankruptcy proceedings.

In FTX class action lawsuits, investors claimed their funds should be returned to them before creditors are allowed to make claims in FTX’s bankruptcy proceedings.

Plaintiff’s argued that FTX violated its Terms of Service Agreement and illegally used investor funds to accumulate debt, which put investor funds at risk. Many of these plaintiff’s feared that no funds would remain to repay customers after creditors chipped away at the remaining assets FTX still had.

FTX Lawsuits Centralized Into Multidistrict Litigation

In response to a motion to transfer all FTX lawsuits before one judge for coordinated pretrial proceedings, the U.S. Judicial Panel on Multidistrict Litigation (JPML) issued a transfer order on June 5, 2023, ordering all FTX lawsuits filed throughout the federal court system to be centralized before U.S. District Judge Michael Moore in the Southern District of Florida for coordinated pretrial proceedings.

As proceedings under the FTX MDL begin, it is expected that U.S. District Judge Michael Moore will ultimately select a small group of representative “bellwether” cases for early trial dates, to help gauge how juries are likely to respond to certain evidence regarding the mounting allegations against the failed cryptocurrency exchange.

While the outcomes of these bellwether trials will not be binding on other plaintiffs, they may help drive the parties toward settlements that would avoid the need for potentially hundreds of eventual individual class action trials to be held.