AN "UNPRECEDENTED" SITUATION OF FRAUD AND DECEIT
The FTX Entities imploded in early November 2022 when they filed for bankruptcy in the aftermath of a massive and nearly unprecedented liquidity crisis. The FTX Entities and their billionaire co-founder and CEO, Sam Bankman-Fried, are now under investigation by the US Department of Justice and the Securities and Exchange Commission for severely mismanaging billions of dollars in client funds.
Before the crash, FTX Trading LTD (FTX) and West Realm Shires Services Inc. (collectively, the FTX Entities) were valued at over $32 billion and known for offering and selling unregistered securities in the form of yield-bearing accounts (YBAs) to residents of the United States and other countries around the world.
When FTX’s troubles increasingly drew media coverage and customers started withdrawing funds, the FTX Entities halted withdrawals. The companies and related entities filed for bankruptcy days later. As a result of this crisis, Bankman-Fried resigned on November 11, 2022, replaced by John Ray III, who previously oversaw the notorious Enron bankruptcy. On November 17, Ray submitted a filing with the United States Bankruptcy Court (District of Delaware) stating that in his 40-year career he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. . . . This situation is unprecedented.” He also published an organizational chart of FTX’s financial and investment empire, revealing a maze-like web of legal entities Bankman-Fried had created to run his empire.
In addition to usage of a convoluted organizational structure, reports have emerged about how Bankman-Fried enabled the secret transfer of $10 billion from FTX Entities to Alameda Research LLC, Bankman-Fried’s venture-capital and trading firm affiliate of FTX, and that at least $1 billion of those funds have disappeared. Separately, according to paperwork filed by Ray with the U.S. Bankruptcy Court, Alameda Research had $4.1 billion in related-party loans. Among those were $1 billion to Bankman-Fried.
The scale of this fraud was matched only by the scale of the publicity campaign employed by Bankman-Fried and the FTX Entities to conjure up an illusion of financial and corporate success. Flush with money from unwitting investors and seeking to further increase their customer reach, Bankman-Fried and the FTX Entities began prolifically signing branding deals with sports institutions and advertising on television in order to entice new customers. The FTX Entities’ publicity and commercial campaign also involved the personal endorsements of internationally known celebrity, entertainment, and sports figures through FTX’s own celebrity “brand ambassadors.” These brand ambassadors used their social media reach and personal brands to induce unsophisticated investors and consumers into a relationship with the FTX Entities.
The Joseph Saveri Law Firm, LLP and co-counsel represent plaintiffs in cases filed in the United States District Court for the Northern District of California. These cases (Lam v. Bankman-Fried, no. 3:22-cv-07336, and Cabo v. Temasek Holdings Ltd., no. 3:23-cv-03974) have been consolidated in In re FTX Cryptocurrency Exchange Collapse Litigation, and all pretrial proceedings have been coordinated in the United States District Court for the Southern District of Florida. The firm serves on the plaintiffs’ steering committee for the consolidated action.