FTX Lawsuits Target Celebrity Endorsers, Venture Capitalists To Recoup Investor Losses

Investors seek damages from celebrities and venture capital firms who failed to make sure the FTX cryptocurrency exchange was legally operated and stable before endorsing it publicly

An increasing number of burned investors are filing FTX lawsuits against celebrity endorsers and financial backers of the failed cryptocurrency exchange, seeking to recover damages from individuals and entities that profited from the company, which it has now been discovered was essentially operating a Ponzi scheme.

Complaints have been filed against so-called “brand ambassadors,” like sports stars Shaquille O’Neal, Tom Brady andStephen Curry. and actors like Larry David, alleging they irresponsibly endorsed the cryptocurrency exchange. More recently, a number of financial backers have also been named as defendants, including venture capital firms, like Sequoia Capital.

The FTX cryptocurrency exchange was launched in May of 2019, and quickly gained popularity amid aggressive marketing and support by key endorsers, making it quickly become the third largest crypto exchange by volume by June 2021.

FTX handsomely paid professional athletes and others to promote the use of their mobile platform as the go-to crypto exchange, and encouraged investors to use the platform. However, after only three years, millions of cryptocurrency investors around the world using FTX exchanges fell victim to what is being considered the largest and most sophisticated Ponzi scheme ever seen, in which tens of billions of digital assets in currencies such as Bitcoin, Ethereum and others vanished, virtually overnight.

Since the collapse, a number of FTX fraud investigations have been launched by lawyers and regulators, and investors are pursuing class action lawsuits and individual claims, indicating that FTX entities shuffled customer funds amongst their affiliated entities to pay other debts in an attempt to maintain the appearance of liquidity.

FTX Cryptocurrency Exchange Collapse

In early November 2022, concerns arose over FTX’s financial stability, causing many investors to rush to withdraw their funds. The rampant withdrawals created a liquidity crisis for the company, prompting the exchange to halt withdrawals and ultimately file an emergency Chapter 11 bankruptcy petition in Delaware on November 11, 2022.

Its founder, Sam Bankman-Fried, an outspoken advocate for cryptocurrency, resigned shortly after. However, evidence arose soon after that Bankman-Fried had been freely transferring FTX investors’ money into his Alameda Research investment firm to use for trading, which lost massive amounts of money on risky investments. It is illegal to use investors’ funds this way, and Bankman-Fried has since been arrested and faces numerous criminal charges.

The events and actions by the exchange have now left upward of five million investors stranded and without access to their digital assets, which could be tied up in a lengthy bankruptcy process. To further complicate matters, the day after FTX filed for bankruptcy, the company claimed it had been hacked, resulting in the loss of $400 million, which has raised additional questions in several of the lawsuits over who could have abused the client funds.

FTX Lawsuits Target Endorsers, Financiers

Starting in November 2022, investors began filing FTX class action lawsuits against various celebrity endorsers, who they say helped FTX in its scam by making it appear like a lucrative, safe and legal way to invest, when it was actually a Ponzi scheme. The lawsuits claim they did this through deceptive misrepresentations and omissions in their endorsements of the platform.

About a dozen celebrities, mostly sports stars, have been named in the complaints, as well as the NBA basketball team the Golden State Warriors, which launched an official partnership with FTX in 2022. In addition, a growing number of firms that invested capital into FTX have also come under fire.

Plaintiffs say firms like Sequoia, which was the target of a complaint filed in early May, funded FTX’s scheme to defraud its investors, and should be held liable for funds lost by cryptocurrency investors.

The lawsuits indicate the firms, and the endorsers, should have ensured any public statements they made about the company, like how investors’ money would be secure, were actually true. Investors claim FTX’s collapse, and the revelations which appear to show the allegedly illegal actions by Bankman-Fried, prove that financiers and endorsers did not do their due diligence before making public statements in support of the exchange.

FTX Lawsuit Consolidation Under Consideration

Given common questions of fact and law raised in cryptocurrency exchange lawsuits currently pending in U.S. District Courts nationwide, several plaintiffs filed a motion to transfer with the U.S. Judicial Panel on Multidistrict Litigation (JPML) in February, requesting the growing number of FTX lawsuits be centralized before one judge for coordinated pretrial proceedings, as each of the cases involve parties who claim the now bankrupt cryptocurrency exchanges stole their digital assets and blocked them from making withdrawals.

In the motion, plaintiffs called for the complaints to be consolidated in the Southern District of Florida.

Last week, the JPML heard oral arguments from both sides over whether the FTX lawsuits should be consolidated into an FTX multidistrict litigation (MDL) and where. The panel has not yet issued a ruling.