Lawsuits Over FTX Scandal Centralized in Florida Federal Court for Pretrial Proceedings

A massive scandal left FTX investors without access to their digital assets, and has resulted in a growing number of cryptocurrency exchange lawsuits throughout the federal court system.

In response to a growing number of recently filed lawsuits over the FTX scandal, the U.S. Judicial Panel on Multidistrict Litigation (JPML) has established consolidated pretrial proceedings in the Southern District of Florida, centralizing all claims brought throughout the federal courtsystem over the fall of the cryptocurrency exchange before one judge for coordinated discovery and pretrial proceedings.

The litigation all stems from the massive collapse of the FTX in late 2022, only a few years after it was launched and widely marketed as the go-to cryptocurrency exchange. However, the company is now bankruptcy and a far-reaching scandal with FTX has emerged, indicating that it was operating as a modern-day Ponzi scheme, causing widespread losses for investors.

FTX lawsuits have been filed against company executives, as well as a wide range of high net worth individuals and companies that promoted the platform, including professional athletes like Tom Brady, Steph Curry and others, as well as venture capitalist firms like Sequoia Capital.

Cryptocurrency investors lost billions in digital assets virtually overnight as a result of the FTX scandal, and a growing number of individual lawsuits and class action claims are now being pursued in U.S. District Courts nationwide, each involving similar questions of fact and law.

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 lawsuits over the FTX scandal 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.

FTX Lawsuits Consolidated in Federal MDL

To help manage the growing litigation, several plaintiffs filed a motion to centralize all FTX scandal lawsuits in February 2023, asking that claims filed in U.S. District Courts nationwide be transferred to one judge to preside over coordinated discovery and pretrial proceedings as part of an MDL, or multidistrict litigation.

After considering oral arguments presented in late May, the U.S. JPML issued a transfer order (PDF) on June 5, establishing the FTX MDL before U.S. District Judge Michael Moore in the Southern District of Florida.

According to the panel, there are currently eight FTX cryptocurrency exchange lawsuits currently pending in two different districts, with an additional 11 related actions filed in four other districts. However, the size and scope of the litigation over the FTX scandal is expected to increase dramatically in the coming months.

In complex litigation, where large numbers of claims are brought by users of the same product, each experiencing the same or similar injuries, it is common for the U.S. JPML to centralize the litigation to reduce duplicative discovery into common issues that will arise in all claims, avoid conflicting pretrial rulings and to serve the convenience of certain witnesses and parties who will be required to testify in each of the lawsuits.

However, the panel notes that not all plaintiffs or defendants agreed on whether the cases should be centralized and where.

“In opposition to centralization, the various plaintiffs and defendants primarily argue that the actions lack sufficient common questions of face and informal coordination provides a practicable alternative. We find these arguments unpersuasive,” the JPML said in the order. “The actions undoubtedly involve several non-overlapping defendants and raise defendant-specific issues. But they all rest on the same core set of facts concerning the alleged fraud that led to FTX’s collapse, and, in particular, revolve around the conduct of FTX’s Samuel Bankman-Fried, the relationship with another Bankman-Fried company known as Alameda Research, and Alameda’s Caroline Ellison.”

FTX Cryptocurrency Lawsuits

In early November 2022, concerns over FTX’s financial stability rapidly emerged, causing many investors to rush to withdraw their funds. The rampant withdraws 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 cryptocurrency advocate, 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.

Since the scandal emerged, 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.

Now that consolidation is approved for the MDL, it is expected that U.S. District Judge Moore will 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 FTX settlements that would avoid the need for potentially hundreds of eventual individual class action trials to be held.